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Top 4 Swift Alternatives Revolutionizing Cross-Border Payments in 2024

10 Mins

July 1, 2024

For over 40 years, Swift (Society for Worldwide Interbank Financial Telecommunications) has been the cornerstone of cross-border payments. However, with businesses now viewing payments as a critical growth driver, many are rethinking Swift's role. Despite its vast network and reliability, Swift’s international transactions can be slow, expensive, and opaque. These issues can disrupt cash flow, complicate financial planning, and potentially hinder business expansion.

In recent times, the payments industry has evolved significantly, driven by the advent of banking APIs, fintech advancements, and blockchain technology. Blockchains, in particular, hold great potential to address many of Swift’s limitations. They operate without borders, are available 24/7, and enable direct payments from payer to payee, eliminating intermediaries.

This article will delve into how Swift operates, the advantages and drawbacks of using it for cross-border payments, and why businesses are increasingly turning to innovative technologies like blockchain and digital currencies to enhance their payment strategies and maintain a competitive edge.

An Overview of Swift

Founded in 1973 and operational since 1977, Swift, or the Society for Worldwide Interbank Financial Telecommunications, is a cornerstone in global finance. Essentially, Swift is a vast messaging network that enables banks and financial institutions worldwide to transfer money using standardized codes.

As the leader in cross-border transactions, Swift includes over 11,000 member institutions, such as banks, brokerages, securities dealers, asset management companies, clearinghouses, depositories, remittance services, and non-financial businesses. These members send an average of 44.8 million messages daily, mostly related to securities (51%) and payments (44%). Swift also handles treasury, trade, and system transactions.

Membership in Swift requires a one-time joining fee and annual support charges, which vary based on classification. Additionally, users are charged per message, with costs depending on type, length, and volume.

Beyond cross-border transfers, Swift offers services like real-time business intelligence, market insights, and compliance tools, enhancing member operations.

Swift is overseen by the central banks of the G-10 countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.

How does Swift work?

Swift operates through a sophisticated system of codes and messaging protocols. Let’s explore the key components that make Swift function seamlessly.

BICs (Bank Identifier Codes)

Each financial institution within the Swift network is assigned a unique code known as the Bank Identifier Code (BIC), also referred to as Swift code, Swift ID, or ISO 9362 code. These codes, comprising either eight or eleven alphanumeric characters, are structured as follows:

  • First four characters: Institution code
  • Next two characters: Country code
  • Next two characters: Location/city code
  • Last three characters: Organization’s Branch code (optional)

Examples of BICs include:

  • HSBC: HSBCHKHHHKH
  • Standard Chartered: SCBLHKHH
  • Bank of China: BKCHHKHH

Swift maintains detailed information about each institution behind their BIC, such as legal name, address, and business type. Institutions must verify and update this information annually or upon any changes.

SwiftNet

Swift’s messaging platform, SwiftNet, uses numerous codes to categorize various types of cross-border payments and transfers, organized into eleven categories:

  • Category 1: Customer Payments and Cheques
  • Category 2: Financial Institution Transfers
  • Category 3: Treasury Markets - Foreign Exchange, Money Markets, and Derivatives
  • Category 4: Collections and Cash Letters
  • Category 5: Securities Markets
  • Category 6: Reference Data
  • Category 7: Treasury Markets - Commodities
  • Category 8: Documentary Credits and Guarantees/Standby Letters of Credit
  • Category 9: Travelers Cheques
  • Category 10: Cash Management and Customer Status
  • Category n: Common Group Messages

SwiftNet Messaging Services

SwiftNet offers four primary messaging services:

  • FIN: FIN, the original and most popular of Swift’s messaging services, handles single transactions on a 'message-per-message' basis. Operating in 'store-and-forward' mode, it ensures messages can be sent even if the recipient is offline. FIN offers several additional features: users can prioritize urgent messages for quicker processing, receive notifications for both successful deliveries and non-delivery alerts, and retrieve messages exchanged over the past 124 days.
  • InterAct: InterAct encompasses all the functionalities of FIN while introducing advanced features like real-time messaging and instant query-and-response options. Utilizing the XML-based Swift MX (Message Exchange), a non-proprietary format, InterAct allows for the inclusion of additional data elements from various financial software systems, making messages more detailed, trustworthy, and easier to process.
  • FileAct: FileAct facilitates bulk payment processing and is also designed for transferring large batches of various message types, including images, reports, and operational data.
  • WebAccess: WebAccess, formerly known as Browse, utilizes SwiftNet to provide users with secure access for uploading and navigating web applications and financial portals.

Sending a Swift Message

To utilize Swift’s messaging services, institutions must connect to SwiftNet via telephone landlines, direct internet connections, Swift’s cloud service (Lite2), or indirectly through partners. Swift provides various interfaces to simplify code assignment, message reception, and integration with other financial systems.

