SWIFT Payments

According to FXC Intelligence, the value of the global cross-border payments market will grow from 190 trill. USD today to 290 trill. USD by 2030 which represents a huge business potential for such payment service providers as electronic money institutions (EMIs). To facilitate these transactions, you should find a means to enable secure financial messaging and efficient cross-border transactions with a wide range of financial institutions worldwide.

Therefore, we invite you to familiarize yourself with the SWIFT payment system. Its extensive network connects thousands of globally dispersed financial institutions and counterparties and can play a significant role in helping your EMI grow by providing access to plenty of opportunities. With SWIFT, your international money transfers can become more streamlined, cost-efficient, reliable, and timely, making your e-money institution more attractive to customers in the competitive market of financial services.

What Is SWIFT?

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a global member-owned cooperative organization connecting over 11,000 financial institutions in more than 200 countries and territories to facilitate secure and standardized financial messaging for international transactions. It supports various types of financial transactions, including international money transfers, trade finance, securities trading, and corporate actions, which is why it’s useful for EMIs. To ensure that all of these transactions are secure, the network employs various security measures and protocols to protect against fraud and unauthorized access.

SWIFT offers a wide variety of products and services, necessary for smooth operations within the financial industry. It provides a range of access options, develops messaging management software packages, carries out macroeconomic analyses, and enables back-office automation. The organization also supports financial crime compliance and standards implementation, delivers professional training, and assists SWIFT users in bolstering their security and resilience.

SWIFT was founded in 1973 as a cooperative society headquartered in Brussels, Belgium, by a group of 239 banks from 15 countries to create a standardized and secure messaging platform for international financial transactions. It quickly expanded its network and membership to include banks and financial institutions from around the world. To modernize and streamline communication among financial institutions, in 2002, SWIFT launched SWIFTNet, an internet-based network that allowed financial institutions to exchange messages securely over the internet. Today, it continues to adopt the latest technologies by exploring the use of distributed ledger technology (DLT), including blockchain, for financial messaging.

The main objectives of SWIFT:

• Enable financial institutions and businesses to connect with a wide range of international counterparties worldwide
• Standardize financial messaging and transaction processing to ensure consistency and accuracy in international financial transactions
• Streamline the exchange of financial information and funds
• Protect financial messaging from fraud, cyber threats, and unauthorized access
• Ensure that transactions reach their intended destinations in a timely and secure manner

What Is a SWIFT Payment?

A SWIFT payment, or a SWIFT transfer, is a type of international financial transaction that utilizes the SWIFT network for secure and standardized communication between financial institutions. In November 2022, SWIFT documented a daily average of 44,8 million FIN messages which underscores the significant role that SWIFT payments play in facilitating international financial activities.

How SWIFT Works

SWIFT is one of the key elements of international finance, facilitating frictionless financial operations through the enablement of global connectivity. The SWIFT network works by providing a platform for financial institutions to send and receive messages related to cross-border payments, securities trading, and other financial transactions. These messages are transmitted in a standardized format to ensure interoperability, consistency, and reliability of the SWIFT payment process. SWIFT messaging management solutions can support the complex high-volume messaging needs of the world’s largest institutions, and the lower-volume, cost-sensitive needs of smaller banks and corporations.

Generally, the SWIFT messaging process involves several essential steps:

• Financial institutions create SWIFT messages to initiate transactions or exchange financial information
• Messages undergo validation to ensure compliance with SWIFT standards, and any discrepancies are flagged
• Validated messages are sent through secure communication channels (direct connections or internet-based services) to the SWIFT network
• SWIFT routes the messages based on the recipient’s SWIFT code, and messages are processed by intermediary banks if necessary, with their information added to the message header
• Messages are delivered to the recipient’s financial institution, which then processes the transaction or responds with the required information
• The recipient’s financial institution sends acknowledgments or confirmations to the sender, indicating that the transaction has been received, processed, and settled
• The settlement of funds or the completion of the intended financial activity occurs based on the type of transaction

For EMIs that process international transactions, understanding SWIFT message types is essential for the efficient processing of these transactions. Their customers may have international financial needs ranging from cross-border payments and trade finance to foreign exchange and global investment opportunities. Moreover, such regulations as anti-money laundering and counter-financing of terrorism (AML/CFT) often require specific message types and formats for compliance purposes, and EMIs are legally obligated to select the appropriate message types.

There is a wide variety of SWIFT message types, including the following:

• Customer payments and cheques, including single customer credit transfers and multiple customer credit transfers
• Financial institution transfers, including general financial institution transfers with cover and request for debit transfer
• Treasury markets – foreign exchange, money markets, and derivatives, including forward rate agreement confirmation and treasury securities trade confirmation
• Collections and cash letters, including advice of payment and payment reconciliation request
• Documentary credits and guarantees, including advice of a third bank’s documentary credit and authorization to reimburse

A crucial component of the SWIFT network is the Bank Identifier Code (BIC), commonly known as the SWIFT code. Each financial institution within the SWIFT network is assigned a unique SWIFT code that identifies the institution and its location. This code ensures that messages are routed to the correct recipient, guaranteeing the accuracy and security of international financial transactions. If your EMI serves customers with international financial needs, the BIC will allow you to connect and communicate with a vast network of financial institutions worldwide.

