SWIFT remains dorminant
Alternative solutions proliferate but none can replace SWIFT soon
The Society for Worldwide Interbank Financial Telecommunication, or SWIFT, system has come under the spotlight once again with US’ recent threat to cut off Chinese banks from the Belgium-based global financial messaging network for aiding Russia’s war against Ukraine.
Two years ago, SWIFT’s expulsion of seven Russian banks from the system following Russia’s invasion of Ukraine triggered a rush to find alternatives. Since then, various solutions have emerged.
A cooperative owned by its users and overseen by the G-10 central banks, SWIFT was created by a consortium of US and European banks in 1973 to facilitate the exchange of secure interbank messages for settling international transactions. Today, it has become the de facto global interbank messaging system connecting over 11,000 member banks and financial institutions in over 200 countries and territories.
In 2022, the system processed 44.8 million financial messages per day and facilitated transactions totalling US$150 trillion, almost six times the global GDP for the year.
SWIFT was created as a neutral utility and had previously refused to cut off Burmese, Russian or Syrian banks that were subject to sanctions by governments including the US, citing its policy of being politically neutral.
However, when the EU passed sanctions on Iran and North Korea in 2012 and 2017, respectively, SWIFT barred banks from these two countries from using the system. The decisions were based on the argument that because the cooperative is based in Belgium and operates under Belgian law, it must comply with EU regulations including sanctions. In 2022, it made the same decision against Russian banks.
Since the dollar serves as the world’s reserve currency and the most often used invoicing currency, SWIFT is a key facilitator of the international dollar system. It has become a powerful tool for the US government to execute its foreign policy and has been used in multiple cases to sanction other countries by cutting off their financial institutions from the system.
Furthermore, Washington imposes secondary sanctions against foreign financial institutions which do business with US-sanctioned targets, requiring American banks to restrict those foreign institution’s use of their US correspondent accounts. In 2014, BNP Paribas was fined $9 billion and banned for a year from conducting certain US dollar transactions for violating US sanctions.
Alternative solutions
The ‘weaponising’ of SWIFT for geopolitical aims raises financial security concerns among countries, spurring the development of various alternatives. Several national payment systems have been developed to promote international payments in their own currencies rather than the dollar.
Russia launched its System for Transfer of Financial Messages (SPFS) in 2014 in response to US efforts to limit Russian banks’ use of SWIFT following the annexation of Crimea. As of January, SPFS had 159 foreign participants in 20 countries which were mostly developing nations, but notably included Germany and Switzerland. Its global connectivity remains limited since the Russian Ruble is not a popular payment currency internationally.
China’s Cross-border Interbank Payment System (CIPS) started operating in 2015 to promote RMB internationalisation and has gained wide international coverage. As of April, it had 141 direct and 1,377 indirect participants connected with a network of over 2,400 correspondent banks in 182 countries and territories. Transaction volumes through CIPS are increasing quickly, processing payments worth $67 billion per day in 2023, a 24% rise from the previous year. However, this daily value is only 12% of SWIFT’s $34 trillion per day.
Collaborations
Instead of creating its own messaging system, CIPS collaborates with SWIFT for RMB cross-border financial messaging. This setup means CIPS is not entirely independent from Western control, with around 80% of CIPS payments currently using the SWIFT messaging system. Despite its growing popularity, RMB's share in global payments remains small at 4.5% compared to the dollar’s 47% as of April.
In January, Russia revealed that it was leading a discussion among BRICS member countries to create a payment network called the BRICS Bridge, aimed at integrating existing infrastructures to conduct trade within the bloc using local currencies. It’s still early days, but if successful, this could significantly reduce the bloc’s reliance on SWIFT.
BRICS, the grouping of Brazil, Russia, India, China, and South Africa, extended its membership in January to include Saudi Arabia, Egypt, the United Arab Emirates, Iran, and Ethiopia. The expanded economic bloc now has a combined population of 3.5 billion people, 45% of the world’s total, and boasts a combined GDP exceeding $31 trillion, around 36% of the global economy compared with the G7’s 43%.
