When you contact us to open an account, one of the first questions we ask you is who and where the payments will go to the account, because this is one of the key points when choosing the best options for financial partners for you. Interestingly enough, it is very important for banks (both traditional and digital) to know the name of the partner’s servicing bank and the SWIFT code of the bank itself. So why is this question being given so much attention? The answer is simple: the bank, like you, is interested in an actively working account and a satisfied client. If the bank is faced with the fact that it will not be able to accept a payment to your company’s account or make a payment from your account to the supplier, this will only lead to inconvenience and problems for you, and the bank risks losing not only commission income, but also the client as a whole. So, when banks are informed in advance about the “address points” of your financial flows, it allows them to build and check the availability of the necessary payment routes in advance. This is where we move to global money transfer systems. The most common are SWIFT and SEPA. Let’s figure out what is the difference between them.
SWIFT (Society for Worldwide Interbank Financial Telecommunications) – it is actually a communication channel. SWIFT appeared in the late 1970s. And according to public data, as of the beginning of 2022, SWIFT members – banks and financial institutions from more than 200 countries – have already sent more than 385 million financial messages. This channel is used by financial market participants, in addition to client and interbank transfers, also for confirmation of trade agreements, answers to requests from institutions, verification and clarification of payments. If we are talking about payment transfers, banks and financial institutions use the SWIFT platform to transmit instructions on how much money should be credited and debited from their customers’ accounts.
The main and key advantage of SWIFT transfers is that such transfers are made all over the world and the currency of transfers is not limited to one currency. Moreover, you have the opportunity to send one currency to your counterparty through conversion, as the system supports payments in 38 world currencies.
Despite its many advantages, SWIFT is not the fastest payment network. The payment reaches its recipient in an average of 2-5 days due to the fact that payments sometimes have to go through different networks of correspondent banks and checks.
How does a SWIFT payment work? When banks process SWIFT messages, they use what are called Nostro and Vostro books to complete the transaction. Nostro accounts belong to the bank that sends the money and Vostro accounts belong to the bank that receives the payment.
When two banks have a direct relationship, that is, they have commercial accounts with each other, SWIFT payments are fast and smooth. For example, here is the process of sending a payment of €100 from your UniCredit Bank in Prague (Czech Republic) to a freelancer’s Siam Commercial Bank in Bangkok, Thailand:
- You give your bank the freelancer SWIFT code which is SICOTHBK (SICO stands for Siam Commercial Bank, TH for Thailand and BK for Bangkok).
- If your two banks have commercial accounts with each other, UniCredit will debit €100 from your account to their commercial account at Siam Commercial Bank.
- Siam Commercial will transfer €100 from his commercial account in UniCredit to the freelancer’s personal account.
However, if UniCredit and Siam Commercial Bank do not have joint accounts, they will have to direct the payment through another bank they both work with, such as Deutsche Bank in Berlin, Germany.
What if there is no bank that works with both sending and receiving banks? In this case, the payment must pass through a number of banks that share accounts until it finally reaches Siam Commercial Bank. Not surprisingly, this makes the transaction more expensive and takes longer.
SEPA (Single Euro Payments Area) – it is the next most popular transfer system. The system appeared in 2008 to facilitate payments in euros. So, let’s highlight its key features, namely:
- Payments are made only in euros
- Payments are made only between financial institutions of the Eurozone (includes the countries of the European Union, as well as Great Britain, Norway, Iceland, Switzerland, Liechtenstein, Iceland, Andorra, Monaco, San Marino and the Vatican)
The advantages of using SEPA transfers are the speed of execution (up to 24 hours); ease of sending a payment (it is usually enough to specify the recipient’s IBAN) and a lower cost of payment execution compared to a SWIFT transfer.
Speaking about the differences of the above-mentioned systems, it is worth recalling the “family roots” of the transfer systems. Yes, SWIFT is a US system, and SEPA is a “child” of the Eurozone. Yes, a transfer in the SEPA system will cost less than a swift transfer. However, exactly where a transfer via SEPA cannot be made, a transfer via SWIFT will be made (it is worth remembering about the different possibilities of sending currencies).
In general, it would be incorrect to consider these two systems as competitors, because each of them has its own purpose and value. The listed facts about these systems make it possible to understand the differences and peculiarities of the work of each of them. We inFinance Business Service we will be happy to help you open an account with exactly those opportunities that will best suit your needs.