SWIFT Payments and the SWIFT Banking System in Canada

As global commerce continues to grow, Canadian businesses increasingly need a safe and secure means to send and receive payments internationally. International transactions often require a network or intermediary institution to ensure everything goes smoothly.

The dominant system for these transactions worldwide is SWIFT.

What is SWIFT?

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a global financial messaging network, the foundation of the swift banking system, that enables financial institutions worldwide to securely exchange information and electronic messages about financial transactions.

It’s important to understand that SWIFT itself doesn’t actually move money – it’s the secure communication system that sends the payment instructions between banks.

These instructions are transmitted over international wires using unique SWIFT codes, also known as Bank Identifier Codes (BICs), which identify the specific banks involved. All major Canadian banks use SWIFT codes for international wires and transactions.

What is a SWIFT Payment?

SWIFT payments are international transactions made through an intermediary bank that allows you to send/receive electronic payments internationally. As mentioned, the SWIFT network doesn’t actually transfer funds, nor is it a banking system.

Rather, it sends payment orders between banks using SWIFT codes. The SWIFT payment system allows for quick, accurate, and secure money transfers overseas.

The financial service creates a global level of connectivity that speeds up international business and brings the world a little closer together. This global connectivity is essential for Canadian businesses engaged in international trade.

While precise daily message volumes fluctuate, SWIFT consistently handles tens of millions of messages per day, facilitating trillions of dollars in transactions globally.

The SWIFT payment network allows individuals and businesses to accept/send international money via electronic or credit card payments. This can be done even if the customer or vendor uses a different bank than the payee. The network is a place for secure financial messaging. In a sense, it’s nothing more than a messenger between banks.

What is a SWIFT Code?

How does SWIFT work? When you use SWIFT, you are not actually sending a money transfer. Instead, it is referred to as a “payment order” between two banks internationally. This is done using a SWIFT code. 

While Canadian banks don’t use IBANs (International Bank Account Numbers), it’s worth noting that the SWIFT network did standardise the formats for IBAN and BIC (bank identifier codes).

SWIFT owns and administers the BIC (Business Identifier Code) system. This means it can identify a bank in seconds and send a secure payment quickly.

A unique SWIFT code is comprised of 8 or 11 characters. Other names for this same code include:

• Bank identifier code (BIC)
• SWIFT ID
• ISO9362

Using a SWIFT Code in Canada

Let’s see how this works in practice. Imagine you’re a business owner in Vancouver, and you need to pay an invoice from a supplier in Australia. Here’s a simplified breakdown of the process:

1. Gather Information: You’ll need your supplier’s banking details: their full name and address, their bank’s name and address, their account number, and the SWIFT code (BIC) of their bank branch.
2. Initiate Payment: You’d go to your Canadian bank (either in person or online) – let’s say you bank with Scotiabank – and request an international money transfer. You’ll provide all the supplier details you gathered.
3. SWIFT Message Sent: Scotiabank will create a SWIFT message containing your payment instructions. This message is securely sent through the SWIFT network to your supplier’s bank in Australia.
4. Payment Received: The Australian bank receives the SWIFT message, verifies the information, and credits your supplier’s account with the funds.

This example illustrates the basic flow of a SWIFT payment. It’s your bank communicating securely with another bank, using SWIFT messages as the “messenger” to your supplier’s bank over the secure SWIFT network.

How Does a SWIFT Payment Work?

The original design and intent of SWIFT was to create a way for banks to communicate faster and more securely among themselves. Particularly in relation to processing international payments.

The word “communicate” is always used because SWIFT is simply a messenger between banks. SWIFT money does not exist. It channels the message enclosing payment instructions from the issuing bank (i.e. the payor) to the remitting bank (i.e. the beneficiary/receiver). 

All banks engaged in a SWIFT transfer will move funds from one account to another based on an underlying network of Nostro and Vostro accounts. This refers to accounts that banks have opened up with each other for the sole purpose of executing SWIFT transactions.

