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Transferring Money With the SWIFT Clearing System

Instructor: Martin Gibbs

Martin has 16 years experience in Human Resources Information Systems and has a PhD in Information Technology Management. He is an adjunct professor of computer science and computer programming.

In today's connected wold, it is easy to transfer money almost anywhere. This isn't magic; there is a large network used by banks and financial institutions to carry out these transfers.

A SWIFT Transfer

Swift currency transfer

Every day, money is transferred across the globe. You could walk into a bank in Chicago and send money to a family member in Beijing. How does this happen? Surely the banks are not using standard email or wide open Internet connections!

Actually, thousands of banks and financial institutions around the world are connected to the SWIFT money transfer system.

SWIFT (Society for Worldwide Interbank Financial Telecommunications) is a money transfer system that connects over 10,000 financial institutions across the globe. Over 20 million messages are sent across the network daily!

The SWIFT network doesn't transfer real money; instead, it sends payment orders between the banks or institutions. Still, these transactions represent billions of dollars transferred each day!

So, how does it work? How does the SWIFT network conduct millions of transactions?

Safe and Secure Transmissions

Instead of transferring money, the SWIFT system transfers messages regarding fund transfers between banks. The system uses unique codes for each bank/financial institution. Think of this as the electronic address of the institution. When a message is transferred, the receiving bank gets the message, and money is transferred through accounts.

Is the system 100% secure? No. Any system can be hacked; hackers work around the clock to try to break into SWIFT. In fact, a breach in May of 2016 resulted in the loss of $81 million from a Bangladesh bank account.

In response to these attacks, SWIFT has added more security measures. One of these is a daily validation report that all clients receive: It shows all SWIFT transactions sent from the client. This way, financial institutions can quickly identify any potential fraudulent activities. SWIFT continually updates it security.

BIC Codes

bank code image

Recall that SWIFT uses codes to identify the banks and institutions. Without these codes, no messages can be send.

Each financial institution has a unique code assigned to it. This code is the BIC, or Bank Identifier Code. Each section of the code has a specific purpose. Let's look at how it is broken down. We'll use the Bank of Beijing's code, BJCNCNBJ, as our sample.

Characters Use Example
1st - 4th Institution Code BJCN
5th - 6th Country Code
(International Standards definition)
CN
7th - 8th Location Code BJ
8th - 11th Branch Code (optional) Not used

Putting this all together, the bank code for the Bank of Beijing is BJCNCNBJ. As another example, the Wintrust Bank in Chicago has a code of NSCTUS44 (Institution Code: NSCT, Country code: US, Location Code: 44, no Branch code used).

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