50 years of SWIFT - will there be 50 more?

50 years ago, Pink Floyd’s The Dark Side of the Moon was being played for the very first time but when it came to payments, travelling far distances wasn’t simply being imagined, it was actually happening. It was 1973, and SWIFT had formed. Now, there would be a common method for communicating about cross-border payments.

50 years on, the initiative to found SWIFT is taken somewhat for granted. Payments is now a highly competitive and congested industry, producing extraordinary innovations from mobile wallets to cryptocurrencies. The question therefore is, although SWIFT changed the world 50 years ago, does it have another 50 years ahead of it? Let’s find out.

The origins of SWIFT

Money is an undeniably important matter – not something you wish to miscommunicate about. However, before SWIFT emerged, internationally sending the right amount quickly and with no disputes was easier said than done.

This was exasperated by the fact that roughly 80% of international payment instructions were still sent by mail in 1977, making the completion of trade a lengthy process. On top of this, instructions were not standardised. Consequently, misunderstandings regarding payments were rife, only increasing the time for successful transactions.

Evidently, a resolution was needed. By the 1950s the beginning of digitalised payments with the help of satellites might well have been underway, but a method to ensure efficient communication remained elusive. Initially, banks saw this as a monetising opportunity with the likes of Citibank creating their very own Machine Readable Telegraphic Input (MARTI) as a subscription service for communication standards in the Eurodollar market. Yet with the concept proven and financial institutions across the globe all needing access to a solution that worked, it wasn’t long before a collective formed to found the not-for-profit organisation, SWIFT.

With 239 banks from across 15 countries, machine-readable encrypted messaging standards, and reduced costs, SWIFT would become the world’s primary interbank messaging service.

Challengers to SWIFT’s dominance

As the organisation which first unified international payments, it is no surprise that SWIFT has gone on to be used by over 11,000 institutions and process an average of 44.8 million messages a day. However, as noted, the payments landscape is forever evolving, meaning that there is no certainty that SWIFT will continue to hold a monopoly in its field.  

In fact, there have already been many challengers to SWIFT such as Ripple, Wise, and Airwallex. Each of these alternative rail systems fundamentally have the same aim as SWIFT yet despite their wish to challenge the established player, their numbers nor infrastructure can compete. This is reflected by how Wise in fact leans on SWIFT so that it can send money to Japan, South Africa and other countries. Similarly, 7% of Airwallex’s transactions go through SWIFT, once more demonstrating the former’s longevity despite disruptive newcomers wishing to present themselves as independent, innovative alternatives.

Despite these private enterprises’ great ability to streamline international transfers and make them cheaper, it therefore appears that a more persuasive reason is required for institutes to part ways with the familiarity and security of SWIFT. Over the last couple of decades, one such reason has become increasingly prevalent – international independence.  

Ever since the turn of the century, it has not been uncommon for countries to vote upon temporarily expulsing financial institutions of foreign countries from the SWIFT network. Iran, North Korea and most recently Russia have all had such threats made against them, resulting in global payment schemes becoming weaponised. As is often the case when it comes to weapons, an arms race has ensued. This has seen nations that often find themselves ostracised from the views of those who are members of SWIFT creating their own alternative payment innovations. For instance, China and Russia have both created Cross-border Interbank System (CIPS) and System for Transfer of Financial Messages (SFPS) respectively.

CIPS and SFPS are not just SWIFT alternatives for China and Russia, they also present a different option for any financial institution which wishes to sign up to them. Already, SFPS has garnered connections with 1,280 financial institutions from 103 countries and regions. As a result, these payment developments – borne out of hostile geopolitical situations – give rise to the possibility of organisations and nations abandoning SWIFT so that they can trade without the threat of sanctions.

Ultimately, as an international not-for-profit organisation with masses of private partners, it is unsurprising that SWIFT experiences rivals from both the private and public sectors. However, for now at least, it appears that SWIFT remains in a commanding position when it comes to facilitating cross-border transactions.

SWIFT’s plans for longevity

Sometimes legacy is viewed as a downfall. Within the disruptive payments industry, this isn’t surprising considering that companies which aren’t able to pivot and adopt new innovations are prone to being left behind. However, SWIFT’s legacy is arguably large enough to have the opposite effect – it enables innovation whilst sustaining loyalty.  

Thanks to working with over 10,000 institutions for half a century, as an organisation, SWIFT has accumulated a high level of trust and partners. As a result, it is able to leverage a huge wealth of knowledge and encourage key players to adopt new solutions with enviable ease, helping it keep pace with payments developments.

For example, in the last few years, SWIFT has innovated with the introduction of:

• SWIFT Go – international transactions are still inevitably more complex and costly than domestic ones. Conducting them has therefore got to be worthwhile and as a result usually only consists of large sums. However, with SMEs increasingly wishing to expand their customer base, SWIFT realised that an affordable way to conduct low-value cross-border payments was needed.
  
  In 2021 SWIFT Go was therefore launched with roughly 600 lenders from across 120 countries joining in under 2 years. Now, small sums of money can cross borders in under three minutes or less on average.
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• Payment pre-validation – SWIFT's success is founded upon it ensuring that communication regarding transactions is standardised; however, this great work goes to waste if the related payment data is incorrect. After all, if a beneficiary’s information is wrong, a transaction is very unlikely to complete.
  
  Since November 2022, SWIFT has been operating a resolution to this issue. Its payment pre-validation system deploys APIs between sending and receiving banks from the beginning of any transaction to ensure that all details are correct before payments take place. As a result, the number of time-consuming payment investigations have been cut drastically.
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• Cross-border CBDCs – CBDCs are not designed to leave their domestic networks; however, if they and other forms of cyrptocurrencies are to become the future of payments, they will need to find ways to work in cohesion. This is an aim which SWIFT is aiming to realise with its latest project.
  
  Having run a successful sandbox of its solution to this problem for 12 weeks with banks from France, Germany and Singapore, SWIFT is now progressing its innovation in this area to a beta stage. If all goes according to plan, SWIFT will once more be at the heart of international payments, enabling digital currencies to easily communicate with one another.

Checking change, checking constants

As always, innovation comes with the demise of previous technologies; however, some things don’t change. No matter whether cross-border payments occur with the assistance of SWIFT or without, there will always be the need for financial controls such as reconciliation. Invest in an automated reconciliation platform which will keep you operational today, tomorrow, for 50 years, and beyond by booking your Aurum demo.