The process of sending a Swift message involves creating a message package containing the sender’s BIC, message code, recipient’s bank details, payment amount and currency, payment purpose, and proof of funds. Swift encrypts and transmits the message to the recipient institution.

Direct transfers require a direct commercial relationship between the sending and receiving banks, with corresponding Nostro/Vostro accounts. If such a relationship doesn’t exist, the payment is routed through intermediary banks (correspondent banks).

SwiftNet messages also specify who will pay the processing fees, with three options:

  • “OUR”: The sender foots the entire bill.
  • “BEN”: Short for “beneficiary,” meaning the recipient takes care of the fees.
  • “SHA”: Stands for “shared,” with both sender and receiver splitting the costs.

Upon message delivery, the involved banks adjust their accounts accordingly, completing the transaction.

Advantages of Swift for Businesses

Before Swift, banks and financial institutions relied on telegraphic transfer, also known as Telex, for international money transfers. However, Telex had significant drawbacks due to its lack of a unified data standard, leading to slow, insecure, and error-prone transactions.

Swift revolutionized cross-border payments by addressing and fixing many of the issues associated with Telex. It established a standardized and secure method, which has become the dominant system for processing international transactions.

Data Standards

SwiftNet messaging services utilize a unified ML data standard, and the advent of XML-based MX messaging has facilitated the integration of data from third-party systems. Currently, Swift is transitioning to the new ISO 20022 message standard, which supports enhanced data in a richer, more structured format, improving data clarity and consistency across transactions.

Security and Reliability

Security and reliability are hallmarks of Swift, delivered through a Virtual Private Network (VPN) that ensures privacy and protection via encryption, authentication controls, integrity checks, and non-repudiation protocols.

Innovation

Swift continues to innovate with new payment services.

Swift gpi (Global Payments Innovation), launched in 2017, unifies disparate domestic real-time payment networks. It employs a unique end-to-end transaction reference (UETR) to track payment status in real-time and reroute them to faster paths. With a pre-validation feature, Swift gpi reduces transaction failure rates. Already, it facilitates $300 billion in daily transactions, with 50% completed within 30 minutes and 96% in under 24 hours.  

In 2021, Swift introduced Swift Go (H4), aimed at SMBs making low-value (under 10,000 USD, GBP, or EUR) cross-border payments. Additionally, Swift offers numerous other services, including compliance tools, analytics, issue resolution, and record-keeping.

Single Network

Swift’s comprehensive platform allows businesses to handle all aspects of cross-border payments without resorting to multiple systems, resulting in significant cost savings.

Faster Payments

Swift’s messaging network and integrations enable straight-through processing of cross-border transactions, reducing settlement times from days to minutes and improving cash flow positions for institutions.

Transparency

Banks using Swift gain visibility into payment statuses and processing fees. The unique end-to-end transaction reference (UETR) provided by Swift gpi tracks payments in real-time, reducing the need for manual follow-ups and enabling faster action on exceptions and investigations.

Trust

With over 44 million messages transmitted daily and 40 years of proven technology, Swift is a trusted entity in global finance. Its commitment to innovation ensures that it continues to meet the evolving needs of its customers, providing a peace of mind that their transactions are secure and reliable.

Major Hurdles in Using Swift

Even with recent advancements, Swift, a 40-year-old technology, still presents significant challenges for banks and financial institutions, impacting their ability to serve business customers effectively. This can result in higher costs, slower settlement times, and the need for complex, manual processes. These factors reduce competitiveness and strain cash flow.

The extent of these challenges varies for each business. The effects depend on transaction volumes and values, the number of markets and currencies involved, and the availability of affordable IT resources.

Slow Settlement Cycles

Swift isn’t known for its speed. Transactions can drag on for up to five days, especially when multiple intermediary banks are involved. Additionally, stringent fraud management practices, while necessary, can slow things down even further, adding layers of friction.

Technical Complexity

Swift isn’t a straightforward, plug-and-play system. Setting it up and maintaining it requires substantial resources, and these costs are often passed on to customers. Furthermore, integrating Swift with other financial systems can be a daunting task, limiting the potential for automation and streamlined processes.

Opaque Fees

With Swift, banks and financial institutions set their own fees, resulting in a patchwork of charges. This inconsistency grows when intermediary banks join the mix for cross-border transactions. Often, businesses don’t discover the actual costs until after the transaction is complete, making reconciliation a headache and financial planning tricky due to unexpected fee deductions.

Ecosystem Vulnerabilities

Swift's effectiveness hinges on the smooth operation of every link in the chain. If any institution in the network encounters issues, it can cause delays or even block payments, creating a domino effect of disruptions.