How to Make a SWIFT Transaction

To make a SWIFT transaction, follow these steps:

1. Contact your bank: Provide them with the details of the transaction. This includes the recipient’s name, bank name, account number, amount, currency, and any other relevant information.
2. Complete the required forms: Your bank will provide you with the necessary forms to initiate the SWIFT transaction. These forms will typically include information on the originator and beneficiary of the transaction, the amount to be transferred, and the currency involved.
3. Provide payment: Once the forms are completed, you will need to provide payment. This typically involves transferring the funds from your account to your bank’s account.
4. Wait for confirmation: Once the transaction has been initiated, you will need to wait for confirmation that the funds have been transferred successfully. This can take several hours or even days, depending on the banks involved and the complexity of the transaction.

SWIFT transactions can be costly, especially for smaller transactions, as they often involve fees and charges from multiple banks involved. You should also ensure that you provide accurate and complete information to avoid delays or errors in processing.

The Nostro and Vostro Accounts

As both banks keep a record of money deposited into the account, this leads to two mirroring sets of ledger known as the Nostro and Vostro accounts. Nostro refers to the account used by the bank to hold money, whereas Vostro refers to the name of the account used by the bank opening it in their books. 

When both banks have a commercial relationship with Nostro and Vostro accounts, the SWIFT transfers are direct and immediate. When banks do not have this type of relationship, the SWIFT network has to determine the best means to pass the message on. In this case, a third party is required; also known as an intermediary bank. 

You have to find a middleman to handle the transaction. Once a correspondent bank that has a commercial relationship between the two financial institutions is found, the SWIFT transaction can proceed. In this case, additional fees will be incurred from the third-party services.

The more intermediary banks involved in the transaction, the more it will cost you to send. It will also take longer to send the payment, at a much higher risk, as there are more parties involved.

When your bank sends a SWIFT message with payment instructions, it instructs the receiving bank to debit the Canadian bank’s Nostro account and credit the beneficiary’s account.

Who Uses SWIFT Payments?

In the beginning, SWIFT was created to facilitate communication about treasury and correspondent transactions only. The functionality of the message format design allowed for large scalability. SWIFT gradually expanded to provide services for:

• Banks
• Clearing systems
• Money brokers and security broker-dealers
• Corporates
• Non-bank financial institutions
• Treasury market participants
• Asset management companies
• Depositories
• Foreign exchange
• And more…

How Much Does a SWIFT Payment Cost?

The total cost of a SWIFT payment can be a bit of a moving target. It’s not a single, fixed fee, but rather a combination of charges that can vary significantly. Here’s a breakdown of the key cost components:

Sending Bank Fees

Your Canadian bank will typically charge a fee to initiate a SWIFT transfer. This can range from around $15 to $50 CAD, or potentially higher, depending on the bank, the amount you’re sending, and the destination country.

Receiving Bank Fees

The beneficiary’s bank might also charge a fee to receive the payment. While less common for incoming payments to Canadian banks, it’s something to be aware of, especially when dealing with banks in other countries.

Intermediary Bank Fees: The “Hidden” Costs

Often, your payment won’t go directly from your bank to the recipient’s bank. It may pass through one or more intermediary banks (also called correspondent banks), and each one can deduct a fee. These fees, sometimes called “lifting fees” or “correspondent bank fees,” are a major source of uncertainty, as they’re often not fully disclosed upfront.

Exchange Rate Markups

When your payment involves a currency conversion (e.g., from CAD to USD), the exchange rate used for money transfers foreign exchange will significantly impact the final cost. Banks typically add a markup to the mid-market exchange rate (the rate you see on Google or currency converters).

This markup can range from 1% to 5% or more, effectively acting as a hidden fee.

The Transparency Challenge

It’s this combination of fees, and particularly the potential for hidden intermediary bank charges and exchange rate markups, that makes it difficult to predict the total cost of a SWIFT payment in advance.

This lack of transparency is a significant concern and contributes to broader data quality challenges in international payments. In fact, one in four companies consider data quality issues a top challenge in managing supplier information.

