WEBVTT - TechStuff Tidbits: What is SWIFT? 0:00:04.400 --> 0:00:07.800 Welcome to tex Stuff, a production from I Heart Radio. 0:00:12.200 --> 0:00:15.080 Hey there, and welcome to tech Stuff. I'm your host, 0:00:15.200 --> 0:00:18.800 Jonathan Strickland. I'm an executive producer with I Heart Radio 0:00:18.880 --> 0:00:21.920 and how the tech are you. First of all, if 0:00:21.920 --> 0:00:24.400 I sound a little different in this episode, part of 0:00:24.440 --> 0:00:28.040 that is because I came into the office because I 0:00:28.080 --> 0:00:32.000 have an interview I'll be doing for a future episode 0:00:32.000 --> 0:00:34.599 of tech Stuff later today, and I wanted to have 0:00:34.920 --> 0:00:38.960 the best possible connection I could for that. And secondly, 0:00:39.159 --> 0:00:43.760 I'm using a totally different microphone, So apologies to all 0:00:43.800 --> 0:00:46.680 of you out there. Just bear with me as I 0:00:47.720 --> 0:00:49.600 as I switched things up, but we'll be back to 0:00:49.680 --> 0:00:54.040 normal before you know it. However, let's get to today's show. 0:00:54.560 --> 0:00:59.120 I got a request on Twitter to cover Swift, particularly 0:00:59.280 --> 0:01:02.639 as it partend pans to the Russian invasion of Ukraine. 0:01:03.120 --> 0:01:06.320 So today we're going to learn what swift is and 0:01:06.400 --> 0:01:10.959 what a ban on Swift in Russia actually means. And um, 0:01:11.000 --> 0:01:13.880 I should credit the Twitter user, but they actually use 0:01:13.920 --> 0:01:16.760 a handle that's a mixture of letters and numbers, so 0:01:16.959 --> 0:01:21.760 I'm not positive on how they prefer that handled to 0:01:21.840 --> 0:01:24.480 be pronounced, but I'll give it a go and say 0:01:24.520 --> 0:01:27.640 it's Yazio. Now let's get to the meat of it. 0:01:28.280 --> 0:01:31.720 And first, uh, there's needs to be some clarification because 0:01:31.720 --> 0:01:35.480 there's actually different swifts in the tech world. For example, 0:01:35.920 --> 0:01:39.760 there is the SWIFT programming language, which was developed by 0:01:39.880 --> 0:01:44.360 Chris Latiner uh in for the Apple family of computer systems. 0:01:44.560 --> 0:01:47.680 But that's not what we're talking about here. Uh No, 0:01:47.880 --> 0:01:51.200 Our SWIFT is an acronym and it stands for the 0:01:51.280 --> 0:01:59.120 Society for Worldwide inter Bank Financial Telecommunication. So when you 0:01:59.160 --> 0:02:03.400 boil it all down, SWIFT refers to a communication system 0:02:03.440 --> 0:02:07.760 that allows banks and other financial institutions to handle stuff 0:02:07.800 --> 0:02:13.560 like transfers between those institutions and often that this can 0:02:13.600 --> 0:02:19.240 include spanning the borders of countries, so international transfers. And 0:02:19.320 --> 0:02:22.360 this is really all about moving money around. And typically 0:02:22.400 --> 0:02:26.760 we're talking about very large sums of money, oodles of cash, 0:02:26.960 --> 0:02:30.760 if you will. So how do you facilitate the transfer 0:02:30.919 --> 0:02:34.840 of money? As companies and customers make or accept payments, 0:02:35.200 --> 0:02:39.480 the money has to travel to the appropriate destination. Now 0:02:40.560 --> 0:02:44.040 we're not usually actually talking about physical cash, like moving 0:02:44.680 --> 0:02:50.080 physical money around. Uh, the physical stuff like paper notes, coins, 0:02:50.520 --> 0:02:53.639 you know, travelers, checks, all that kind of thing. Those 0:02:53.639 --> 0:02:57.320 are just the representation of the concept of money. Actually, 0:02:57.360 --> 0:03:00.280 if you go down that road long enough, you risk 0:03:00.360 --> 0:03:03.200 the possibility that you conclude that all money is just 0:03:03.320 --> 0:03:05.720 a big game, and that if we stop believing in it, 0:03:05.720 --> 0:03:09.639 it will go away. So head away from the light, 0:03:09.760 --> 0:03:14.799 Carol Ann. It will do you no good. Anyway. This 0:03:14.880 --> 0:03:19.040 gets way more complicated than just moving cash around. You know, 0:03:19.080 --> 0:03:22.960 it's really easy to understand how cash moves because you've 0:03:22.960 --> 0:03:26.239 got one party the hands