In the interconnected world of global finance, there’s a behemoth system that plays a pivotal role in ensuring secure, standardized, and swift communication between financial institutions. This system is known as SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication.

What is the SWIFT Network?

SWIFT is a global member-owned cooperative that provides a network through which financial institutions can send and receive information regarding financial transactions. Established in 1973, SWIFT replaced the older telex technology, which was slower and less secure, with a system that could handle the massive volume of requests in the evolving world of international banking.

How Does SWIFT Work?

SWIFT doesn’t transfer money or securities. Instead, it sends payment orders between institutions’ accounts using a standardized system of codes. These payment orders must be settled by correspondent accounts, often referred to as “nostro” and “vostro” accounts, that the institutions have with each other. The complete process involves:

• Ordering Customer: Initiates the transfer through their bank.
• Ordering Bank: Sends a SWIFT message to the beneficiary’s bank.
• Beneficiary Bank: Receives the SWIFT message and credits the beneficiary’s account.
• Beneficiary: The end customer who is supposed to receive the money.

Scenario:

John, living in New York City, wants to send $10,000 to his sister, Maria, who resides in Paris, France. John holds an account with Bank of America (BoA), while Maria has an account with Société Générale in Paris.

Steps:

1. Initiating the Transfer:
   • John visits his local BoA branch or logs into his online banking and requests an international wire transfer of $10,000 to Maria’s account in Paris.
   • John provides all necessary details, including Maria’s account number, bank name, and bank’s SWIFT code/BIC (Bank Identifier Code).
2. Ordering Bank (Sender’s Bank) Processing:
   • BoA prepares a SWIFT message, specifically an MT103 (Customer Credit Transfer), to request the transfer of funds to Maria’s account.
   • The MT103 message will include various details such as the transaction reference number, ordering customer details (John), beneficiary details (Maria), amount to be transferred, currency, and any other necessary transaction details.
3. SWIFT Network:
   • BoA sends the MT103 message via the SWIFT network to Société Générale.
   • The SWIFT network ensures the secure and standardized transmission of the MT103 message from BoA to Société Générale.
4. Beneficiary Bank (Receiver’s Bank) Processing:
   • Société Générale receives the MT103 SWIFT message and recognizes it as a request to credit funds to Maria’s account.
   • After all checks and processing, Société Générale credits €8,500 (assuming a conversion rate of 1 USD = 0.85 EUR and no fees for simplicity) to Maria’s account.
5. Completion:
   • Maria receives a notification from Société Générale (either via SMS, email, or her online banking portal) that her account has been credited with €8,500 from John.
   • John also gets a confirmation from BoA (either as a paper receipt, an email, or an online notification) that his international transfer of $10,000 to Maria has been processed.

It’s important to understand that while the SWIFT message is sent almost instantaneously, the actual fund transfer can take anywhere from several hours to several days. This delay is due to various checks, intermediary banks, currency conversion processes, and banking hours. The SWIFT network simply facilitates the communication between banks, ensuring that the payment orders are standardized and secure. The actual transfer of funds happens through correspondent banking channels.

Structure of SWIFT Messages

A SWIFT message has a unique format structured into multiple parts:

• Application Header: Identifies the type of message.
• User Header: Carries the routing information.
• Text Block: Contains the actual content of the SWIFT message.

Each field within a SWIFT message is represented by a tag number. For example, in an MT103 message (used for customer credit transfers), “:20:” denotes the transaction reference number, while “:50K:” represents the ordering customer.

{1:F01BANKBEBBAXXX2229054112}{2:O1030919010103BANKDEFFXOXO2256995765N}{4:
:20:TRANSACTIONREF1
:23B:CRED
:32A:190109USD1000000,
:33B:USD1000000,
:50K:/1234567890123456
JOHN DOE
123 MAIN STREET
ANYTOWN, US
:59:/9876543210987654
JANE SMITH
456 ELM STREET
OTHERTOWN, US
:71A:SHA
:72:/INS/BANKUS33XXX
-}

Here’s a brief breakdown of this message:

• {1:…}: Application Header (Basic Header) – Contains information about the message type.
• {2:…}: User Header – Carries routing information and the message’s priority.
• {4:…}: Text Block – This is where the actual SWIFT message content resides.
  • :20: Transaction Reference Number
  • :23B: Bank Operation Code (CRED indicates a credit transfer)
  • :32A: Date of the transaction, currency used, and the transaction amount
  • :33B: Currency and the original ordered amount
  • :50K: Details of the ordering customer (sender)
  • :59: Beneficiary details (receiver)
  • :71A: Details of charges (SHA indicates shared charges between sender and receiver)
  • :72: Sender to receiver additional information

This standardized format ensures that all financial institutions on the SWIFT network can consistently interpret and process transactions, regardless of the parties’ geographical locations or native languages.

