Several Russian banks were banned from the SWIFT financial-messaging system following Russia’s full-scale invasion of Ukraine. So, what does it mean to lose access to this important part of the international economy, and are there any viable alternatives?
Effective communication systems are the backbone of how the world stays connected, from mobile phones, email networks, to banks.
What do banks use to communicate?
SWIFT – or the Society for Worldwide International Financial Telecommunications – is a system that banks use to securely send messages to each other. It is one of the key pillars of the financial world, connecting more than 11,000 member banks in some 200 countries and territories globally. Trillions of dollars’-worth of currency are sent across borders every single day – and it’s largely thanks to the messages sent by SWIFT.
How does SWIFT work?
If you wish to transfer $1,000 from your bank in Singapore to your friend in the UK, you’ll need a few key details; namely your friend’s account number and his bank’s SWIFT code. If the two banks have an account with each other, they authenticate the payment request, apply an exchange rate and the equivalent amount is deducted from your bank account for your friend to receive.
If the banks don’t have a relationship, the message will be sent through intermediary banks, until the payment request is verified for your friend to receive his or her money.
“It’s really about secure, automated payments,” Alistair Milne, an economist at Loughborough University told CNBC. “This is so that everything integrates with the bank systems.”
What happens if a bank is banned from SWIFT?
SWIFT has been thrown into the spotlight with the Russian invasion of Ukraine, after which numerous Russian and Belarusian banks were removed from the SWIFT network as part of economic sanctions. This essentially means those banks’ ability to conduct financial transactions on an international scale has been disrupted.
However, SWIFT is not the only system for international transactions. Russia has its System for Transfer of Financial Messages or SPFS, serving 400 users as of February 2021. Twenty-three of the users were foreign banks.
The People’s Bank of China also has the Cross-Border Interbank Payment System, or CIPS. By 2019, it reached more than 3,000 banks directly and indirectly, across 167 countries and regions.
Furthermore, alternative networks like cryptocurrencies and the blockchain are advancing.
Caroline Malcolm, who heads international policy at blockchain data company Chainanalysis, acknowledges that a legacy system like SWIFT is hard to detach from. “But there are certain capabilities and features in blockchain-based systems that can’t be matched by traditional systems,” she said in an interview with CNBC. “Blockchain allows people to hold their own funds and control that in a very direct way.”
Watch the video above to find out more about the future of payments.