over cash to another party 0:03:26.320 --> 0:03:30.640 in return for goods or services. But the concept of 0:03:30.760 --> 0:03:34.640 money that's trickier. However, it's also important to get a 0:03:34.720 --> 0:03:38.440 handle on this in order to understand what's with role 0:03:38.560 --> 0:03:41.720 is beyond just it's a way for financial institutions to 0:03:41.800 --> 0:03:44.720 communicate with each other. I mean, technically I could just 0:03:44.760 --> 0:03:47.560 say that and that would be it, but I don't 0:03:47.560 --> 0:03:52.080 feel like that gives you an understanding or an appreciation 0:03:52.120 --> 0:03:56.280 of what swift is and what it does. So first, 0:03:56.320 --> 0:04:00.840 let's talk about what money is in bank account oounts. So, 0:04:02.080 --> 0:04:05.080 when you, as a bank customer, make a deposit to 0:04:05.120 --> 0:04:08.680 your personal bank account, what you're actually doing is creating 0:04:08.680 --> 0:04:13.120 a liability for the bank. And that's because the you're 0:04:13.160 --> 0:04:17.560 not literally handing over notes, like to a bank. You know, 0:04:17.600 --> 0:04:21.160 if you're making a wireless transfer, you're not handing cash 0:04:21.200 --> 0:04:23.360 to a bank that then turns around and puts it 0:04:23.400 --> 0:04:26.360 in a big vault that just has all the cash 0:04:26.400 --> 0:04:28.799 for all the accounts in it. That's not what's happening. 0:04:29.400 --> 0:04:31.919 So they don't literally have a room full of cash 0:04:31.960 --> 0:04:34.359 and they just go in and scoop out some of 0:04:34.400 --> 0:04:37.400 it to represent your bank account. So what you're doing 0:04:37.520 --> 0:04:41.440 in a sense is you are loaning money to the bank, 0:04:41.839 --> 0:04:44.279 and the bank can then use that money to issue 0:04:44.320 --> 0:04:47.680 stuff like loans to other people, loans with interest, then 0:04:47.720 --> 0:04:51.800 in turn generate revenue for the bank. So you make 0:04:51.800 --> 0:04:55.599 a deposit and technically the bank owes you that amount 0:04:55.680 --> 0:04:59.120 of money, and it has to pay out that money 0:04:59.200 --> 0:05:02.520 whenever you want it, either because you're making a payment 0:05:02.560 --> 0:05:05.920 to someone else or you just want to withdraw your cash. 0:05:06.200 --> 0:05:09.360 On the flip side, if you withdraw more money than 0:05:09.560 --> 0:05:12.040 you actually have in your account, or you know, you 0:05:12.120 --> 0:05:14.279 spend more than you have, maybe you write a check 0:05:14.640 --> 0:05:16.760 for more money than is in your bank account as 0:05:16.839 --> 0:05:21.200 it were, then you become overdrawn and now you owe 0:05:21.240 --> 0:05:25.800 the bank that extra amount the amount that you overspent 0:05:25.920 --> 0:05:29.479 or overdrew, and of course there's usually a fee thrown 0:05:29.520 --> 0:05:32.880 on there as well, and that amount becomes an asset 0:05:33.160 --> 0:05:37.120 to the bank. So customer deposits are bank liabilities, and 0:05:37.200 --> 0:05:41.400 overdrawn accounts or loan payments those are assets. If two 0:05:41.440 --> 0:05:46.160 parties are using the same bank, any money transfers can 0:05:46.200 --> 0:05:49.920 be made pretty darned simply. So let's say that I 0:05:50.000 --> 0:05:53.320 want to pay you ten dollars, and I cannot be 0:05:53.400 --> 0:05:56.919 more clear, I am not paying all of you ten dollars. 0:05:56.960 --> 0:06:01.040 You would bankrupt me. But hypothetically I want to pay 0:06:01.080 --> 0:06:03.120 you ten dollars, and it just so happens that you 0:06:03.200 --> 0:06:07.320 and I use the same bank. So I tell my bank, hey, 0:06:07.680 --> 0:06:10.440 I want to transfer ten of my dollars what are 0:06:10.480 --> 0:06:14.280 in my account to my friends account, so that those 0:06:14.320 --> 0:06:18.320 dollars that were mine now become their dollars. And the 0:06:18.320 --> 0:06:21.240 bank first verifies that I actually have ten dollars in 0:06:21.320 --> 0:06:26.320 my account that I can transfer, and that you definitely 0:06:26.480 --> 0:06:28.960 have an account with that same bank, so that there's 0:06:28.960 --> 0:06:31.559 a place to transfer it to, and then the bank 