Everything you need to know about SWIFT payments

In an increasingly global world, cross-border payments have become a central part of day-to-day business transactions. Money is sent across the world to international business partners and contractors and remote work has led to numerous companies having at least one if not several team members on their payroll who are based in foreign countries and thus need to receive their salaries via international money transfers. 

One frequently used term in the discussion about global payment solutions is SWIFT. It is estimated that more than 50% of all cross-border payments worldwide are issued via SWIFT transfers.

But what exactly are SWIFT payments? How do they work? And even more important: How much do they cost and how long do they take to process? In this blog post, we tell you everything you need to know about the SWIFT banking system.

The acronym SWIFT stands for Society for Worldwide Interbank Financial Telecommunication and designates a messaging and transaction network allowing banks and other financial institutions to exchange information on an international level. SWIFT is a member-owned cooperative with headquarters in Brussels, Belgium. 

It is important to note that the SWIFT system does not actually hold or transfer funds or securities, but merely provides a secure messaging space for international payment orders. Currently, the SWIFT banking system connects more than 11,000 institutions in over 200 countries worldwide. According to the SWIFT cooperative, the network processed on average 42 million messages per day last year.

Banks which adhere to the SWIFT banking system receive a special identifier code which is known as SWIFT code or SWIFT ID. Sometimes also called BIC code (Bank Identifier Code) or ISO 9362 code, this unique identifier is composed of 8 to 11 characters. These characters identify:

• The bank itself (first four characters)

• The country where it is located (next two characters)

• The location of the head office (next two characters)

• Optional: the individual branch (next three characters, sometimes replaced by “XXX”)

The purpose of the SWIFT code is to make sure that international payments are transferred to the correct bank. Therefore, you need to indicate the SWIFT code of the receiving bank when processing an international money transfer, along with the IBAN (International Bank Account Number) of the recipient which is needed to attribute the payment to the right account.

The aim of the SWIFT banking system is to enable secure financial transactions on an international level. Basically, SWIFT is a global bank network which allows participating institutions to exchange electronic information on payments and money transfers between them in a secure and standardized way.

Thanks to the fact that each bank which is part of the SWIFT system receives a unique SWIFT code, payments can be attributed to the correct financial institution, thus saving time and money. Since its creation in 1973, the SWIFT payment system has turned into a key element in the global financial infrastructure. Despite the presence of other providers of financial message services such as Ripple, the SWIFT banking system still holds a dominant position in the market.

Now that you know what SWIFT is and what SWIFT codes are for, you might ask yourself: “How does SWIFT work?”. Well, let’s take a closer look at how SWIFT payments between two participating banks are processed. As we’ve already explained, the SWIFT system sends a transaction message from your bank to the beneficiary’s bank which then credits the money to the beneficiary’s bank account. 

But what exactly happens in between? Well, the exact processing steps of the SWIFT payment depend on whether the two banks have a commercial relationship with each other, i.e. whether they are connected in a way that allows them to transfer funds directly between their respective Nostro and Vostro accounts.

Scenario 1: SWIFT transfer between banks with a direct commercial relationship

The first scenario is the easier one - and the one which usually involves less fees. Let’s assume you want to send money from your bank account with a UK-based bank to an employee bank account in Hong Kong. Both banks are part of the SWIFT system and are in a commercial relationship with one another. In processing terms, the SWIFT transfer will involve the following steps:

• SWIFT message from UK bank to Hong Kong bank containing payment instructions

• UK bank will debit your account by the amount you want to send to your employee

• UK bank will credit the amount to Hong Kong bank

• Hong Kong bank will credit your employee’s personal account

Please note that this is a simplified version of the process and that there are further actions involved in the actual money transfer process between the two financial institutions. Resulting transaction fees are also left out.

Scenario 2: SWIFT transfer between banks without a direct commercial relationship

Let’s stick with our example from scenario one. But this time, the two banks don’t have a direct commercial relationship. In this case, the payment can’t be processed directly between your bank and the recipient’s bank. Instead, the transaction needs to go through one or even several intermediary banks.

For example, both banks (i.e. the UK bank and the Hong Kong bank) could have an established relationship with an American bank which would then become the intermediary (also known as correspondent) bank. The SWIFT money transfer would then become more complicated and involve the following steps:

• SWIFT message from UK bank to Hong Kong bank in order to work out a way to process the transfer via an intermediary bank

• UK bank will debit your account by the amount you want to send to your employee

• UK bank will credit the amount to the intermediary bank, i.e. American bank

• American bank will credit the amount to Hong Kong bank which is the beneficiary’s bank (usually this is where additional transaction fees arise)

• Hong Kong bank will credit your employee’s personal account

Needless to say, the more intermediary banks are involved in the SWIFT payment, the longer it takes and the higher the cost of the transaction.

Despite the advance in technology, SWIFT transfers aren’t processed in an instant. Even in the 21st century, moving money across the globe takes time. Factors that influence the processing time of a SWIFT payment include:

• Number of intermediary banks needed for the SWIFT transfer

• Anti-fraud checks, also with regard to international money laundering, which are carried out for each transaction

In general, SWIFT payments take between 3 and 5 days to be processed. For transfers within the EU, processing times are usually between 1 and 2 days.

Although the SWIFT banking system is designed to facilitate international bank transfers for banks which are already connected through the system, sending money across the globe can be an expensive endeavor. As mentioned before, transaction fees levied by intermediary banks are one aspect to consider.

In addition, sending money in a foreign currency usually means having to pay foreign exchange fees. Conversion charges and service fees can quickly add up, resulting in a total cost of up to 50 euros per transaction.

Another aspect to consider is that many banks also charge the recipient of a payment, which may be a remote employee working for your company. Before making a SWIFT payment to foreign employees, you should therefore make sure to advise your bank to put all charges on your account - including those potentially levied by an intermediary bank.  

Learn more about SWIFT charges in our related Help Center article.

One of the key challenges in global payroll is getting everyone paid on time and in the correct currency. Depending on the size of your globally distributed workforce and the countries your team is spread across, issuing payments to all team members will be a time-consuming and expensive process which further requires a considerable amount of careful planning to make sure everyone receives their pay without delays. 

Imagine having to issue a separate SWIFT transfer for every single employee once every month - or even more frequently, depending on the chosen/ legally determined payment frequency. As it is, ensuring global compliance already is quite a burden for payroll teams and they really don’t need any additional worries added to their workload.

With a global payroll solution like Lano, you don’t have to worry about how to pay your remote employees anymore. Our smart platform comes with a digital wallet allowing you to pay contractors and employees in over 170 countries, choosing from 28 different currencies. Get in touch today to learn more about how Lano can help you simplify your global payroll and pay employees and contractors worldwide with one click.