You think goods, services and money make trade happen? There’s something intangible yet more fundamental that enables trade. Trust me, you will find it in this article!
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Cursory google searches would have told you what SWIFT (Society for Worldwide Interbank Financial Telecommunication) is. I am not going to repeat it but will help you relate to it and tell you why it is important, briefly.
SWIFT Logo for representation purposes. Copyright with SWIFT
SWIFT is a messaging system. Yes, it is like email for banks. Only banks around the world can send and receive messages between themselves in this messaging system. And it has to be about a financial transaction. Which means they cannot exchange cute cat videos or talk about weather. Banks generally use SWIFT for asking for payment, instructing one another to make a payment, send each other confirmations of treasury or trade transactions they did amongst each other. Each message is an instruction or an important FYI that results in a financial action on the other side.
So why the big fuss if it is like an email system between banks. Open your email inbox now, yes now! See for yourself the loads of messages sitting in your inbox, junk box and spam box. Deep inside you will also see a mail from a Nigerian Prince wanting your help (payment request) to send you loads of money (Payment instruction). Smartly you ignored the message which could have otherwise costed you money and acidity.
To avoid the pesky Prince and other fraudsters, SWIFT has an elaborate system of authenticating senders and receivers of messages, which ensures that all message senders are authenticated (the banking version of a Twitter blue tick). Many of them have an added layer of identification between themselves through bilateral (key exchange) mechanisms. As a result, if a bank receives a SWIFT message, it is authentic, received from who they claim themselves to be and the message is ‘actionable’ . There are additional acccount mechanisms, but for the purposes of our understanding, suffice to say, it is a very authentic messaging system that keeps ALL SPAM out.
Reliable & Secure: “I haven’t received the email yet”. Some of us have used this excuse or know someone who has. Such excuses don’t work with SWIFT. In its 47 years of existence, SWIFT (claims that it) hasn’t lost a single message out of the billions that were exchanged in its platform. So secure is the platform that if a bank says they sent, the recipient bank would have received it.
Not only has SWIFT not lost a single message, but the platform is so secure that no one else was able to hack or gain access to messages that were not meant for them. Yes I hear that you have heard about hacks (Bangladesh central bank etc.) but these were login credentials abused instead of the SWIFT platform yielding to hackers. Again, not a single hack in almost half a century!
Some feat!
Automation: These days we live in an API driven world where our email talks to our bank, one application talks to another etc. But SWIFT has implemented automation (which it calls ‘Straight Through Processing’) for the last 20+ years. To facilitate this, SWIFT has standards and rules on how messages are to be structured, how each field needs to be filled for each business case and so forth. So, a huge portion of the millions of messages exchanged everyday have not seen human hands at all. They all have been generated by, handed off to, received by, read and acted upon automatically , by the myriad software applications in a bank [Core banking applications, Payment (product) Processors, Payment hubs, message queues and other technical jargons your friendly neighbourhood tech guy might help elaborate].
What is the big deal you may ask, RPA is a thing and a pilot too puts his plane on autopilot. Just like how the autopilot reduces human errors and saves lives, automation in SWIFT message processing reduces errors (financial — yeah your money), speeds up transactions (in most cases less than a day but not more than two) and thereby reduces cost for you as a customer of a bank.
Standard, widely used. We know countries can’t agree on political systems, can’t agree on borders between them and proudly agree to disagree on several areas. But if there has to be a stellar example of worldwide agreement on something that has held for a long time, it is the standards published by SWIFT. So in a sense, it is truly one of the very few things the world agrees on — before expelling some specified banks due to politics that is.
There is much much more to SWIFT than this article, but for someone who wants to understand what the big fuss is about, I believe this is a good starting point. Let me know your thoughts.
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This blog is an attempt to explain the world of international finance from a bird’s eye view. While it was written with a layperson audience in mind, some of my friends in this field who have read these posts, found the posts to be useful to understand the fundamentals. So if you are new to the world of international finance or are familiar with it at some level, you will still find these articles helpful to some degree.
If you are an expert and want to offer some suggestions or contribute subject matter, you are welcome and your contributions will be cherished!
A good way to understand the world of international finance is to take a scenario & see how things work. For this purpose, we will take the restrictions put on Russia by the west subsequent to its “special military operations” in Ukraine that started in Feb 2022. Remember, we aren’t taking any sides, but are using the situation to understand the world.
Some articles of this blog are standalone and can be read independently. However, if you are someone who would like to follow a structure, then you will find reading in the following order helpful.
As a first step, we need to become familiar with “what is money”. Yes we all use it, save it and grow it, but do we know what exactly it is? Read it up in Money money, who art thou?
Have you wondered how international trade works? And why most transactions in the world are performed in USD.Find out the answers in
The world of International finance works on a distributed giant machine composed of banks. Read more on how they play a role in facilitating trade across borders in Gods of Trust!
Or how the tools of international finance play a big role in Geo-Politics in The Kill Switch.
The thing with adaptive systems is -they adapt. If one of the players don’t play nice and makes a move that hurts others, everyone takes notice. A famous saying in geo-politics is, “capability is more dangerous than intent“. This is to say, when a player accumulates an advantage, whether the intent was good or malicious doesn’t matter. Because intentions can change at a moment’s notice but a capability may takes years to build. So if a country has a finger on the kill switch, some others will work on building another capability and a few others will try to make the kill switch useless. This is a relentless game. The next series of posts will look at the challengers to the current mechanism of international finance. How some are red herrings, some are just minor inconveniences and some, turn out to be more serious. In the first of the articles in this series, we see how some of the challengers have challenges.
A new kid is on the block, a money kid! It looks like its parents, but is more sophisticated. It is a simple, yet a powerful new form of money. And it seems to be blooming across the world. Yes we are talking about CBDC. What is it you ask? Find out in CBDC- A new form of money.
In, the shifting gears of cross border payments with CBDC, you will read about why several countries are implementing CBDCs and the different collaborative initiatives between countries in the world in this area.
We look at one of the most promising collaboration projects that is set to revolutionise payments in Let’s talk mBridge. Read how it reduces risk, cost & transfer time for all parties – countries in general, corporates that do business internationally and common people like us.
Supplementary articles:
These are “explainers” on some key concepts that assist the understanding of the main theme will also appear in this blogpost. They can be read anytime or as a supplement to the main ones.
Like the one on the SWIFT network at the below link.