0:06:31.640 --> 0:06:34.880 handles the transfer and the books are balanced, and all 0:06:34.960 --> 0:06:38.440 that is really easy because it's all in house. But 0:06:38.560 --> 0:06:42.520 what happens if you and I use different banks, Like 0:06:42.600 --> 0:06:45.200 I have one bank and you use a different bank. Well, 0:06:45.240 --> 0:06:48.279 then the money has to be moved around. And when 0:06:48.320 --> 0:06:52.240 banks move money around, they are not shipping cargo containers 0:06:52.240 --> 0:06:54.960 filled with cash. If you really take a step back, 0:06:55.000 --> 0:06:57.119 it just looks like banks are just kind of moving 0:06:57.200 --> 0:07:00.279 numbers around. Like the account for what's do when the 0:07:00.320 --> 0:07:03.160 paying that number goes down by whatever the amount was 0:07:03.240 --> 0:07:05.800 that was paid, and for the account what's receiving the 0:07:05.839 --> 0:07:09.200 paying that number goes up by that same amount. I 0:07:09.240 --> 0:07:11.480 am skipping over some stuff like I'm skipping the bit 0:07:11.560 --> 0:07:15.080 where during transfers you typically have parties that are charging 0:07:15.120 --> 0:07:18.240 for the transfer service, so it's never as simple as 0:07:18.240 --> 0:07:21.360 the same amount going in as coming out, which gets 0:07:21.400 --> 0:07:24.360 further complicated when we talk about international transfers because that 0:07:24.400 --> 0:07:28.040 also includes things like currency conversions as well as other fees. 0:07:28.480 --> 0:07:34.120 So on a simplified level, if I wire you ten bucks, 0:07:35.080 --> 0:07:38.040 my bank account goes down by ten bucks and yours 0:07:38.200 --> 0:07:40.640 goes up by ten bucks, or you know, the equivalent 0:07:40.720 --> 0:07:46.320 in whatever your currency is minus whatever fees were incurred 0:07:46.360 --> 0:07:49.520 along the way. But there is a lot more going 0:07:49.560 --> 0:07:52.200 on there because there has to be I mean, how 0:07:52.240 --> 0:07:56.280 does the actual money shift over from one institution to another. 0:07:56.920 --> 0:07:59.360 If we're using two different banks, how does the ten 0:07:59.480 --> 0:08:02.280 bucks and amount I have with my bank actually changed 0:08:02.320 --> 0:08:05.520 to an amount that you have with your bank. Well, 0:08:05.560 --> 0:08:09.440 if our two banks have reciprocal accounts, which is also 0:08:09.560 --> 0:08:12.840 called correspondent accounts, it's I think it's more common to 0:08:12.840 --> 0:08:16.200 hear correspondent accounts in Europe and reciprocal accounts in the 0:08:16.240 --> 0:08:19.760 United States. Anyway, That means they just settle the actual 0:08:19.760 --> 0:08:23.120 transfer on the back end. Usually the person that gets 0:08:23.400 --> 0:08:26.360 the money transferred to them has access to the funds 0:08:26.400 --> 0:08:29.560 pretty much right away, but the formal settlement might take 0:08:29.600 --> 0:08:32.280 a little bit longer between the two banks. This also 0:08:32.360 --> 0:08:35.480 means that if something were to go terribly wrong, you 0:08:35.559 --> 0:08:38.880 might find yourself ten bucks overdrawn if you grab the 0:08:38.880 --> 0:08:41.320 cash right away and something happened on the back end. 0:08:41.360 --> 0:08:44.280 Because there is risk here. If one of the two 0:08:44.280 --> 0:08:48.080 banks is unstable and goes under then any transfer represents 0:08:48.080 --> 0:08:52.319 a potential loss. But assuming everything's okay, here's how it works. 0:08:52.360 --> 0:08:59.200 So reciprocal accounts or uh, you know, the correspondent accounts, 0:08:59.280 --> 0:09:02.400 these mean that each of the banks actually has a 0:09:02.400 --> 0:09:06.400 bank account with the other bank, So We'll say. Let's 0:09:06.600 --> 0:09:09.360 use an example where you have Bank A and Bank B. 0:09:09.720 --> 0:09:13.520 I use Bank A, you use Bank B. And it 0:09:13.559 --> 0:09:17.240 turns out that Bank A has a reciprocal account of 0:09:17.240 --> 0:09:20.640 correspondent account with bank B, and bank B has a 0:09:20.679 --> 0:09:23.760 similar account with Bank A. Now I'm gonna send you 0:09:23.840 --> 0:09:27.520 ten bucks, and I tell Bank A to send ten 