Architecture and SWIFT

The SWIFT network, in essence, is a vast messaging network used by banks and other financial entities to quickly, accurately, and securely send and receive information, such as money transfer instructions. Let’s dive into the technological infrastructure behind SWIFT:

1. Message Formats (MT & MX): SWIFT messages are formatted to certain standards. Traditionally, SWIFT used ‘MT’ (Message Type) messages with specific formats for various transaction types (e.g., MT103 for customer credit transfers). Nowadays, SWIFT has been moving towards XML-based ‘MX’ message formats under the ISO 20022 standard, which offers more structured and detailed messaging.
2. FIN & InterAct: These are two of the primary messaging services on the SWIFT network.
   • FIN is the legacy message transfer application. It’s a store-and-forward system for MT messages.
   • InterAct is used mainly for MX (ISO 20022) messages and offers more real-time message processing.
3. SWIFTNet Link: This is the software that users need to connect to SWIFTNet (SWIFT’s network). It communicates with the user’s back-office systems and handles sending and receiving SWIFT messages.
4. Hardware Security Modules (HSM): For security, SWIFT mandates the use of HSMs, which are devices that manage digital keys securely. All SWIFT messages are signed using a digital signature to ensure their integrity and authenticity, and HSMs play a crucial role in this.
5. Alliance Access & Alliance Gateway: These are the main interfaces between an institution’s internal systems and the SWIFT network. They process SWIFT message operations, including message creation, routing, and communication with SWIFTNet.
6. Distributed Architecture: SWIFT has a robust distributed architecture with multiple data centres globally. This ensures high availability and redundancy. In the event one data centre faces issues, the network can continue to operate normally.
7. SWIFT GPI (Global Payments Innovation): This is a more recent service aiming to enhance cross-border payments. It uses a cloud solution and offers features like end-to-end payment tracking, ensuring faster and more transparent cross-border transactions.
8. Security & Compliance: SWIFT has stringent security requirements for its members. The Customer Security Programme (CSP) by SWIFT lays out a series of controls and checks that members must implement. This includes regular external and internal assessments, ensuring that the network remains secure against potential threats.
9. Network Protocols: SWIFT uses standard internet protocols (like TCP/IP) but layers them with heavy security. The combination ensures global accessibility while maintaining security.

Security and SWIFT

Given the sensitive nature of its operations, SWIFT prioritizes security. It employs a combination of hardware, software, and protocols to ensure the confidentiality and integrity of its messages. Institutions using SWIFT need specialized hardware and software interfaces that meet the cooperative’s stringent security requirements.

SWIFT’s Role in the Modern Financial Landscape

While SWIFT’s primary purpose is to facilitate cross-border payments, its role has expanded:

• Sanctions and Compliance: With global geopolitics always in flux, SWIFT has been leveraged as a tool for enforcing international sanctions.
• Innovations: SWIFT has not rested on its laurels. The introduction of initiatives like the Global Payments Innovation (gpi) aims to modernize cross-border payments further, ensuring they are faster and more transparent.

Alternatives and the Future

While SWIFT remains dominant, alternative systems and technologies, such as blockchain, are being explored for cross-border transactions. Countries like Russia and China have also looked into developing their domestic alternatives to SWIFT.

Blockchain vs. SWIFT

SWIFT:

Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized, and reliable environment.

• Centralized: Operates on a centralized model where transactions are processed through a series of centralized nodes, namely the banks and financial institutions.
• Message-Based: SWIFT essentially transmits messages that instruct payments between customer accounts at different banks.
• Intermediary: Often, transactions between banks in different countries will involve intermediaries, sometimes multiple, which can add time and cost to the process.
• Standardized: Uses standardized transaction formats (like MT or the newer ISO 20022).
• Speed: Despite being called SWIFT, the actual money transfer can sometimes take days, primarily due to the processes of intermediary banks, compliance checks, and currency conversion.

Blockchain:

A blockchain is a decentralized and distributed digital ledger used to record transactions across many computers. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.

