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How does money move from one bank account to another when making international payments?
It’s an easy question to dismiss in this digital age. Numbers seem to dance on our phone and desktop screens, quickly losing the meaning behind them, and we no longer see the infrastructure beneath the surface carrying out the tasks.
Taking cash out of a bank in a big sack and then carrying that sack to another bank in another country is obviously nonsense, but the reality is that is what’s happening millions of times a day, except that the big sack of cash has been replaced by computer code.
One of the pieces of infrastructure used to communicate this code is the SWIFT messaging system.
SWIFT is a vast messaging network banks and other financial institutions use to send and receive information, such as money transfer instructions (Investopedia). It also acts as a global standard for these messages, meaning the instructions are understood by all participants across the world.
You can think of it as a global game of pass-the-parcel. When a bank in Country A wants to send money on behalf of its client to Country B, it will utilize the SWIFT messaging service. SWIFT assigns the banks that use it a set of numbers, along with numbers for the country, the region within that country, and the local branch it’s ultimately going to – this is what we know as a BIC code.
SWIFT doesn’t move the money or participate in the actual clearing of transfers at all; it simply provides the network that allows instructions to be sent on where the money should go.
At a base level, a financial institution can transfer money in and out of a country if they have a banking license for that country – this is the same for banks and fintechs.
The way the banking industry developed, however, meant that most banks are essentially national banks operating within one country i.e. they only have a banking license for the country they are based in. The way they operate outside of that country is having an agreement with a bank within the other country they want to do business with.
This is where SWIFT comes in – they act as the global messaging service between those national banks who want to make international payments.
Fintech takes a different approach by creating their own parallel payment network. This is based on acquiring many individual banking licenses around the world (a long and arduous process) and then combining them into a single network.
They then replace the complex SWIFT system of messaging between banks with a direct transfer within their own platform. This allows them to create more flexible networks as they own the infrastructure from one end to the other – their network, their rules.
This brings us to the crux of the matter – how does the fintech infrastructure system compare against the SWIFT messaging system when making international payments? Let’s look at it through 5 key parameters – Cost, Speed, Transparency, Security and Usability, paying particular focus on the end-user.
SWIFT is typically more expensive for end-users versus going through a fintech payment rail. This is because a SWIFT message can often go through several banks, several branches of that bank, and several countries. At each stage, the handler can charge a fee, both a straight-forward banking fee but also an FX commission for exchanging currencies.
As well as this, banking fees are typically higher than a fintech would charge for sending an international payment.
The fintech infrastructure means payments go directly from payer to payee, and both the charges per transaction and FX rates are low compared to the industry standard.
This is a big one. As we said before, the SWIFT messaging system can go through multiple touchpoints on its journey from payer to payee.
A whole plethora of delays can happen here, but even though most transactions will go smoothly, it often takes a few working business days for the money to land in the intended account.
With the integrated infrastructure fintech’s have built, even international payments are essentially real-time in a lot of cases because they are all travelling within the same system.
Transparency is another area where that integrated fintech infrastructure really pays off.
Imagine the SWIFT messaging system as all the international shipment companies working together to deliver your package. DHL picks up your item from the company that you bought it from, bring it to a FED Ex depot, UPS pick it up from there and bring it to the port, DHL ship it to your country, and then a local delivery service drops the package to your door.
Now, imagine having to track that. Now imagine something going wrong and trying to figure out where your package is by having to call all the companies.
We are now in a world where people want to order something and then track it at each stage of its journey in real-time. Because all international payments going through a fintech are going through a single ecosystem, both the payer and payee can track that payment like when they order a new lamp from Amazon.
This not only helps with keeping suppliers happy (and with fewer questions) it also helps the reconciliation process if things go wrong (such as the full amount not arriving due to unexpected fees).
A fundamental part of any financial system is the security underpinning it. If systematic risks aren’t reduced enough to be perceived as negligible, no business would use the system to send their hard-earned money.
The underlying truth here is that these systems are as secure as each other, mainly because A) everyone has to adhere to the same laws and regulations and B) every financial institution, including fintech’s, needs to have significant security in place to give their customers peace of mind.
A happy byproduct of the fintech revolution is that both sides have been pushing each other on the security front. As well as this, there is a healthy amount of collaboration and information sharing, especially around predictive and automated security systems. The priority on all sides is to keep the bad guys out.
Usability is a tough metric to compare as all systems are different. Remember, the SWIFT messaging service does not hold any funds of its own, it simply relays messages from one financial institution to another. This means that usability all comes down to the system the user has to communicate that message to SWIFT or to the fintech.
This is another area where fintech’s have been pushing the envelope in terms of making these systems user centric. This has led to traditional platforms investing to catch-up. It’s a win-win for the user.
Currently, 98% of all money transfers go through the SWIFT messaging system. This is a hugely dominant position in the market, and one that is not likely to be replaced soon.
The dominance of SWIFT could be seen in the Russian sanctions, where removing their banks from the SWIFT messaging system was debated more than almost any other move. This demonstrates how entangled the global financial system is with SWIFT, particularly at that governmental and institutional level.
This does not deter fintech’s however, because they know that their system has significant benefits for the user. Banks and financial institutions recognize this themselves, and partnerships and collaborations are very commonplace.
This direction of travel means SWIFT will remain dominant for some time to come, but we will probably see its market share diluted slowly but surely, with this competition hopefully driving better customer experience. This dilution may come in the form of direct replacement, or an amalgamation of infrastructures.
How will money move from one bank account to another in the future? That’s up to the market to decide.
If you want to learn more about how fintech’s can help your business move money faster, quicker and cheaper versus traditional methods, get in touch today.
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