0:09:27.559 --> 0:09:31.000 dollars to your account in Bank B. Bank A reduces 0:09:31.040 --> 0:09:34.040 the amount in my account by ten dollars and then 0:09:34.160 --> 0:09:38.280 adds ten dollars to its own bank account that is 0:09:38.320 --> 0:09:42.640 with Bank B, so essentially is depositing ten dollars into 0:09:42.679 --> 0:09:46.280 its account in Bank B. Then Bank A tells Bank B, hey, yo, 0:09:46.400 --> 0:09:49.120 I just sent you a tenor could you drop that 0:09:49.160 --> 0:09:54.280 into the bank account for insert your name here. Bank B, 0:09:54.920 --> 0:09:57.360 after verifying the Bank A's account with them had in 0:09:57.440 --> 0:10:01.079 fact increased by ten dollars with then add ten dollars 0:10:01.080 --> 0:10:05.040 into your account. But here's another twist. It's not like 0:10:05.200 --> 0:10:09.680 every bank has an account with every other bank, which 0:10:09.720 --> 0:10:13.319 means sometimes we need another party in here. We need 0:10:13.360 --> 0:10:16.800 a third party bank that maintains lots of accounts with 0:10:16.920 --> 0:10:20.640 other banks, uh, sort of a banks bank, if you will. 0:10:21.000 --> 0:10:24.079 So here in the United States, the Federal Reserve serves 0:10:24.120 --> 0:10:27.720 that function for tons of banks, hundreds of them. So 0:10:27.920 --> 0:10:30.880 going back to our example, let's say Bank A and 0:10:30.880 --> 0:10:34.360 Bank B do not have reciprocal or correspondent accounts with 0:10:34.400 --> 0:10:38.280 each other, but they do each have accounts with the 0:10:38.320 --> 0:10:42.480 Federal Reserve. Well, now, when I tell my bank to 0:10:42.679 --> 0:10:46.600 wire you ten dollars, that communication must go through the 0:10:46.600 --> 0:10:50.160 Federal Reserve, where Bank A puts the money into its 0:10:50.160 --> 0:10:52.679 account with the FED. And the FED then, as kind 0:10:52.679 --> 0:10:54.839 of like our very first example, where you have two 0:10:54.880 --> 0:10:58.200 people using the same bank, it balances the books internally 0:10:58.559 --> 0:11:02.280 and moves the money from Banquet's account to Bank b's 0:11:02.320 --> 0:11:05.960 account that is also with the FED. And then Bank 0:11:06.040 --> 0:11:09.120 A tells Bank B, Hey, yo, check your account with 0:11:09.200 --> 0:11:11.440 the FED. There's a sweet tent spot in there that 0:11:11.520 --> 0:11:14.520 I need you to PLoP into the account of insert 0:11:14.600 --> 0:11:21.240 your name here, and voila money transfer. Now, these transfers 0:11:21.480 --> 0:11:24.280 often happen, you know, they happen over clearance systems that 0:11:24.400 --> 0:11:29.160 clear those those payments, they verify and validate them. Here 0:11:29.200 --> 0:11:32.520 in the US, the big one is FED wire. There 0:11:32.520 --> 0:11:35.560 are other systems for large money transfers in the United States, 0:11:35.880 --> 0:11:37.920 but there's no real need to dive into all of 0:11:37.960 --> 0:11:40.559 those just yet. We will touch on some of them 0:11:40.600 --> 0:11:44.160 a little bit later. And of course this can get 0:11:44.200 --> 0:11:47.200 more and more complicated. You start getting into a six 0:11:47.200 --> 0:11:49.960 degrees of separation kind of situation. You might actually need 0:11:50.040 --> 0:11:53.719 a fourth bank in the mix to facilitate a transfer 0:11:54.200 --> 0:11:57.240 right because there might not be a single common bank 0:11:57.880 --> 0:12:02.680 that links the senders bank account to the recipient's bank account. 0:12:03.360 --> 0:12:06.160 This becomes increasingly common when you're talking about banks that 0:12:06.200 --> 0:12:09.120 are in different countries. The two endpoints might not have 0:12:09.480 --> 0:12:13.240 that single third party bank in common, so the transfer 0:12:13.400 --> 0:12:16.120 kind of has to go through hop scotch through various 0:12:16.200 --> 0:12:19.760 connections in order for everything to be settled. Uh. Typically speaking, 0:12:19.800 --> 0:12:22.200 the more connections that has to go through, the more 0:12:22.320 --> 0:12:25.760 fees are incurred, and the less money is going to 0:12:25.840 --> 0:12:29.320 come out the other end when it finally gets there. Now, 0:12:30.280 --> 