SWIFT Regulations

The SWIFT network is subject to regulatory supervision at various levels to ensure that it operates within the frameworks of international financial regulations and security standards. The first level is its own set of bylaws and internal rules, created and enforced by SWIFT’s Board of Directors, composed of representatives from member institutions. They guide the network’s governance, operations, and security protocols.

The next important regulatory level is national regulations that are applicable depending on the jurisdictions involved in a transaction. Many regions and countries impose their own rules concerning financial transactions, data protection, and other crucial aspects concerning SWIFT. Although the EU member countries also have their national regulatory frameworks, they’re largely consolidated by several legal acts introduced by the EU.

In the EU, the following legal acts are applicable to SWIFT:

• Regulation (EU) No 2015/847, or the EU SWIFT Regulation, is a central legal act governing SWIFT transfers of funds, in any currency, within the EU through a set of rules for the transfer of data for the purpose of financial messaging
• General Data Protection Regulation (GDPR) applies to the processing of personal data within the EU, which includes financial data
• EU’s 1-6th Anti Money Laundering Directives (AMLDs) apply to the monitoring of financial transactions conducted within the SWIFT network with the aim of combating illegal financial activities
• Regulation (EU) 596/2014, or Market Abuse Regulation (MAR), addresses market abuse and insider trading within the EU, and financial institutions involved in securities trading on the SWIFT network must comply with MAR’s rules to prevent market abuse
• Directive (EU) 2015/2366, or the 2nd Payment Services Directive (PSD2), regulates payment services and providers within the EU, and while it’s not specific to SWIFT, it has implications for financial institutions that use SWIFT for payment services

According to the different levels of supervision, SWIFT operations are overseen by multiple institutions at national and international levels. These are the most notable ones:

• The European Central Bank (ECB) monitors SWIFT’s compliance with the EU SWIFT Regulation and ensures that SWIFT provides secure and efficient financial messaging services
• National financial regulatory authorities are responsible for ensuring that financial institutions adhere to applicable national regulations within their jurisdiction while operating within the SWIFT network

Benefits of SWIFT Payments for EMIs

By this point, you’ve probably realized that as an EMI, you could be using SWIFT to facilitate and optimize your financial transactions by securely sending and receiving financial messages related to cross-border payments. SWIFT can enable your EMI to connect with plenty of financial institutions and counterparties, ensuring the efficient and reliable exchange of financial information and funds. With SWIFT payments, your international money transfer services could significantly improve, allowing you to better serve customers involved in global financial transactions and ultimately build trust and loyalty.

Here are the specific advantages of SWIFT for your EMI:

• You will benefit from global reach as SWIFT provides access to a vast network of financial institutions worldwide that will allow your EMI to reach a global customer base and engage in almost limitless cross-border transactions
• Since SWIFT payments are based on standardized message formats and processes, you’ll be able to reduce the risk of errors and ensure streamlined communication with other financial institutions
• You’ll be able to rely on SWIFT’s robust security measures, including encryption, to protect the integrity and confidentiality of your transactions
• SWIFT payments are known for their efficiency in settling transactions which will allow you to offer customers quick and reliable cross-border payment services and improve the overall customer experience
• SWIFT messages can facilitate risk management for your EMI as their standardized formats enable the identification and monitoring of transaction risks
• SWIFT payments support a wide range of financial services, including international money transfers, trade finance, foreign exchange, and investment products, and provide a versatile platform for financial activities which means that your EMI will be supported continually as you start offering more diverse products and services
• SWIFT payments can provide your EMI with access to securities trading markets, allowing you to offer investment and trading services to the customers
• SWIFT messages often include transaction information which can enable your EMI to generate thorough reports for customers and regulatory compliance

Differences Between SWIFT and Other Payment Networks

While SWIFT payments boast plenty of valuable advantages, keep in mind that as an EMI facilitating cross-border payments, you can choose from several international and regional payment methods. Your decision will depend on such essential factors as your intended services, target markets, customer needs, and regulatory requirements in the jurisdictions of your EMI’s operations.