• Decentralized: Unlike SWIFT’s centralized model, most blockchains operate on a decentralized model. This means no single entity has control, and transactions are processed collectively by the network.
• Token-Based: Most blockchains represent value with tokens (like Bitcoin or Ether). When a transaction occurs, actual tokens move on the blockchain, rather than just sending a message.
• Peer-to-Peer: Blockchains allow for peer-to-peer transactions, eliminating the need for intermediaries. This can result in faster and cheaper transactions, especially for international transfers.
• Cryptography: Uses strong cryptographic principles for transaction validation and data integrity. This makes transactions tamper-evident and secure.
• Smart Contracts: Some blockchains, like Ethereum, allow for “smart contracts” – self-executing contracts where the terms are written into lines of code. This can automate and streamline many financial processes.
• Transparency: Public blockchains, by design, are transparent, meaning that every transaction can be viewed by anyone and any time, ensuring full traceability of transactions.

Major Differences between SWIFT and Blockchain:

1. Architecture: SWIFT is centralized, while most blockchains are decentralized.
2. Control: SWIFT is governed by the member banks and the SWIFT organization, while public blockchains are typically open and governed by consensus protocols.
3. Speed: Traditional SWIFT transfers can take days, while blockchain transactions can be completed in minutes or seconds, depending on the blockchain.
4. Cost: Blockchain can potentially reduce transaction fees by eliminating intermediaries.
5. Security: Both systems prioritize security but in different ways. SWIFT focuses on securing messages and ensuring the integrity of instruction delivery. Blockchains use cryptography to ensure data integrity and security.
6. Transparency: Transactions on a public blockchain can be viewed by anyone, ensuring transparency. SWIFT transactions are private between the involved entities.
7. Innovation: Blockchains, particularly those supporting smart contracts, offer opportunities for various financial innovations, while SWIFT mainly deals with standard financial messaging.
8. Integration: As of now, SWIFT is more deeply integrated into the global financial system. However, there are efforts to integrate blockchain into traditional banking, and some banks have even started using blockchain for specific operations.

SWIFT has acknowledged the potential of blockchain and has been exploring how it can leverage the technology. For instance, SWIFT has run tests using blockchain for real-time Nostro account reconciliation, with positive results.

Blockchain in Azure Lesson

Building a Working Demo: Blockchain vs. SWIFT on Microsoft Azure

1. Initialization of Azure Blockchain Service:

• Action: Launch the Azure portal.
• Task: Create an instance of Azure Blockchain Service.
• Details: Opt for the Proof-of-Authority consensus mechanism, suitable for a controlled demo environment.

2. Smart Contract Creation:

• Action: Utilize the Truffle Suite available in the Azure marketplace.
• Task: Write a simple contract that simulates transaction behaviors (e.g., transferring funds between accounts).
• Details: Deploy this contract to the Azure Blockchain Service once ready.

3. Integration & Automation:

• Action: Set up Azure Logic Apps and Azure Functions.
• Task: Design a workflow in Logic Apps that listens for a transaction initiation and then calls the respective Azure Function.
• Details: The Azure Function should interface with your smart contract, executing the transaction.

4. Simulating SWIFT System:

• Action: Instantiate an Azure SQL Database.
• Task: Build a simple table structure to represent transaction logs.
• Details: Create a REST API (using Azure Functions or ASP.NET Core) that receives transaction requests, logs them in the SQL database, and simulates the delay typically associated with SWIFT by pausing before marking the transaction as ‘complete’.

5. Blockchain Transaction Interface:

• Action: Using Azure Web Apps, develop a simple web interface.
• Task: The interface should allow users to initiate transactions on the blockchain.
• Details: On submission, this should connect to your Logic App from Step 3, triggering the blockchain transaction.

6. Monitoring & Analytics:

• Action: Set up Azure Monitor and Log Analytics.
• Task: Configure metrics for both the SQL Database (SWIFT simulation) and Blockchain Service.
• Details: Track transaction commit times, query times, and any errors.

7. Visualization & Reporting:

• Action: Integrate with Power BI.
• Task: Create a dashboard reflecting transaction times, costs, and other vital metrics.
• Details: Showcase side-by-side performance graphs, offering viewers an instant comparison of the two systems.

8. Security Protocols & Documentation:

• Action: Document the cryptographic security features of blockchain within Azure.
• Task: On the side, illustrate how a traditional system like SWIFT might be protected in a cloud environment.
• Details: This will serve as an informative piece when presenting the demo, highlighting differences in security postures.

9. Cost Overview:

• Action: Utilize Azure Cost Management.
• Task: Monitor the resource consumption and costs associated with both your blockchain setup and SWIFT simulation.
• Details: Prepare a brief report on the comparative costs, highlighting potential savings and efficiencies.

10. Resource Management & Cleanup:

• Action: Review your Azure resources.
• Task: Once the demo is complete, script a clean-up procedure using Azure CLI or PowerShell.
• Details: This ensures that post-demo, all resources are appropriately deallocated, preventing unnecessary costs.