Payments System - Swift Network - Messages
Payments System - Swift Network - Messages
Payments System - Swift Network - Messages
WAQUAR AHMAD
Now that we understand correspondent banking, account relationships and how accounts are used,
But the question is how do banks communicate with other bank (Cross border)???
The time has come to look at SWIFT and SWIFTNet. Why is the SWIFT Network so crucial and why are
standards needed?
Banks and their correspondents must therefore exchange a lot of information. Various means were
used in the past for that purpose: Phone, Fax and Telex. These were fairly handy at the start. But with
the time, two major problems arose and they were worsened with the fast growing international trade.
1. Security
2. Manual work
The major role of SWIFT
Problem Solution
Security of the message transport Through SwiftNet network
Manual work Automation through standardization
SWIFTNet
SWIFTNet carries financial messages in a highly secure way from one party to another over the
network.
SWIFT has set up a Public Key Infrastructure (or PKI) and digital certificates to enable secure
communication among its participants. All communication going through SWIFTNet is highly
encrypted, so that an external party cannot spy on the message or forge it.
At the beginning, SWIFTNet was used to transport financial messages. Nowadays, SWIFT also provides
services for the transfer of high value documents, such as commercial contracts, in a safe and efficient
manner around the globe
SWIFT makes automation possible through Standardization
Before SWIFT, Communication was really difficult. Standards were therefore needed to enhance the
communication among banks. A standard is a widely accepted, agreed upon, or established definition
of what something should be.
SWIFT MT is a Financial Messaging standard, a common language that financial institutions use for
the exchanges of financial information with their customers and among themselves.
Automation can allow to process payments messages STP (Straight-Through Processing) without
human intervention at all. It is faster because the receiver quickly receives the funds, but cheaper as
well since no human intervention means less error and less rework.
In conclusion,
SWIFT transports financial messages, but does not hold accounts for its members and does not perform
payment clearing or settlement.
SWIFT developed a message standard (SWIFT MT) which has been adopted as international standard to help
financial institutions to automate messages processing and streamline their processes.
Foreign Exchange markets.
The foreign exchange market, simply called FOREX, is the place where supply and demand of currencies meet.
A transaction in the FOREX market always involve the buying of one currency and the simultaneous selling of
another currency. That is why currencies are always quoted in pairs. An FX rate quotation (e.g. EUR/USD or
USD/EUR) expresses the amount of money that can be bought of a certain currency in terms of another
currency.
EUR is Base currency. The currency that is actually traded in exchange of Quote currency (USD).
USD is the Quote currency or Price currency. The currency that is used to determine the base currency value.
The banks in the different countries belong to the main players of the FX market. They access the market to
trade the currencies on behalf of their customer or for themselves.
Banks make money on the FX markets by “playing” with the exchange rates. They buy at bid rate and
sell at ask rate. There are always bid price and ask price for a currency pair. The difference between ask
and bid price is called the spread.
When you look at rates, it is always important to understand from whose perspective you are looking at.
When do banks go to the FX market?
Banks do not send orders to the FOREX Market every time a customer instructs them to perform a
transaction in foreign currency. That would be too costly and inefficient. Instead of that, Banks collect all
the FX instructions until a point in time and then look at the FX account position to determine if they need
to buy the foreign currency (In case there is too little on the account) or if they need to sell it (In case
there is too much on the account).
In some cases, a bank may immediately access the market and trade a currency. It will not wait until the
time where the treasury looks at the currency account positions. That is the case generally for unusually
high amount transactions.
What are the Swift MT messages ???
SWIFT MT Messages
It allows all business and financial institutions to connect their network to exchange their financial messages.
Each network member is identified bi the BIC CODE also known as swift code.
Does BIC stand for “Bank Identifier Code” or "Business Identifier Code”
SWIFT BIC Codes can be used for the identification of financial and non-financial institutions. Companies and
similar entities like Non Governmental Organizations, can therefore be assigned a BIC code.
• LAFAFRPP is the BIC of Lafarge (LAFA) / in France (FR) / Main office of Paris (PP)
• LAFAFRPP446 is the BIC of Lafarge (LAFA) / in France (FR) / Main office of Paris (PP)/446 branch located in
that HQ Area
SWIFT MT Messages
No Description Space
MT 101 Request for Transfer Customer-to-Bank and Interbank
MT 103 Single Customer Credit Transfer Interbank
MT 202 General Financial Institution Transfer Interbank