What is SWIFT Code: Definition, Functions, and How It Works

Thanks to the rapid development of digital technology in the 21st century, it is now possible for people to transfer money to recipients in countries far away from theirs. The SWIFT code has been developed to assist the process of facilitating such transactions. So, to kick off the article, what is SWIFT code? 

Definition

So, what is SWIFT code? Based on its basic definition, it is a particular code used to identify countries, banks, and the branches of said banks. Since the banks of each country have their own internalized working systems that differ from one country to another, there needs to be a particular mechanism to ensure that international transactions are doable. 

The SWIFT code was designed to ensure that the transferor and the transferee can be identified. The common format of a SWIFT code is as follows: 

1. Bank Code - 4 letters to represent the bank (usually the shortened name of the bank) 

2. Country Code - 2 letters to identify the bank’s country (e.g., US for the United States) 

3. Location Code – 2 characters of letters or numbers to identify the bank’s head office location 

4. Branch Code – 3 numeral digits to signify the bank’s head office Functions Anytime you’re dealing with an international money transfer, then it’s time for you to use a SWIFT code to make the transaction more convenient.

 All international money transactions today rely on the code to safely transfer money In the past, the SWIFT code was only used for treasury and correspondent transaction-related matters when the system wasn’t as advanced as it is today. 

However, as messaging technology becomes more sophisticated, more services that rely on SWIFT codes appear. Many services, such as corporations, foreign exchange, money brokers, depositories, and others, use SWIFT codes as their primary method to function. 

How it Works

When trying to answer the question “what is SWIFT code, " we must understand that the code is essentially a messenger that facilitates communication between both sides—because of that, knowing how the code works can help you if you need to send some money abroad. How does the code work? 

As countries have different banking rules from one another, the code used for the payment method is then utilized in a payment known as the SWIFT payment. The payment is electronically-powered and thus will require the wire payment method to ensure the transaction is successful.   

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Because both parties must know the exact identity of anyone involved, the sender and recipient of money must have what is known as a Nostro and Vostro account. Here, the Nostro account is a foreign currency account held by a bank against its correspondence bank abroad using that country's currency. This account is used to facilitate the bank sending the money. 

The Vostro account is the opposite type of Nostro, where this bank is a correspondence bank from a bank abroad to a bank in the country of sending the money. With these two types of accounts, SWIFT transactions can now be carried out to ensure the validity of the identities of senders and recipients of the money.   

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Difference from IBAN

 The IBAN code is also used to identify the receiving bank's location and the transferee's account number. Since both deal with money transfers, people can sometimes be confused about the definitions of the two types of codes. If so, what are the differences between SWIFT and IBAN codes? 

Compositions 

While the SWIFT code consists of the composition described above, the IBAN code consists only of an individual's account number. Moreover, the IBAN code consists of 34 specific characters consisting of letters and numbers, which indicate the official number of an individual's account that distinguishes it from a SWIFT code. 

Examples 

In case you’re wondering, here are the examples of both codes: SWIFT: AAAA BB CC 123 IBAN: GL21 1234 5698 7654 3210 Now that you know the answer to the question “what is SWIFT code” transferring money to an overseas transferee is becoming more convenient than ever. 

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