With the rise of cryptocurrencies and the increasing number of blockchain-based transactions, the banking sector faces new challenges. Blockchain technology’s rapid emergence and evolution could transform how financial transactions are conducted. It could also affect the way geopolitical leverage is undertaken.
Blockchain-based technologies provide fewer hacks, high speed, security, and irrevocability of transactions or events. The 2016 SWIFT hack highlighted the vulnerability of its infrastructure. Banks and stock exchanges are starting to use blockchain-based solutions to stay ahead of the curve and secure their data. The increasing number of banks and other financial institutions using blockchain could help them cut down on costs and improve the efficiency of their operations.
SWIFT and other interbank payment systems are inflexible, old, slow, and increasingly vulnerable to assaults when banks are under pressure to save costs and secure consumer data from hackers, which blockchain might help with.
What does SWIFT stand for?
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is an international cooperative network involving 11,000 financial institutions from 200 countries. SWIFT’s mission is to develop a standard language and service for global financial messaging. SWIFT’s technology allows interbank transfers to take place worldwide. In 2021, SWIFT member institutions sent 42 million messages per day across the network, up 11.4 percent from the previous year.
How does it work? The SWIFT network includes the processing, transmitting, and messaging of secure information between financial institutions. Imagine a buyer in one country and a supplier in another country that have banks registered with SWIFT. They can use the network by themselves, or to be connected using a third party. Through the provision of the relevant SWIFT numbers, they can transfer funds with secure, standardized SWIFT messages.
What is the difference between SWIFT and Blockchain?
The real question is whether SWIFT needs to be worried about blockchain technology or not. Blockchain can be used for various purposes, the most common being as a payments system. Cryptocurrencies such as Bitcoin and other digital money are also commonly used to send and receive payments. These transactions require only an internet connection and take place instantly. While a transaction can take a long time to be 100% confirmed, blockchain transactions can be conducted in just a couple of seconds. We will further highlight the pros and cons of both technologies as payment systems in the following sections below.
Centralization or Decentralization
While SWIFT is a centralized service, blockchain is a decentralized one. In the case of SWIFT, financial institutions handle all necessary operations. On the other hand, blockchain miners/validators handle all the work in a decentralized manner
Speed
With SWIFT, cross-border transactions usually take around three to five days to complete due to the involvement of multiple intermediaries. With blockchain technology, however, the process is almost instant.
For most international money and security transfers, the SWIFT mechanism can be challenging and needs innovation. The types of transformation required in the payments ecosystem is also evidenced by the high fees typically charged when processing cross-border transactions. Other factors such as the volume of data transferred and the security breaches caused by cyber-attacks must also be considered to improve the system’s efficiency.
Implementation Costs
Due to the enormous size of the network and its already established nature, the implementation of blockchain technology will be costly. This could also cause a backlash from the banks that have already invested much money in the SWIFT system.
Trust
Both blockchain technology and SWIFT are reliable. However, trust is a distinctive factor between them. Blockchains are ideally trustless infrastructures, meaning that they do not require any intervention to function, and instead are run based on a set of pre-specified algorithms. In contrast, SWIFT is an element of the existing financial system which deposits all of the power to governments and financial houses, enabling a system that requires trusting that “a few” will always (at all times) act in the best interest of “the many”. The flaw of the latter ideology was made evident in the great recession of 2008.
Cross-border transfers
Cross-border transactions can be performed through blockchain technology, except in a decentralized fashion. With the recent rise of interoperability solutions, geared to attain a unification of existing numerous blockchain networks, single-point cross-border payment solutions like SWIFT can be developed but without the control of any individual organization. Hence, financial institutions (like banks) can plug into such a solution and enjoy all the benefits of blockchain technology.
Monopoly
The robust and diverse network exchanges messages and information for financial transactions, among other applications. Half of the world’s high-value transactions are handled by the SWIFT network.
Security
Through blockchain technology, a public record is automatically generated when people transact. Computer algorithms allow anyone to verify the transactions and review a log for every activity, and transactions are secure, fast, and in real-time. Meanwhile, SWIFT transactions do not happen in real-time. It takes days to settle an international transaction, and the fees charged for them are usually around 10 percent of the total cost.
Will SWIFT lead the Blockchain Revolution in Banking?
The fintech industry continues to lead the way in developing the blockchain revolution. Many companies are already introducing innovations that are expected to have a significant impact on the future of financial services.
Due to the increasing number of companies and organizations that are already using blockchain technology, SWIFT must adopt innovations to address the various issues that they face. Stellar, Onyx (by JPM), and Ripple, are expected to become relevant in the global payments industry.
Innovations will provide a more stable and competitive alternative to the swift global network. Some of these include the emergence of smaller companies such as Strike with open API, which offers a quick and inexpensive way to make international payments.
With the widespread availability of blockchain technology, likely, many fintech companies will eventually follow the Strike model and develop open-source solutions. Other international payment networks are designed to bypass the US’ influence over SWIFT. These include the China International Payment System (CIPS), INSTEX, and SPFS.
SWIFT should explore the use of blockchain. According to the various companies currently competing in the payments industry, their solutions could potentially replace the existing Swift network and make it a very fragmented market.
New Digital Strategy for SWIFT and the Future of Payment
Even before the age of the internet, SWIFT was already operating. It is still taking steps to keep up with the changes brought about by more recent technological innovations. Since 2001, the SWIFT network architecture has been based on an IP infrastructure. It has chosen XML’s protocols for exchanging messages. In 2020, it was considered outdated due to the emergence of new technologies that provide better user experiences.
Traditional payment systems are becoming more transparent and real-time, and many ACH systems now capture rich data about transactions. SWIFT implements a new digital strategy that will focus on instant payments, new messaging standards (ISO 20022), and end-to-end transaction management with real-time analytics. Also, SWIFT announced their work on integrating blockchain technology with its products. It would build a proof of concept (PoC) which will help SWIFT to replace ‘Nostro’ accounts — an account that a bank holds in a foreign currency in another bank — and free up cash by allowing it to invest in other profitable measures.
Concluding thoughts
After years of focusing on the traditional methods of completing global transactions, the financial industry is now considering the use of blockchain technology. This innovation allows users to perform the same tasks at a lower rate and with better security. By fully integrating blockchain into the global financial industry, users can feel more secure and trust the system they use. Let’s build a new blockchain future.