0:12:33.440 all I'm doing here is describing some very high level 0:12:33.559 --> 0:12:36.120 concepts when it comes to moving money around. There's a 0:12:36.160 --> 0:12:39.199 lot more that goes into all of this, with special 0:12:39.240 --> 0:12:42.560 identify irs for the accounts and banks that are all 0:12:42.800 --> 0:12:46.680 necessary so that the money from the correct accounts ends 0:12:46.760 --> 0:12:50.960 up at the correct destinations. So without those designations, without 0:12:50.960 --> 0:12:54.320 those guarantees. We would not have confidence in our financial 0:12:54.320 --> 0:12:57.439 systems because we would never be sure that the money 0:12:57.480 --> 0:13:00.840 we were sending to someone was actually going to right person. 0:13:01.400 --> 0:13:06.280 And when people lose confidence in financial systems, the systems collapse. 0:13:06.640 --> 0:13:11.920 So the whole house of cards depends upon people having 0:13:11.920 --> 0:13:15.520 this confidence in them. I have a lot more to 0:13:15.600 --> 0:13:18.199 say about all of this, but before we get into 0:13:18.280 --> 0:13:29.360 more of it, let's take a quick break. Okay, we're back. 0:13:29.679 --> 0:13:34.560 So in order to make money transfers work, particularly between 0:13:34.640 --> 0:13:39.600 banks that are in different countries, we have to establish protocols, 0:13:40.160 --> 0:13:43.600 that is, the rules that we use by which money 0:13:43.640 --> 0:13:47.400 can move around. We also have to establish the actual 0:13:47.520 --> 0:13:53.400 communication systems the infrastructure, so that will facilitate the movement 0:13:53.640 --> 0:13:56.760 of money at a speed that is useful. Uh. If 0:13:56.800 --> 0:13:59.760 it took days or weeks or months for customers to 0:13:59.800 --> 0:14:03.719 have a transfer go through, whether we're talking individuals or 0:14:03.720 --> 0:14:08.360 companies or countries, commerce would slow way down and that 0:14:08.360 --> 0:14:12.200 would not be acceptable. And um A big part of 0:14:12.200 --> 0:14:16.840 this is the actual messaging system that financial institutions will 0:14:16.960 --> 0:14:19.880 use to notify one another of payments. So in the 0:14:19.880 --> 0:14:24.200 old days, you could do this over telegraph wires. In fact, 0:14:24.200 --> 0:14:26.880 that's where we get the term wire transfers because in 0:14:26.920 --> 0:14:30.680 the old days, a customer could go to a telegraph office, 0:14:31.160 --> 0:14:34.520 they could pay an amount to that office and say, 0:14:34.600 --> 0:14:38.120 I want to wire this money to my cousin who's 0:14:38.160 --> 0:14:42.240 in across the country in California, and the telegraph operator 0:14:42.280 --> 0:14:45.560 would send a message to the appropriate destination, and then 0:14:45.600 --> 0:14:48.480 your cousin in California would go to their local telegraph 0:14:48.600 --> 0:14:52.600 office and once verified, that office would pay out the 0:14:52.680 --> 0:14:56.000 amount that you were wiring over, minus whatever fees you 0:14:56.040 --> 0:14:59.160 had to pay in order to do this. Now, this 0:14:59.280 --> 0:15:02.480 evolves slight lee over the years into more and more 0:15:02.520 --> 0:15:07.280 complex systems such as tell x Telex essentially involved using 0:15:07.360 --> 0:15:12.600 teleprinters to communicate across phone lines to send messages to destinations. 0:15:12.640 --> 0:15:15.400 So you could actually, you know, type out a message 0:15:15.400 --> 0:15:17.720 and it would send it over to telephone lines to 0:15:17.800 --> 0:15:20.840 a printer that would print out that message. And banks 0:15:20.840 --> 0:15:24.240 for using this in order to do big money transfers. 