Always ask your bank for a full breakdown of all anticipated fees and the exchange rate that will be applied before you send a payment.

Challenges in Cross-Border Payments for Canadian Businesses

Making international payments isn’t always as simple as sending money within Canada. If you’re running a business that deals with international suppliers or customers, you’ve likely encountered some of these common challenges.

Cost

Cross-border payments often come with multiple fees, including charges from your bank, the recipient’s bank, and potentially several intermediary banks in between. Exchange rate markups can also add significantly to the cost.

Speed

International payments can take time to process, sometimes several days. This can be due to factors like intermediary banks, time zone differences, and the necessary compliance checks. Cut-off times could also delay a payment.

Transparency

It can be difficult to track the progress of a cross-border payment and to know exactly when it will arrive. This lack of visibility can make it harder to manage your cash flow.

Regulatory Compliance

Canadian businesses must comply with regulations from FINTRAC, including reporting requirements for international electronic funds transfers over a certain threshold.

Currency Risk

Fluctuating exchange rates can impact the final cost of your payments, creating uncertainty and potentially leading to losses.

Fraud Risk

International payments can be targets for fraud, such as business email compromise (where fraudsters impersonate suppliers) or fake invoices.

Correspondent Banking

There’s a declining number of correspondent banks available. Domestically and globally. This could lead to higher prices and longer wait times for payments

Understanding these challenges is the first step towards finding more efficient and cost-effective ways to manage your international payments.

A Brief History of the SWIFT System

Prior to the development of the SWIFT network, banks relied on a system called TELEX to send wire transfers. Not only did the process move at a snail’s pace, but TELEX lacked the security and sophistication for a time when technology was making exponential progress.

The free message format did not have a unified set of codes (like SWIFT) to name banks and transaction types. This created a lot of confusion and led to many human errors. TELEX senders had to describe every transaction in full sentences, which was then interpreted and executed by a dedicated receiver.

Therefore, as necessity is the mother of invention, the SWIFT network was born.

To address these shortcomings, SWIFT, an organization representing the Society for Worldwide Interbank, was founded in Brussels, Belgium, in 1973.

SWIFT, an organisation representing the Society for Worldwide Interbank, is a member-owned organisation. It was founded in Brussels, Belgium, in 1973 for the purpose of establishing common processes and standards for financial transactions. Banks needed a universal and consistent way to get money across the oceans. That’s where the SWIFT network comes in. Six major international banks formed a cooperative society to operate the global network in a secure and timely manner.

What is the SWIFT Payment System?

The SWIFT payment system enables banks and other financial institutions to securely exchange electronic messages about international transactions. It provides a standardised messaging platform that facilitates communication between banks and other financial entities.

How Does the SWIFT Payment System Work Today?

Currently, SWIFT provides messaging services to over 11,000 financial institutions in more than 200 different countries and territories worldwide and helps facilitate global business. SWIFT achieved a new peak day on 30th Nov 2021, with 50.3 million messages, higher than the peak on 26th Feb 2021 by +8.5%

While the network started primarily for simple financial messages and payment instructions, it now sends reference data for a wide range of actions. This includes transactions for:

• Security  
• Treasury  
• Trade 
• System

Economic Sanctions

In the past decade, SWIFT has also been used for economic sanctions. In 2012, the European Union passed a sanction against Iran that compelled SWIFT to disconnect sanctioned Iranian banks.

As of Feb. 28, 2022, the United States, EU, U.K., and Canada have agreed to levy sanctions against Russia in response to its invasion of Ukraine. They have agreed to remove select Russian banks from the SWIFT messaging system.

Alternatives to SWIFT for International Payments

While SWIFT is a widely used network for international payments, it’s not your only option. Depending on your specific needs, other methods might offer advantages in terms of cost, speed, or convenience. Here are some key alternatives:

Online Payment Platforms

For Canadian businesses, online payment platforms like Tipalti offer a powerful alternative to traditional bank transfers. These platforms are designed to automate and streamline the entire international payment process, often providing:

• Lower Costs: By optimising payment routing, negotiating better exchange rates, and reducing manual processing.
  