Meanwhile, digital instant payment systems for retail transactions are proliferating globally, especially in Asia. According to the Bank of International Settlements, there are over 60 such systems globally, enabling person-to-person and person-to-merchant money transfers within seconds using mobile phones.
India’s Unified Payments Interface (UPI), which started in 2016, is a hugely successful example. It allows users to make fast, cost-free payments by sending a text or scanning a QR code, making money transfers easier, cheaper, and more secure for businesses and consumers.
In 2023, UPI processed over 11.76 billion transactions worth 182.25 trillion Indian rupees ($2.2 trillion), accounting for more than three-quarters of India’s digital retail payments.
The platform has expanded cross-border by linking up with payment systems in Bhutan, Mauritius, Singapore, Sri Lanka, and the United Arab Emirates. Agreements have been negotiated to implement QR-based UPI payments in Cambodia, Hong Kong, Japan, Malaysia, South Korea, Taiwan, Thailand, the Philippines, and Vietnam.
Moreover, UPI’s open-source codes for the digital identity system, the Modular Open Source Identity Platform, are publicly available to other countries to build their own digital identity infrastructure, leveraging India’s success.
However, most cross-border payment links are built on bilateral agreements, which are difficult to scale. Each network has its own standards for data, security and privacy, and each deal involves specifics around laws, foreign-exchange regulations, IT and operational specifications, choice of settlement banks, criteria for participating banks and fintechs, and compliance screening. As a result, many proprietary or national cross-border rails have been created, making interoperability across countries difficult.
This has prompted five Southeast Asian nations, including Indonesia, Malaysia, the Philippines, Singapore, and Thailand, to work on Project Nexus to create a gateway for connecting their digital payment infrastructures and standardising the way they connect to each other for cross-border payments.
In addition, fintech providers such as Airwallex, Nium and Wise have sprung up to streamline cross-border business payments. They move money internationally cheaply and efficiently, providing added value services such as automatic rerouting of payments to the fastest and most effective settlement path, real-time progress status, ease of integration with other services such as foreign exchange, management of compliance obligations, and enhanced customer support. However, their services are layered on top of existing financial networks, including SWIFT, not necessarily replacing them.
Crossing borders
Ultimately, innovative technologies such as blockchain will eliminate the need for a centralised intermediary like SWIFT by enabling real-time, secure, and cost-effective cross-border payments between banks in direct peer-to-peer mode. And according to US-based think-tank Atlantic Council, there are currently 13 cross-border wholesale central bank digital currency, or CBDC, projects under development globally.
A good example is the mBridge project for cross-border CBDC payments involving China, Hong Kong, Thailand, and the United Arab Emirates. In 2022, 20 banks from these four jurisdictions conducted interbank payments and foreign exchange on the platform using CBDCs and successfully settled real transactions totalling $22 million. Despite that, further experimentation is required before mBridge is ready for implementation.
Lastly, there are alternatives using crypto assets such as bitcoin, Ethereum and stablecoins. However, until these crypto assets become legal tenders, such solutions are unlikely to be adopted for interbank payments.
Meanwhile, SWIFT is enhancing its services to face rising competition. It is converting to the ISO 20022 global messaging standard to enrich data quality and customer experiences while elevating security and governance of the messages. It is piloting its own cross-border CBDC system, partnering with major commercial banks and the Banque de France and the German Bundesbank. It has also undertaken an initiative called SWIFT Global Payment Innovation to make international payments faster, more transparent, and traceable. According to SWIFT, about 40% of such payments are credited to end-beneficiaries in less than five minutes, 50% within 30 minutes, and almost 100% within 24 hours.
The proliferation of alternative payment solutions will continue, driven by geopolitics as well as innovative technologies. This aligns with the global demand for more diversified and less centralised channels for financial transactions. But for now, none of the alternatives can replace SWIFT any time soon.