0:15:24.280 --> 0:15:28.520 But obviously, as the world became more interconnected and more complicated, 0:15:28.680 --> 0:15:32.120 and more and more businesses were expanding beyond the borders 0:15:32.200 --> 0:15:36.240 of their native countries, we needed a more sophisticated communication 0:15:36.320 --> 0:15:40.160 system to handle all that and it really became necessary 0:15:40.560 --> 0:15:44.400 as global banking grew and evolved. In addition, there was 0:15:44.520 --> 0:15:48.800 tensions within the financial industry there always are, uh. There 0:15:48.800 --> 0:15:51.240 were banks such as City Bank, based out of New 0:15:51.320 --> 0:15:55.960 York in the United States that created early proprietary messaging standards, 0:15:56.000 --> 0:16:00.000 but that proprietary bit meant that other banks really weren't 0:16:00.080 --> 0:16:03.040 too keen to have to adopt a standard that was 0:16:03.080 --> 0:16:08.200 created and potentially controlled by a single entity like City Bank. 0:16:08.840 --> 0:16:10.920 It would mean that if you know, City Bank was 0:16:10.960 --> 0:16:15.080 completely in charge of making changes and updates, they wouldn't 0:16:15.080 --> 0:16:18.200 really have a spot at the table to make suggestions, 0:16:18.320 --> 0:16:20.560 it would And so you know, no one wants to 0:16:20.600 --> 0:16:22.640 play by somebody else's rules. They want to be the 0:16:22.680 --> 0:16:26.600 ones to define the rules. Other methods that competed with 0:16:26.640 --> 0:16:29.400 City banks popped up and it all became a mess 0:16:29.440 --> 0:16:34.640 because one thing you really need in finance is interoperability, right. 0:16:34.760 --> 0:16:37.600 You want everyone to be playing by the same rules, 0:16:38.320 --> 0:16:41.400 Otherwise you run into these pain points where you have 0:16:41.520 --> 0:16:44.120 to switch from one rule set to another just in 0:16:44.200 --> 0:16:46.400 order to get the money to move from point A 0:16:46.480 --> 0:16:49.040 to point B. So there was a very real danger 0:16:49.240 --> 0:16:53.320 that different proprietary systems were gonna make international transfers more complicated, 0:16:53.720 --> 0:16:58.160 not easier, and really, when you boil it down, complicated 0:16:58.240 --> 0:17:03.160 often leads to being more expensive. Nobody wants that. So 0:17:04.200 --> 0:17:07.440 in Europe in the early nineteen seventies, nearly two d 0:17:07.640 --> 0:17:10.560 forty banks collaborated on finding a way to make this 0:17:10.680 --> 0:17:15.520 work and established both a communication infrastructure and a common 0:17:15.560 --> 0:17:20.200 messaging language for the purposes of money transfers. One decision 0:17:20.200 --> 0:17:24.080 they made was to locate the headquarters of their new organization, 0:17:24.280 --> 0:17:29.520 which was SWIFT, in Belgium. Specifically, it's headquartered in a 0:17:29.600 --> 0:17:32.840 suburb in Brussels, and you might wonder, well, why did 0:17:32.840 --> 0:17:36.080 they choose that location, And it's largely because you had 0:17:36.080 --> 0:17:39.800 two massive parties that were really playing tug of war here. 0:17:40.320 --> 0:17:42.560 You had the Finance District of New York on one 0:17:42.600 --> 0:17:45.960 side and the Finance District of London on the other side, 0:17:45.960 --> 0:17:48.600 and both of them really wanted to have, you know, 0:17:48.880 --> 0:17:52.720 more of a say in how this developed. So Brussels 0:17:52.760 --> 0:17:55.880 was kind of considered neutral territory where the parties could 0:17:56.240 --> 0:18:00.480 be assuaged. The No One arm of the financial industry 0:18:00.480 --> 0:18:03.399 would set all the terms, and then the members of 0:18:03.440 --> 0:18:07.879 SWIFT began to work to build out the protocols and 0:18:07.920 --> 0:18:12.280 communication system that would support what they wanted. Now to 0:18:12.280 --> 0:18:16.480 be clear, Swift's purpose is not to actually serve as 0:18:16.520 --> 0:18:20.639 a financial institution. It is not balancing the books, it 0:18:20.720 --> 0:18:26.320 is not clearing transactions. No actual money passes through Swift, 0:18:27.080 --> 0:18:29.920 so that all of that, the actual clearing of transactions 0:18:29.920 --> 0:18:34.040 that gets handled by some other service such as fed wire. 0:18:34.560 --> 0:18:37.760 There's one that's called CHIPS, which isn't just an old 0:18:37.760 --> 0:18:41.000 TV show about motorcycle cops. It's also an acronym for 0:18:41.160 --> 0:18:45.120 clearing House Interbank Payment System, which is out of New York. 0:18:45.680 --> 0:18:48.760 Fedwire and CHIPS are just two clearing systems. Fedwire being 0:18:48.760 --> 0:18:52.600 a US federally regulated system, CHIPS being operated by a 0:18:52.600 --> 0:18:55.919 private company called the New York clearing House Association. But 0:18:56.040 --> 0:18:59.600 there's also other ones. There's like the Bankers Automated Clearing 0:18:59.600 --> 0:19:04.320 System or b ACS BACKS that is a very similar 0:19:04.440 --> 0:19:07.880 type of organization. It operates out of the United Kingdom. 