• Faster Payments: Through automation and direct connections to banking networks.
  
• Greater Transparency: With upfront fee disclosures and real-time tracking.
  
• Simplified Reconciliation: By integrating with your accounting software (like QuickBooks, Xero, or NetSuite).
  
• Multi-Currency Management: This allows you to easily manage payments in various currencies, including CAD.

International ACH

Similar to domestic ACH wire transfers, international ACH allows you to send funds electronically between bank accounts in different countries.

This option is typically less expensive than SWIFT, but it’s also usually slower, often taking several business days for funds to arrive.

Multi-Currency Accounts

If your business frequently handles multiple currencies, a multi-currency account can be a useful tool.

These accounts allow you to hold balances in different currencies, manage accounts, and make payments directly from those balances, minimising the need for currency conversions and associated fees.

Other Fintech Solutions

A number of other fintech companies, such as Wise (formerly TransferWise) and Remitly, specialise in international money transfers.

These platforms often focus on providing competitive exchange rates and lower fees, particularly for smaller transactions.

The best option for your business will depend on the size and frequency of your payments, the countries you’re dealing with, and your priorities in terms of cost, speed, and security.

Additional SWIFT Services

The SWIFT system, also known as the Worldwide Interbank Financial Telecommunication Network, offers many services that will help you send seamless, international transactions. Here are a few to check out:

Industry-leading Applications

SWIFT connections give you access to a variety of applications, from real-time instruction matching to forex transactions and treasury. 

Expect applications that include tools for:

• Banking market infrastructure for processing payments between banks
• Securities market infrastructure for clearing and settlement instructions
• Instructions for securities, forex, and derivatives transactions

Business Intelligence

SWIFT offers universal business intelligence dashboards and reporting utilities. This enables customers to get a dynamic, 360-degree view of messaging, activity, reporting, and trade flow. You can filter based on demographics like region, country, message types, and other related parameters.

Compliance Services

SWIFT offers services aimed at financial crime compliance. This includes reporting and utilities for Know Your Customer (KYC), Anti-Money Laundering (AML), and Sanctions. For Canadian businesses, this aligns with FINTRAC’s compliance expectations.

Messaging and Connectivity

SWIFT is the king of conversation, and the entire focus is communication. The core of the business resides in streamlining the movement of messages and providing a safe, reliable, and secure network. 

SWIFT has a variety of messaging hubs and software so clients can effortlessly send and receive global transactional messages.

SWIFT GPI – Faster, More Transparent Payments

SWIFT GPI (Global Payments Innovation) is an initiative designed to significantly improve the cross-border payments experience. If your Canadian bank uses SWIFT GPI, you can benefit from:

• Increased Speed: GPI payments are often processed much faster than traditional SWIFT transfers.
  
• Transparency: You can track the status of your payments in real time, seeing where your money is and when it’s expected to arrive.
  
• Confirmed Credit: You receive confirmation when the funds are credited to the recipient’s account.

SWIFT Go – Streamlining Smaller Transactions

For smaller businesses making international wires and payments, SWIFT Go offers a simplified and cost-effective solution. Launched in 2021, SWIFT Go is designed for:

• Speed: Payments are typically credited within seconds or minutes.
  
• Predictability: Fees and exchange rates are known upfront.
  
• Ease of Use: It’s a user-friendly option, particularly well-suited for small and medium-sized businesses (SMBs) and consumers. Several Canadian banks, including RBC, have adopted or are planning to adopt SWIFT Go.

These additional services demonstrate SWIFT’s ongoing efforts to adapt to the evolving needs of the global financial community.

SWIFT Payments and Canadian Regulations

If your Canadian business uses SWIFT for international payments, it’s essential to be aware of the relevant regulations and compliance requirements. Here are some key areas to consider:

FINTRAC Reporting

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) is Canada’s financial intelligence unit, responsible for combating money laundering and terrorist financing.

Under Canadian law, businesses must report international electronic funds transfers (IFETs) of $10,000 CAD or more to FINTRAC. This reporting requirement applies to SWIFT payments that meet this threshold.

