What Are the Alternatives to SWIFT Payments?

First of all, are there alternatives to SWIFT Payments?

Well, yes and no — yes, there are competitors; no, there aren’t any direct replacements.

To sum this article up, other messaging networks exist, and they each have their own set of advantages, but they’re also highly geographically limited. This defeats the primary goal of the SWIFT network, which is to standardise messaging and communications between banks and financial entities to avoid misinformation.

On the other hand, there are blockchain applications and cryptocurrencies. These are great alternatives, and more importantly, borderless, but their volatility in valuation and the lack of acceptance make it difficult for any business to transact with them.

With that said, let’s dive into the nitty-gritty of the alternatives to SWIFT payments and the future of the SWIFT Network.

What are the advantages of SWIFT?

Since its establishment in 1973, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) has been the standard for international payments. Today, over 11,000 banks and financial institutions use this messaging network to communicate. And in 2022, the SWIFT network recorded an average of 44.8 million messages per day.

It’s safe to say that the SWIFT network is still the big brother in global remittance even after half a century.

This is not surprising either, because the SWIFT network operates in over 200 countries and ensures all payments are authentic, unaltered, and legally binding. At its core, this network enables international payments to be accountable, accessible, and transparent.

What are the limitations of SWIFT?

Among the most significant drawback of the SWIFT Network is the processing time.

Typically, for cross-border SWIFT payments, a transfer is routed through several banks within the network and a complex process of verification before reaching its destination. Because of this, a standard global payment takes an average of two to five days to complete.

Not just that, going through several intermediary banks inevitably add to the final cost. This not just makes it a pricey global payment solution, but also makes it difficult for businesses to plan ahead due to the uncertain cost.

Over the years, coupled with accelerating globalisation, came the need for SWIFT alternatives.

Read on.

5 best alternatives to SWIFT for global transfers

When SWIFT first came to the market, there were no other systems that offered the same value as SWIFT did for international payments. But as the global payment space matures, and alongside technological developments, there are a handful of options as SWIFT alternatives.

Despite having their own set of advantages and limitations, each of them serves a different purpose and provides options for users.

Cryptocurrencies

Sending money abroad using cryptocurrencies has become increasingly popular due to its cost-effectiveness and efficiency. This process involves using crypto wallets, neobanks, or crypto-integrated FinTech platforms to convert between fiat currencies and cryptocurrencies. More technically, this process is known as “on-ramp” and “off-ramp”.

This not only applies to popular decentralised currencies such as Bitcoin (BTC) and Ethereum (ETH) but also central bank digital currencies (CBDCs) issued by central banks. These currencies, which are built on blockchain technology, enable users to transact securely on a point-to-point basis across borders in real-time. Above that, the settlement is also near-instantaneous as it does not require any intermediaries.

On the contrary, here is the price to pay for crypto’s speed and transparency:

• Protection – Although blockchains provide a robust defence for crypto transactions, users are still vulnerable to various frauds as it remains an unregulated market. In practice, even the money lost due to a technical malfunction during a transaction may be hard to recoup. And some businesses are not willing to accept this trade-off.
• Usability – The crypto industry is still finding ways to achieve mass adoption. Keyword: still. Until then, most users must turn their cryptocurrencies into fiat currencies before spending any of them.
• Volatility – Cryptocurrencies are notorious for their fluctuant nature. One day, the coins in your wallet may be worth $1,000 USD, but the next, they might only be worth $800. This makes it tremendously hard for any businesses to transact in crypto.

Local transfer

A local transfer is a process of sending money to a recipient’s local bank account through a network of financial institutions. As opposed to SWIFT, which uses a network of messaging services, local transfers are a more direct approach that gets the money transferred from account A to account B. Consequently, this shortens the processing and settlement period.

In addition, through local payment routes, it eliminates the international payment fees that are typically charged on SWIFT payments, hence reducing the cost of transactions overall.

An example of a local transfer is an Automated Clearing House (ACH) transfer, which allows bank-to-bank transfers through the Automated Clearing House Network.

SEPA

SEPA, short for Single Europe Payments Area, is often referred to as the European SWIFT network, as the main difference between these networks is its geographical scope. SWIFT supports international transfers across the world while SEPA only supports transfers in the Eurozone. In comparison with SWIFT’s gargantuan network of over 200 countries, SEPA only has 36 member states.

To make a SEPA payment, users only need a Euro account and the International Bank Account Number (IBAN) of the recipient; no need for a Bank Identifier Code (BIC). This makes SEPA more convenient and hassle-free in comparison with SWIFT, which requires detailed information about the bank and beneficiary.

Having said that, like SWIFT payments, SEPA payments also face the issue of processing time (which can take up to three days) and a high transaction cost.

CIPS

In 2015, China launched the Cross-Border Interbank Payments System (CIPS) to promote the use of renminbi for international trade settlement. This system provides clearing and settlement services that connect both onshore and offshore clearing markets and participating banks.

As of May 2023, CIPS has a total of 1441 members with 80 as Direct Participants and 1361 as Indirect Participants.

• Direct participants – Participants who have opened an account in the CIPS and communicate directly through the CIPS.
• Indirect participants – These are the participants who have indirect services provided by the CIPS through direct participants.

According to the Center for Strategic and International Studies, the daily volume of CIPS averages about ¥385 billion yuan ($45.6 billion USD).

Here’s the difference that separates CIPS from other alternatives: CIPS wasn’t designed to replace SWIFT. Instead, it collaborates with SWIFT and uses SWIFT-compatible messages on high-value global renminbi transactions.

SPFS

Russia’s System for Transfer of Financial Messages (SFPS) has been in development by its central bank since 2014. Similar to other messaging systems, members of this network can send and receive financial messages.

This system is built to create and process documents in UFEBS (Unified Formats of Electronic Banking Messages) and MT formats, which are comparable to SWIFT’s messaging formats.

Despite having existed for over eight years now, the network only consists of roughly 400 members. This is largely owed to the fact that the majority of international banks refused to join the SPFS due to political reasons such as fearing Western sanctions.

What are the impacts of SWIFT alternatives?

As we speak, the US dollar is still the dominant world reserve currency used in an estimated 88% of the world’s trade, according to a report from the Bank for International Settlements. But, if the alternatives such as CIPS and SPFS continue to expand, it poses a de-dollarisation threat and the US dollar may gradually lose its grip on the world economy.

China has the ambition to make its currency, the Yuan, the dominant world reserve currency, but t it still has a long way to go due to the tight foreign exchange controls over its value. Not just that, it also isn’t fully convertible to other global currencies.

Russia, on the other hand, has begun demanding energy payments in its local currency, Ruble. With this, the rise of an alternative currency for the industry may cause knock-on impacts on the dollar-denominated world trading system.

The future of SWIFT payments

Despite the competition to set new global payment standards, SWIFT continues to develop and integrate new features such as the SWIFT gpi (Global Payments Innovation). This initiative combines the traditional SWIFT messaging and banking system with a new set of rules, including transparency of fees, end-to-end payment tracking, and confirmation of credit to the recipient’s account.

While there is still room for improvement, the SWIFT gpi is a step in the right direction that addresses the decades-old issues of speed and transparency.

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