A cross border transaction is transferring value from one country / jurisdictional area to other. A cross border transaction anywhere in the world will likely be using the swift network 2 process the transaction
The 1960s and 70s saw rapid growth in international banking. The market saw a need for new technology and standardization to streamline communication and automate international transaction processing. In year 1973, around 239 banks from 15 different countries came together and formed an organization to process transactions across countries. This institution is called SWIFT (Society for Worldwide Interbank Financial Telecommunication).
SWIFT was created by banks but has since expanded it involved not only banks but securities firms, market infrastructures, and corporates. SWIFT has steadily revolutionized financial communication. SWIFT has over 27 regional offices where more than 3,000 employees are working it has a network of business partners around the world, SWIFT keeps funds flowing, supply chains moving, and the world’s economies turning
Cross Border Payment Example
Suppose Sarah has moved to Paris and now wants to learn French. Her friend Jake, who lives in the USA, wants to help her and requests his bank to send $2000 from his US account held at Citibank to Sarah’s account held at La Banque Postale in France in Euro Currency.
The transaction would not require any intermediaries or correspondents, as there is a direct relationship between Citibank (USA) and La Banque Postale (France).
Figure 91 SWIFT Credit Transfer STP Flow
- Jake Initiates the Credit Transfer
Jake initiates a credit transfer using the net banking service offered by Citi Bank.
He logs into his online banking portal, enters the transaction details which contains Sarah’s account number, bank identifier (BIC/SWIFT Code), and the transfer amount.
After reviewing the details, he confirms and submits the transfer request.
- Internal Processing at Citi Banks end
Once the request is submitted, Citi Bank’s channel application receives the payment instruction and forwards it to the internal transaction processor.
Transaction Processor at Citi Banks end performs the mandatory transaction processing functions like account balance check, fraud detection, and compliance screening. If the transaction gets processed without any error, it is formatted into a SWIFT MT 103 or Pacs.008 message.
- Accountings performed at CITI Bank
Citibank will debit Jake’s account for 2,000 U.S. dollars, and the equivalent amount in euros (1,831 euros) will be credited to Citi’s nostro mirror account. The actual nostro account is maintained at La Banque Postale in euro currency.
- Citi Bank Sends Message to SWIFT Network
Citi Bank generates Pacs.008 message under the ISO 20022 standard or an MT103 message under the traditional SWIFT FIN format. Depends on whether the bank is using FIN or FINPLUS service
The Citi bank is having a direct correspondent relationship between with La Banque Postale hence the message is sent directly via SWIFT to La Banque Postale without requiring an intermediary bank.
- SWIFT Validates the Message
The SWIFT network validates the message. It checks if the participants involved in the message are part of the SWIFT network.
- SWIFT Network Delivers the Payment Message
Once the swift validates the message then it transmits the Pacs.008 or MT103 message to La Banque Postale.
- La Banque Postale Processes the Transaction
Upon receiving the payment message, La Banque Postale validates the structure and details of the incoming transaction. The bank runs compliance checks, sanctions screening and anti-money laundering verification, and fraud check before processing the payment.
If everything is in order, the funds are debited from CITI banks Euro Account and credited to Sarah’s account, making them available for her use.
- Sarah Receives the Funds
Sarah’s account is credited with the transferred amount. Sarah will receive a notification from her bank for the funds credit.