You can compare SWIFT to the following payment networks:

• Single Euro Payments Area (SEPA) – while SWIFT has a global reach, SEPA is tailored for euro transactions within the eurozone, providing quicker and cost-effective solutions for EMIs with a focus on euro-centric activities
• Automated Clearing House (ACH) – SWIFT supports multiple currencies on a global scale, and ACH systems are often domestic, suited for EMIs with a primary focus on specific national markets
• Ripple – while SWIFT relies on a centralized messaging system, Ripple operates on blockchain technology, utilizing a distributed ledger to record transactions on separate devices, and its native digital currency, XRP, is often used as a bridge currency for facilitating cross-border transfers that are settled almost instantly
• Visa and Mastercard – while SWIFT is more suitable for larger-value and wholesale transactions, making it suitable for EMIs involved in corporate and institutional banking, Visa and Mastercard networks are ideal for retail payments and card transactions which is why they are chosen by EMIs focusing on consumer-oriented financial services

How to Join the SWIFT Network

To access the SWIFT network, your EMI should take several key steps that will prepare it for frictionless SWIFT integration and secure financial communication with other financial institutions. The process requires robust compliance and technical knowledge, and we strongly recommend consulting with our legal team with expertise in financial services and business development who can help you meet SWIFT compliance requirements and guide you through the SWIFT onboarding process.

For now, take note of the general but essential steps for joining the SWIFT payments network:

• Contact a SWIFT service bureau or SWIFT partner who is mandated to act as an intermediary facilitating your connection to the SWIFT network
• Prepare the necessary documentation for the compliance assessment and undergo the compliance assessment
• Based on your business needs, choose the appropriate connectivity option (e.g., Alliance Lite2 or SWIFTNet)
• To ensure that your EMI’s technology infrastructure aligns with SWIFT’s messaging standards, work with your chosen SWIFT service bureau or partner to integrate the necessary SWIFT interfaces into your systems
• Implement secure communication protocols, such as HTTPS or other SWIFT-approved protocols
• Undergo SWIFT certification to ensure that your systems comply with SWIFT messaging standards and security protocols
• Obtain a BIC for your EMI
• To ensure that your EMI can effectively communicate and transact within the SWIFT network, conduct thorough testing of your connectivity and messaging capabilities in a controlled environment
• If testing is successful, you can start using the SWIFT network for live transactions

To join the SWIFT network, you should generally prepare the following documents:

• A formal letter expressing your EMI’s intent to join the SWIFT network addressed to SWIFT representatives or your chosen SWIFT service bureau/partner
• Copies of your EMI’s business registration certificate and Articles of Association
• A copy of your EMI license
• A document detailing the ownership and shareholding structure of your EMI
• AML/CFT documentation, including customer due diligence (CDD) records for key stakeholders, directors, and beneficial owners
• Audited financial statements
• Your EMI’s business plan
• A document indicating the SWIFT connectivity option your EMI plans to use
• Documents related to the certification process, demonstrating that your EMI’s systems comply with SWIFT messaging standards and security protocols
• A detailed plan outlining how your EMI intends to conduct testing to ensure the successful integration and functionality within the SWIFT network

The list of documents you’ll have to prepare will ultimately depend on such factors as your jurisdiction, the nature of your business, and the specific requirements set out by SWIFT. If you wish to ensure that all legal and regulatory aspects are properly addressed with your unique business model and goals in mind, reach out to our experienced team who will be pleased to conduct a thorough analysis and prepare every document for you.

Choosing the Right SWIFT Partner for Your EMI

A SWIFT partner is an organization that provides services to financial institutions to facilitate their participation in the SWIFT network. They act as intermediaries, offering a range of services to help such institutions as your EMI connect to and utilize the SWIFT infrastructure for secure and standardized communication in the global financial ecosystem. To choose the right SWIFT service provider, you should consider a variety of crucial factors that may have a significant impact on the future of your business.

First, research the provider’s compliance mechanisms, experience, trustworthiness, and reputation in handling SWIFT transactions, especially in ensuring robust SWIFT connectivity. Look for financial institutions with a proven track record of reliability and expertise in international payments. The most reputable ones include IBM Financial Services, AccessPay, Bottomline Technologies, and ACI Worldwide but there are many other providers that can meet your EMI’s needs.

If relevant, you’ll probably want to assess the global reach of the financial institution. If your clients are global, you should choose one with an extensive network of correspondent banks, providing access to a wide-reaching ecosystem, and facilitating frictionless transactions of various currencies to a wide range of destinations. Such wide-reaching networks will also provide risk mitigation as they have many alternative pathways to ensure business continuity in the event of a disruption.

If you wish to implement SWIFT payments into your EMI’s operations, our team here at Regulated United Europe will be delighted to support you in ensuring that your company fully complies with the relevant legal requirements and establishes efficient SWIFT-related processes. If you haven’t obtained a necessary EMI license yet, we can certainly guide you through the license application process or lead the acquisition of a ready-made company with an existing e-money institution license. With experienced lawyers, business development professionals, and financial accountants at your side, you will find the process of adhering to SWIFT requirements easy, seamless, and transparent. Contact us now to schedule a personalized SWIFT consultation and set the stage for long-lasting success.