0:19:07.960 --> 0:19:11.720 These are the types of institutions that are actually moving 0:19:11.760 --> 0:19:16.479 the money around. But what SWIFT is doing is serving 0:19:16.520 --> 0:19:21.680 as a communications system between banks and financial institutions, so 0:19:21.880 --> 0:19:25.280 it can carry the message that says, hey, bank A, 0:19:25.880 --> 0:19:29.200 you need to transfer X amount of money to bank 0:19:29.359 --> 0:19:33.320 b and Swift has to do this in an efficient, fast, 0:19:33.440 --> 0:19:38.040 and critically a secure way. And that's actually the real 0:19:38.119 --> 0:19:41.159 value of Swift that it allows for financial institutions to 0:19:41.280 --> 0:19:45.160 send these messages about moving money around in a way 0:19:45.160 --> 0:19:48.879 that is dependable and safe. Part of that security is 0:19:48.920 --> 0:19:52.680 that Swift also doesn't really maintain financial information on an 0:19:52.680 --> 0:19:57.320 ongoing basis. It's what is called a store and forward operation, 0:19:57.800 --> 0:20:00.920 meaning it holds onto information really only as long as 0:20:00.920 --> 0:20:06.080 it is necessary to complete a transaction. Swift the organization 0:20:06.960 --> 0:20:12.399 set up a private international communications network specifically dedicated to 0:20:12.680 --> 0:20:16.560 financial transaction messages. So if you think of the Internet 0:20:16.600 --> 0:20:20.760 as a network of networks, Swift is a network, a 0:20:20.880 --> 0:20:25.879 specific network for the sole purpose of financial institutions sending 0:20:25.920 --> 0:20:30.719 these messages in order to make money move around the world. Uh. 0:20:30.800 --> 0:20:33.480 The need for a private network was clear because the 0:20:33.520 --> 0:20:39.600 demands of finance were increasingly growing as globalization increased as well, 0:20:40.040 --> 0:20:44.560 and if the financial institution was just relying on leasing 0:20:44.640 --> 0:20:50.360 out some some network infrastructure from other providers, they would 0:20:50.400 --> 0:20:53.280 be hitting up against their limits pretty quickly on a 0:20:53.320 --> 0:20:55.880 regular basis, and that just didn't make sense. It made 0:20:55.920 --> 0:20:58.679 more sense for them to build out a system that 0:20:58.840 --> 0:21:03.600 was solely dedicated for the financial industry. A year after 0:21:03.600 --> 0:21:07.520 the organization's founding, so this is nineteen seventy four, the 0:21:07.640 --> 0:21:10.840 members of Swift decided to contract with a company called 0:21:10.880 --> 0:21:14.479 Burroughs Corporation based of Detroit, Michigan, here in the United States. 0:21:15.080 --> 0:21:18.399 That company would supply the computer equipment that would handle 0:21:18.480 --> 0:21:22.880 these electronic messages, and also the company installed the systems 0:21:22.920 --> 0:21:28.520 around the world, so these would be the backbone, the infrastructure, 0:21:28.600 --> 0:21:32.800 the actual hardware that carries the electronic messages across the 0:21:32.800 --> 0:21:36.720 Swift system. And it took four years for the Swift 0:21:36.840 --> 0:21:41.800 organization to design and and bring online the Swift system. 0:21:41.880 --> 0:21:45.760 It officially launched in nineteen seventy seven when Prince Albert 0:21:45.800 --> 0:21:50.840 of Belgium sent the first message over the Swift system. UM. 0:21:50.880 --> 0:21:54.000 I'm not sure what he sent, Maybe it was where's 0:21:54.040 --> 0:21:57.400 my money? Anyway, at launch, Swift had more than five 0:21:57.840 --> 0:22:01.080 member banks across fifteen countries, and two years later, in 0:22:01.200 --> 0:22:05.720 nineteen Swift was handling more than a hundred twenty thousand 0:22:05.800 --> 0:22:09.560 transfer messages per day, and a major part of Swift 0:22:09.680 --> 0:22:13.120 was