Cross-Border Payment Infrastructure: SWIFT and Correspondent Banking

The Money Movement Misconception

Popular understanding suggests "moving money" involves physical or electronic transfer of assets from one location to another. This represents a misnomer—a simplification obscuring complex coordinated series of offsetting debt agreements. Domestic money movement involves banks using intermediary systems coordinating agreements resulting in sending banks agreeing they owe customers less while receiving banks agree they owe recipients more.

International money movement follows identical principles with one critical difference: banks largely cannot hold money extraterritorially directly for most practical purposes. Instead, they rely on correspondent banking relationships.

Correspondent Banking Fundamentals

Banks can maintain accounts at other banks, a practice occurring with extreme frequency. Major international reasons include facilitating payments in other currencies and jurisdictions.

Consider a practical example: a banking customer in Japan needs to send U.S. dollar payments to American institutions. The Japanese bank prefers dollars over yen for this transaction, while the recipient institution has difficulty accepting international payments.

The local Japanese institution holds some dollars on its books—potentially hundreds of millions—but does not physically control more than tiny fractions. That minimal fraction comprises paper currency available for purchase at branch offices in small quantities at substantial spreads. The vast majority of dollar holdings are owed to it by larger correspondent banks.

The Correspondent Chain

Major Japanese banks supply yen/dollar liquidity domestically but lack direct U.S. banking system access themselves. Instead, they maintain accounts at various U.S. banks. These correspondent relationships mean dollars owned by Japanese institutions are owed to them by U.S. correspondents. Neither Japanese banks nor their local account holders have actual custody of dollars they intend to move.

Correspondent banks with full U.S. financial system access, including FedWire for domestic wire transfers, serve as crucial intermediaries. When local banks execute wires, they pass instructions to major correspondents, which pass instructions to U.S. intermediaries, which effect funds transfers through FedWire running through the Federal Reserve.

This creates offsetting series of rapid agreements about changes in amounts owed between bilateral counterparties. The result: sending parties have less yen, receiving parties have more dollars, and at least five entities collect fees.

Correspondent banking has always operated in these broad strokes. The absence of explicit technological substrate proves notable—the process could use TCP/IP, telegraph, or horseback letter delivery. Indeed, all these methods have been extensively employed in correspondent banking across centuries.

SWIFT: Encrypted Messaging Infrastructure

SWIFT operates as both a company and, like Kleenex, a metonymic term for its best-known product: FIN, an extremely specialized low-volume encrypted messaging platform. The characterization "low volume" carries technical humor—5 billion annual messages sounds substantial but represents inconsequential scale in modern computing. This equals approximately 160 transactions per second.

SWIFT's near-synonymity with international wires reflects its position as the primary interoperation method banks choose for wire coordination. Specifically, they transmit MT 103 messages—slightly longer than tweets—then each bank operates internal books and systems making encoded requests reality or failing gracefully.

Network Effects Dominance

Technology specifics regarding MT 103 field allowances interest professionals but don't explain SWIFT's importance. SWIFT represents a multi-layered network effects business. Platform membership provides many more easily reachable counterparties. Regulators and auditors express far greater comfort with SWIFT than alternative solutions. Compliance officers possess extensive experience with SWIFT message operational oddities.

Advantages continue and compound, making each marginal financial institution more likely to join SWIFT while making SWIFT more valuable for existing members. This creates powerful lock-in dynamics.

SWIFT Limitations

SWIFT does not monopolize international money movement functionality. Primarily, it doesn't directly affect money at all. Money doesn't travel over SWIFT any more than over napkins, though each could potentially contain money movement instructions banks might choose to implement.

SWIFT doesn't even monopolize the functionality commonly assumed. Banks maintain documented procedures for "moving money when SWIFT is down" that don't involve pausing economic activity. Major correspondent banks know relevant phone numbers for U.S. institutions holding billions of their dollars and can transact through various methods available to customers with such substantial deposits.

Banks as Policy Arms

Banks operate as policy arms for governments holding jurisdiction over them, receiving guaranteed monopolization of lucrative franchises in return. This pattern recurs throughout financial infrastructure.

SWIFT theoretically operates as a Belgian cooperative. The Federal Reserve theoretically represents a joint-stock company owned by member banks rather than U.S. government components. These represent consensual fictions. SWIFT publishes governance documentation emphasizing "strict neutrality" in its final clause—another consensual fiction.

SWIFT functions as a policy arm answering to the EU. It can be directed against disfavored individuals, organizations, and governments, including indiscriminately. This has occurred previously and all parties understood recurrence possibilities. This represents only part of available policy responses.

Commander's Intent Framework

The U.S. military employs "commander's intent"—balancing institutional order-following with complex ground states unknowable to order writers. Commander's intent informs subordinates of actual desires so they can intelligently embellish orders.

Commentators frequently confuse actual effects of severing particular banks from SWIFT with perceived motivating policy goals. More significant than either: what actions communicate regarding commander's intent to policy arms responsible for enforcement.

Specifically, significant changes communicate that previously overlooked institutional money now faces scrutiny. This signals: "Billions in fines will be distributed stochastically over coming years. Institutions minimize exposure by successfully intuiting Bad Risks lists. Previous tolerance of questionable practices will sharply decrease, and all parties will maintain convenient amnesia regarding prior blindness if prudent."

AML Enforcement Complexity

Policymaking through sanctions enforcement carries deep concerns, but remains absolutely pervasive in financial industry regulation, particularly regarding anti-money laundering (AML). Much sanctioned activity gets enforced under AML regimes because they're established law, have existing relatively capable enforcement agents, apply to all human activity touching money, and can create process crimes from almost any underlying predicate.

SWIFT currently dominates news because, as nearly pervasive infrastructure, it offers one-stop-shopping from political actors' perspectives. However, local compliance officers are assumed to read this news carefully and adjust practices accordingly.

Unintended Consequences

The global financial system represents very blunt instruments for expressing societal preferences. While governments haven't explicitly banned oligarchs' wealth usage previously, they've already severely complicated routine activities for ordinary citizens in affected regions.

Following 2014 events, many U.S. banks stopped serving customers with certain passports. No one explicitly decided "Your nation got invaded, so you should have less financial access half a world away." It flowed indirectly through risk assessment chains: heightened money laundering risks, inability to discriminate between different regions, prioritizing AML compliance over minimal foreign business, resulting in blanket restrictions.

Critically, no one—not regulators, not compliance departments, not front-line employees delivering decisions—believes themselves accountable for these results affecting tens of thousands of individuals. Adverse actions against innocent individuals will certainly increase with current conflicts.