Political Influences

Swift is governed by the G-10 central banks, which are influenced by their respective national governments. Political tensions can impact which banks and institutions can use Swift. For example, banks in countries like Russia, Iran, and North Korea are currently barred from accessing the Swift network due to geopolitical conflicts.

The best 4 Swift alternatives for 2024

Businesses have several alternatives to Swift for enhancing cross-border payments. However, the effectiveness of these alternatives can vary. The best option depends on the specific needs and characteristics of each business, as well as their ability to access these alternatives.

Card Networks

International card networks like Visa, Mastercard, and Amex offer businesses a popular and reliable way to handle payments from global customers. These networks are not only widely accepted and secure but also incredibly convenient for cross-border transactions.

With B2B commerce moving online at a rapid pace, card networks are gaining traction in this sector. They also entice businesses with reward and protection schemes, encouraging more transactions. However, it’s important to be mindful of currency conversion fees and other charges that can apply. While they offer many benefits, these card networks often rely on Swift’s infrastructure, meaning they can still face some of the same issues, like slow settlement times.

Other Banking Networks

Global ACH, also known as International ACH Transfer, offers a way to move money between U.S. and foreign bank accounts by utilizing various national payment systems like EFT, SEPA, BACS, and BECS. In Europe, SEPA (Single Euro Payment Area) stands out as a leading international banking network.

Domestic banking networks can also be leveraged for international payments. Examples include Fedwire in the U.S., CIPS in China, BACS in the UK, BECS in Australia, and EFT in Canada. Additionally, India and Singapore have recently linked their digital payment systems, UPI and PayNow, allowing for instant, low-cost fund transfers, benefiting customers from eight participating banks.

These alternative networks provide businesses with various options to enhance their cross-border payment processes, tailoring solutions to specific needs and regional infrastructures.

Fintechs

Fintech companies enhance traditional banking networks by leveraging APIs to address the challenges of international money transfers. They offer innovative services like pre-funding to create the illusion of 'instant' payments, automatic rerouting for the fastest and most efficient settlement paths, real-time tracking of payment progress, seamless integration with other services such as foreign exchange, compliance management, and superior customer support.

By partnering with fintech providers, businesses can delegate much of the work involved in processing cross-border payments, allowing them to focus more on their core activities. Leading fintech providers in this space include TransFi, Airwallex, Nium, and Wise, each offering unique solutions to streamline and improve international transactions.

Blockchains and Digital Currencies

Blockchains are decentralized ledgers shared among nodes on a computer network, independent of traditional banking and card systems. This independence means blockchains are not constrained by operating hours or geographic boundaries. They offer a territory-agnostic, single-currency system with transparent protocols accessible to users worldwide.

On a blockchain, users can transact directly with one another, bypassing third parties and thereby reducing costs and settlement times. While blockchain technology is a proven method for secure transactions, the digital currencies that operate on them (like Bitcoin) are often unregulated and can be highly volatile. Stablecoins address this volatility by pegging their value to fiat currencies. For instance, Tether USD (USDT), pegged to the US dollar, has a market cap of around $83 billion.

Blockchains and digital currencies also facilitate efficient fiat currency transactions. In this process, the payer uses a fiat currency to 'on-ramp,' which is then converted to a digital currency (typically a stablecoin). This digital currency is transferred across the blockchain and subsequently converted to the payee's preferred fiat currency.

TransFi leverages blockchain technology to offer innovative cross-border payment solutions through its Payouts and Collections product. This service allows businesses to streamline their international transactions, providing fast and cost-effective solutions.  

Additionally, Central Bank Digital Currencies (CBDCs) present a regulated digital currency alternative for cross-border payments. Issued by central banks, CBDCs offer greater regulatory oversight. With over 100 CBDC projects currently in various stages of development and testing worldwide, the landscape for blockchain-based payments continues to evolve, promising more secure and efficient solutions.

Conclusion

While Swift remains the cornerstone of cross-border payments, continuously enhancing its offerings, businesses today have a wealth of alternatives at their fingertips. Fintech innovations, spearheaded by open banking APIs and blockchain technology, are paving the way for more agile and cost-effective solutions.

TransFi exemplifies this shift with its cutting-edge products like Payouts, Ramp, and Collections, which revolutionize international transactions by making them faster, more efficient, and more transparent.

Yet, even the most progressive businesses are unlikely to completely move away from Swift. Instead, we're entering an era of coexistence, where companies will blend traditional methods with modern innovations, tailoring their strategies to what works best for them. This dynamic landscape promises to fuel ongoing advancements in cross-border payments, ultimately giving businesses a competitive edge and greater flexibility in managing their global finances.

TransFi Team

Unlocking the Future of Finance

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