Payments Canada and Lynx

Payments Canada is the organisation that oversees Canada’s clearing and settlement systems. This includes Lynx, Canada’s high-value payment system, which uses SWIFT messaging for interbank communication.

How SWIFT Integrates with Lynx

Lynx relies on the SWIFT network to facilitate the secure exchange of payment messages between participating Canadian financial institutions.

When a high-value payment is initiated through Lynx, SWIFT messages (including both traditional MT messages and newer, ISO 20022-compliant MX messages) are used to communicate the payment instructions. Lynx is a real-time gross settlement system.

ISO 20022: A New Standard

Canada is actively transitioning to the ISO 20022 messaging standard for financial transactions, including those processed through Lynx. ISO 20022 offers significant advantages over older message formats, including:

• Richer Data: ISO 20022 messages can carry much more detailed information, including extended remittance data, payer/payee details, and regulatory reporting information.
  
• Improved Efficiency: The standardised format facilitates automation and straight-through processing.
  
• Better Compliance: The enhanced data supports compliance with regulations like those from FINTRAC.
  
• Interoperability: Allowing for easier communication between systems.

Lynx is fully ISO 20022-enabled, allowing Canadian financial institutions to leverage the benefits of this new standard.

SWIFT’s Role in Domestic Payments

It is important to note that SWIFT’s primary role in Canadian domestic payments is within the Lynx high-value payment system.

PIPEDA and Data Privacy

In addition to payment-specific regulations, the Personal Information Protection and Electronic Documents Act (PIPEDA) governs how businesses handle personal information.

When collecting and sharing supplier information for international payments, you must comply with PIPEDA’s privacy principles.

Streamlining International Payments – The Benefits of Automation

Throughout this guide, we’ve explored the complexities of international payments, including the challenges of using the SWIFT network and complying with Canadian regulations. Relying on manual processes for these transactions can lead to:

• High Costs: Due to bank fees, exchange rate markups, and the labour involved in manual data entry and reconciliation.
  
• Slow Processing: Payments can take days or even weeks to reach their destination, impacting your cash flow and supplier relationships.
  
• Increased Errors: Manual data entry is prone to human error, leading to payment delays, incorrect amounts, and potential compliance issues.
  
• Limited Visibility: Tracking the status of payments can be difficult, leaving you in the dark about where your money is.
  
• Complex Compliance: Staying on top of all the changing rules and requirements

Automating your international payment processes with a platform like Tipalti offers a powerful solution. Here’s how it can transform your operations:

• Reduced Costs: Automation helps you minimise bank fees, secure better exchange rates, and eliminate the labour costs associated with manual processing.
  
• Faster Payments: Automation speeds up the entire payment process, ensuring your suppliers get paid on time.
  
• Fewer Errors: Automated workflows and data validation significantly reduce the risk of human error.
  
• Real-Time Visibility: Have access to a clear, real-time view of your payment status, so you always know where your money is.
  
• Simplified Compliance: Automation tools help you manage compliance with regulations like FINTRAC reporting requirements with built-in checks and automated data collection.

 By embracing automation, you can free up your team’s time, reduce costs, and gain greater control over your global financial operations.

The Future of SWIFT

Although there are other real-time messaging services like Ripple, Fedwire, and Clearing House Interbank Payments Systems (CHIPS), SWIFT continues to retain a dominant position in capital markets. There’s a good reason for that too.

The attributed success is due to how continually the network adds new message codes to transmit different kinds of international financial transactions through. In other words, it’s constantly adapting to new financial needs and fintech processes. This makes it the most reliable, flexible, and functional messaging system used for international wire transfers on the planet.

If your Canadian business is considering using SWIFT as a messaging network, understanding the process is a good first step! However, there are numerous options for paying international suppliers, from prepaid debit cards to interact e-transfers to other international funds transfers to ACH to wire transfers and more. Check out our latest ebook, Comparing the Top Global Payment Methods, for more.

Frequently Asked Questions (FAQ)