How SWIFT works and why it’s used in payments
International payments are an integral part of almost any business today, and if we're talking about iGaming, they are an inevitable component of finances. Seamless ability to send payments from any part in the world to any other allows to provide services from most countries and to meet the needs of a diverse audience.
But how is this capability achieved in the global financial system? Building a payment flow between countries requires a complex infrastructure and cooperation of technologies from many financial institutions and banks. Organizing this is not easy, and for this purpose, SWIFT is often used. Let's take a closer look at how this works.
What is SWIFT?
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a system for exchanging messages between banks. Essentially, it is a coded language that contains payment information. SWIFT messages encode details about the amount, purpose, direction of the payment, recipient, and sender. Thanks to this, banks around the world understand where the payment needs to be sent and for what purpose.
It is important to note that SWIFT is not a payment method and does not move money itself. It is merely a system for exchanging information that banks need to move funds. For this purpose, there are correspondent banks that help establish a functioning network around the world. In practice, payment goes from one bank to another, but with "stops" at intermediaries, since not all banks can exchange payments directly between them. Simply, not every bank "knows" every other bank in the world and therefore cannot physically set up quick and active communication with it. But thanks to the established network of several dozen banks, which can have several dozen more in their network too, payment exchanges with so-called "stops" are possible. And SWIFT is required so that everyone understands each other and speaks the same language. This simplifies communication and makes it standardized. Thanks to this, situations of misunderstanding between employees can be avoided, and payments can be accelerated.
Although SWIFT payments are widely used, this approach has several serious drawbacks:
- Speed of payment: Due to the fact that the payment passes through several "stations," it requires more time than a local payment from one bank to another directly. International payments of this type are processed only during business hours, which means they can take several days. Standard SWIFT payments can take a week, but sometimes faster: 3-4 days. This is because payments can be processed manually, and correspondent banks often request additional information from the sender to ensure legitimacy of payment purpose. Although all these reasons are understandable and logical, for clients, this is still more of a disadvantage, as it forces them to wait several days and slows down business processes.
- Cost: The cost of SWIFT payment can be quite high, as it is formed based on the number of correspondent banks that need to be involved, and thus fees need to be paid. Processing of payment is lengthy, which requires participation of several employees or even departments. An average price range of 25-75 euros is considered normal in international practice, but nevertheless, it significantly affects expenses if a company makes dozens or hundreds of payments a day.
- Need for complete payment information: To make a payment through the SWIFT system, payer must provide a set of necessary data for it to be processed successfully. This includes full name of the recipient, their address, account number, purpose of payment, and supporting documents. For example, if you need to send payment for services to another company, bank may request a contract and invoice for this service, as well as details of your interaction. This is done to minimize the risk of money laundering and aiding fraudsters who may use international payments for criminal purposes.
Considering all these drawbacks, it may seem that making international payments is not advantageous, expensive, and time-consuming. And this is indeed, at the moment, not the most convenient method. But it is universal and widely accepted in most countries. In the era of globalization and internet, remaining confined to one country does not benefit most products, as it limits customer base, partners, and networking opportunities.
Why you need SWIFT and its major alternatives
International companies that have a number of partners abroad cannot do without using SWIFT technology. Because today, SWIFT is the only one network that has the broadest coverage and allows payments to be sent to almost any country and in different currencies. By gaining access to the system, you do not have to worry about the international capabilities of your business and can enter into partnerships with advantageous counterparties: not only those available in your own or neighboring country. But, considering all the aforementioned drawbacks, the search for alternative technologies often comes to the fore.
Although there is no full-fledged replacement for SWIFT yet, potentially a number of developments can pose significant competition to it.
For example, an alternative to SWIFT can be blockchain technology, which underlies cryptocurrency. Cryptocurrency allows payments to be sent around the world, regardless of countries and time of day. The technology works 24/7, and cost of payments is much lower than a standard SWIFT transfer. Well-known and established cryptocurrencies like Bitcoin, Litecoin, and Ethereum, however, have their main drawback — high volatility, which prevents them from fully functioning as a convenient payment instrument for all participants in this process. This problem is solved through the use of stablecoins — coins whose value is always stable and tied to fiat currency. For example, US dollar or euro. The most popular stablecoin today, USDT, developed by Tether, has become a universal payment instrument. USDT is used by gaming business for making payments to partners, receiving payouts from payment systems, and storing funds. The advantages of USDT include its constant stable value, as well as the ability to exchange it for fiat currency at any time using crypto exchanges. There are also other stablecoins developed by fintech companies that provide a variety of options. For example, USDC from Circle, which has even received approval from European Union's MiCA regulation and is aimed at an audience within the EU.
As frequently used alternatives for individuals, as well as some businesses, we can mention international payment platforms such as Wise. Sometimes they can be faster and cheaper than a standard bank transfer. Especially if transfer is made within the Wise internal system. MoneyGram, Western Union, and similar money transfer services between participating countries can also replace SWIFT for the daily needs of the population. Such payments are processed from several hours to several days, but they are cheaper, and they can also be received in cash at the point of sale. Of course, for businesses, Western Union and MoneyGram are not suitable in all cases, but they handle individual clients quite well.
Instant payment systems, like SEPA Instant in Europe or Faster Payments in the UK, allow for instant payments within their regions, which also replaces the capabilities of SWIFT and helps save on fees and charges. In Europe, almost all bank payments operate under SEPA system, which processes funds in euros and works only in the Eurozone. The local system is created based on integration of European banks and handles all euro payments. The disadvantage of this system is that payments are processed only on business days, but right now the EU is working to speed up processing time of transfers to 10 seconds and make them available 24/7. With the implementation of this update, payments under the SEPA system will become cheaper and even more in demand by businesses and individual users.
Among less universal alternatives, there are the SPFS (Financial Messaging System) in Russia and CIPS (Cross-border Interbank Payment System) in China, which are created for their own needs and used only by these countries.
In summary, we can say that SWIFT, although inconvenient in few ways, still forms the basis of international payment communication and required by most business projects. If you are looking to open a SWIFT IBAN account for your business, contact Monoup, and we will help you find the best banking provider option in your industry.
