How does SWIFT Work?
1. SWIFT enables the payee to transfer money to an account located in another bank in another country to uniquely identify a financial institution.
2. SWIFT assigns every financial organisation a unique code, which usually has eight or eleven characters. As for the eleven-character swift code, the first eight characters will be the same as the eight-character swift code.
3. The last three codes are usually used to identify individual branches.
4. In the classical eight-character swift code, the first four characters are the institute code, which is used to identify the financial institution. The next two characters indicate the country code, and the last two characters represent the location or city code.
To understand the workings of SWIFT we will go through two cases:
CASE 1: The Two banks have a commercial account with each other.
Let’s assume that GFG Inc. wants to transfer 1 Million dollars from their account created in Bank of America in the U.S.A. to XYZ. Inc., situated in Australia, has bank account in the National bank of Australia, a simple scenario is that two banks both have a commercial account with each other which means they do have an established relationship. In that case, Bank of America (GFG Inc.’s bank ) will send a swift message or payment instructions to National Bank of Australia (XYZ Inc.’s bank), and within a few minutes then Bank of America (GFG Inc.’s bank ) will deduct 1 million dollars from their account and National bank of Australia (XYZ Inc.’s bank) will credit 1 Million dollars in their commercial account. The last step is to credit 1 Million dollars to XYZ Inc.’s personal account minus any fees charged for the transfer.
CASE 2: Interacting banks do not have a commercial bank account with each other.
Let’s assume that GFG Inc. wants to transfer 1 Million dollars from their account created in Bank of America in the U.S.A. to XYZ. Inc., situated in Australia, which has a bank account in the National Bank of Australia, this will be a complex scenario as two banks don’t have an established commercial relationship with each other. So in this case, they will look for an intermediary Bank, which has a commercial relationship with both banks. This third bank will act as the bank in the middle to handle the transaction, and the step will be like this. Bank of America (GFG Inc.’s bank ) will deduct 1 Million Dollars from their bank, Bank of America (GFG Inc. bank ) will notify the bank in the middle to debit their commercial account by 1 Million Dollars and credit the commercial account of National bank of Australia (XYZ Inc.’s bank) for the same amount. National Bank of Australia (XYZ Inc.’s bank) will then credit the money to XYZ Inc.’s account. In this scenario, since there are more steps involved in the whole process more fees might be charged, and more processing time will be needed than in the previous simple scenario.