Why SWIFT is still indispensable for cross-border payments

How important SWIFT’s interbank messaging network is to cross-border payments can be measured in many ways, and SWIFT itself likes to do so with its data on transaction numbers and amounts. For example, as of December 2022, Swift had recorded an average of 44.8 million FIN (payments and securities transactions) messages per day during the year, a year-on-year increase of 6.6%.

And of course, SWIFT serves as the primary interbank messaging service for financial institutions globally. It works with 11,000 member institutions and facilitates $150 trillion in transactions per year.

Not too shabby for the supposed creaky and sluggish incumbent ripe for fintech-driven disruption, eh?

We do not mean to suggest that SWIFT is perfect. Far from it – and then some – but in the financial industry, where trust and reliability prevail, it is not easy to disrupt the primary interbank network. After all, building a faster and more efficient alternative to SWIFT is one thing. It is another to gather all the banks to join that option and use it instead of SWIFT. And then there is the question of cost.

This helps explain why suspected SWIFT disruptors are not – at least not yet – a real threat to the Belgium-based organization.

Startups building alternative rails

If a cross-border payments startup wanted to attract VC attention, it can only say that it aimed to challenge SWIFT. In the go-go days of low interest rates and easy money for fintech startups, this was not unusual.

To be sure, some alternative rails have been successful, from Rapyd and Ripple to Wise and Airwallex. But if you do a little digging, you’ll sometimes find that they still work with SWIFT. Wise, for example, says on its blog that it uses the interbank messaging network to send money to South Africa, Japan and US dollars to countries around the world. “But Wise is working to reduce these costly intermediary fees. And make it clear when there may be fees to you. Upfront. So there are no nasty surprises,” the blog post said.

For its part, the start-up of B2B cross-border payments Airwallex has been successful. It is valued at $5.5 billion and processes around $50 billion in transactions annually. That said, the valuation did not increase last October despite the company raising another $100 million, reflecting sober fintech investor sentiment.

About 7% of Airwallex’s transactions go through SWIFT, but that could increase in the future, according to company executives. While Airwallex executives in 2020 called for widespread disruption of global cross-border payments, as the company matures, they recognize that there are benefits to working with SWIFT. “I wouldn’t say the company’s vision is to replace SWIFT,” CEO Jack Zhang said in an interview last year, adding that he sees Airwallex as “more complementary to the SWIFT network.”

Thailand-based blockchain transfer startup Lightnet, on the other hand, has been unequivocal about its intention to replace SWIFT. In the heady days of the latest cryptocurrency bull market, after raising $31 million in a Series A round, Lightnet said in a statement that it is “well positioned to replace the decades-old, inefficient SWIFT system and unreliable underground banking.”

We will believe it when we see it.

Interoperability challenges in Asia

Outside of the startup community, central bankers have been active in Asia building bilateral real-time cross-border payment rails that enable retail payments to be sent internationally using just a mobile number. In theory, these rails could become an alternative to SWIFT for small payments.

Progress has been rapid. The May 2021 link between Singapore and Thailand’s respective QR code-based real-time retail payment systems, PayNow and PromptPay, was the first of its kind globally. A month later, Thailand and Malaysia completed the first phase of connecting their respective PromptPay and DuitNow systems. PayNow and DuitNow will be connected in phases. Furthermore, Singapore PayNow connected to India’s United Payments Interface (UPI) in February.

The central banks of Indonesia, Malaysia, the Philippines and Singapore signed a general agreement on payment connectivity in November 2022 in Bali. In March, the Bank for International Settlements (BIS) said it would work with the central banks of these five nations to connect their national payment systems through a cross-border payment gateway. However, it is unclear when this project will be completed.

Achieving greater regional connectivity – which already exists using SWIFT – will be more challenging than bilateral agreements. The five countries need to adapt their respective regulations for these payment solutions to build a truly interconnected regional payment ecosystem.

Furthermore, the system will probably only cover the largest payment corridors in Southeast Asia. Smaller economies in the region and poorer countries may lack the underlying infrastructure to participate. In Myanmar’s case, geopolitical risks exist that will make it difficult for the country to be part of a wider regional cross-border payment system.

SWIFT adapts

A positive development from SWIFT’s increasing competition is that the organization has been given the impetus to address some of the consistent pain points of its services. In 2021, for example, it launched SWIFT Go for low-value cross-border payments in the SME segment. Because this is a SWIFT initiative, getting banks to sign up wasn’t difficult: around 600 lenders in 120 countries are currently part of the network. 85% of payments made on SWIFT Go are reportedly completed in three minutes or less.

Meanwhile, aware of growing interest in blockchain-based payments, SWIFT has been busy testing an interoperability solution to enable domestic central bank digital currencies (CBDCs) for cross-border payments. It recently ran 12 weeks of successful sandbox simulations with the French, German and Singapore central banks as well as 15 commercial banks. SWIFT’s role in the initiative is to provide a hub for the interconnection solution where messages are sent between parties. CBDCs never leave their domestic networks.

The next step is a beta phase. In the meantime, the sandbox will focus on various use cases, such as settlement of securities transactions, trade finance and contingent payments.

In a May commentary, two financial experts at the Atlantic Council in Washington DC argue for rejuvenating rather than replacing SWIFT. Noting SWIFT’s advantages of being established, such as its network of 11,000 banks, they point out that “SWIFT can build on a system that the world already depends on rather than creating something new from scratch. Think of it as an individual customer – why switch to a whole new bank if my current one is going to offer all the same features?”

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