the standardization of those messages. See back in the 0:22:13.119 --> 0:22:16.760 tell X days when people were using teleprinters, there was 0:22:16.800 --> 0:22:21.160 no international standard. People would use forms, and forms could 0:22:21.240 --> 0:22:26.960 vary from institution to institution. They all covered the same stuff, 0:22:27.359 --> 0:22:30.400 but they were laid out differently, right, so you would 0:22:30.400 --> 0:22:32.880 have to really look over the form and say, all right, well, 0:22:32.920 --> 0:22:36.840 now I found the account number, for example, and here's 0:22:36.880 --> 0:22:39.400 where the amount is. All those sort of things would 0:22:39.440 --> 0:22:43.679 be different from one institution to another, and that was 0:22:43.720 --> 0:22:47.520 a bit of an issue. Swift standardized that. However, the 0:22:47.600 --> 0:22:50.199 members of Swift also wanted to create a protocol for 0:22:50.240 --> 0:22:53.879 electronic message formats that was at the same time backwards 0:22:53.880 --> 0:22:58.040 compatible with the old telex system, because in the early 0:22:58.119 --> 0:23:01.919 days a lot of institution were still dependent upon tell x, 0:23:02.040 --> 0:23:04.919 so it's not like everyone switched over to Swift on 0:23:05.040 --> 0:23:08.040 day one. It would take a while, which meant they 0:23:08.040 --> 0:23:10.920 wanted to make sure that any messages sent over Swift 0:23:11.040 --> 0:23:16.760 could also travel over tell X in order to minimize 0:23:16.800 --> 0:23:20.199 the impact. Otherwise, like if you change everything overnight and 0:23:20.240 --> 0:23:22.760 you require everyone to get on the same page, it 0:23:22.800 --> 0:23:26.240 just takes forever for that to actually happen. So this 0:23:26.320 --> 0:23:29.960 was a pretty important part of their decision. Tell X 0:23:30.080 --> 0:23:33.920 designated banks using a bank Identify R code, which is 0:23:33.960 --> 0:23:37.439 a unique code for each bank, Like you have to 0:23:37.440 --> 0:23:41.240 have a specific individual code so that you not only 0:23:41.240 --> 0:23:43.520 know what bank it is, but what branch, you know 0:23:43.560 --> 0:23:46.600 what location you're talking about. So these are kind of 0:23:46.640 --> 0:23:51.760 like fingerprints. They are unique to specific banks or financial institutions. 0:23:52.119 --> 0:23:54.679 Swift would adopt that same approach, but they called it 0:23:54.760 --> 0:23:58.919 the Swift code. Swift has evolved over the years and 0:23:58.960 --> 0:24:00.880 has been at the center of various tugs of war 0:24:00.960 --> 0:24:05.080 between different members of the organization. The current version of 0:24:05.160 --> 0:24:08.560 Swift dates to two thousand five, at least that's when 0:24:08.560 --> 0:24:11.400 it was completed. It actually started a little bit earlier, 0:24:11.640 --> 0:24:14.879 but you know, they regularly go in and tweak things 0:24:15.080 --> 0:24:19.760 and make changes to make things work more smoothly, and 0:24:19.840 --> 0:24:23.440 to get into all the intricacies of Swift protocols would 0:24:23.480 --> 0:24:26.720 get really dry, and I argue it would also be 0:24:26.760 --> 0:24:29.480 really hard to follow. Like pretty quickly I would reach 0:24:29.520 --> 0:24:34.040 a point where I know I wouldn't be completely aware 0:24:34.040 --> 0:24:36.959 of what it was I was saying. The smart folks 0:24:36.960 --> 0:24:39.560 out there, they might listen to me and go, well, 0:24:39.600 --> 0:24:41.399 I know what he's trying to say, but he clearly 0:24:41.440 --> 0:24:44.320 doesn't understand it. I'd rather just sidestep that and tell 0:24:44.400 --> 0:24:47.679 you it gets more technical and more complicated than I 0:24:47.720 --> 0:24:51.159 am comfortable covering. However, it is important to understand that 0:24:51.200 --> 0:24:54.480 SWIFT has rules in place that define things like the 0:24:54.600 --> 0:24:59.280 kinds of transactions that can happen between different parties. Um 0:24:59.480 --> 0:25:03.800 away of identifying specific banks, including specific branches and locations, 0:25:04.720 --> 0:25:07.200 it has ways of providing a secure means of communication 0:25:07.680 --> 0:25:10.640