SPFS, SWIFT, CIPS and others: how interbank payments work

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In simple terms, how interbank payments work, why the world needs other systems for transmitting financial messages besides SWIFT, and why no one seriously discusses the use of Telex, e-mail and fax.

Level 1 – correspondent accounts​

Let's start with the basic level - direct transfers. To transfer funds from one bank to another, there must be agreements between them on opening accounts. There is some analogy here with accounts of individuals, but such accounts will be called correspondent accounts or correspondent accounts. If there are no correspondent accounts, settlements between banks at this level are impossible.

Correspondent account interaction consists of several steps. When a client of bank A wants to transfer money to a client of bank B, he creates an order. To instantly transfer money using it, three conditions are required:

• in fact, this money should already be in bank B in the correspondent account of bank A opened there;
• Bank A must ask Bank B to transfer the required amount from its correspondent account to the account of the specified client of Bank B;
• Bank B must quickly comply with this request.

This is a simplified description of the process. The main thing is that no one physically transports money anywhere. They are already in the correspondent account in the bank to which the transfer is addressed. When the correspondent account is empty, the transfer will not go through. Exceptions may be cases where there is a separate overdraft arrangement between banks.

This scheme will work great until there are too many banks - hundreds or thousands. Establishing relationships between each bank and all the others is a difficult task.

Level 2 – option with a central bank​

In the case of a large number of participants within one country, central banks come to the rescue. Usually their role is performed by the country's main bank or other authorized organization. In this scheme, all banks and other financial institutions open correspondent accounts there. It turns out to be a kind of bank for banks, where all transfers are carried out internally.

A transfer from a client of bank A to a client of bank B begins to look like this: bank A asks the central bank to transfer money from its correspondent account to the correspondent account of bank B and inform it that this money is intended for a specific client, whose account is indicated in the message. The central bank fulfills this request if the correspondent account of bank A is not empty. Bank B, seeing the money and message received in the correspondent account, replenishes the account of the specified client.

In this scheme, the central bank plays the role of a payment system, since it moves money between bank correspondent accounts.

It was this scheme that was fundamental in many countries until a massive need for cross-border transfers arose. At the beginning of the 2000s in Russia, this task was supplemented by the problem of slow payment processing by the Central Bank. In particular, it was mentioned in the magazine “Finance and Credit” No. 41 (329) for November 2008. Both gaps were eventually closed by the SWIFT system, through which 80% of interbank settlements within the country took place in 2006! Russia was then in second place in terms of the number of system users (~475) after the States.

Level 3 – SWIFT​

SWIFT is a system for transmitting encrypted messages between financial institutions. In a simplified sense - a messenger, or a communication platform. It allows you to carry out transactions directly, bypassing central banks and, more importantly, conduct cross-border transactions.

SWIFT was launched in 1977 in Brussels with the support of 240 banks from 15 countries. Before SWIFT, all messages were transmitted via Telex and were processed manually in some places, which, in addition to low processing speed, led to numerous errors. The advantages of SWIFT lay in the active use of computers, cryptography, authentication, standardization of formats and messages and their automatic processing.

Albert, Prince of Belgium sends his first message via SWIFT

In essence, SWIFT brings us back to the scheme with disparate correspondent accounts, where the order is transmitted through an automated computer system.

SWIFT has nine message categories. One of them is client payments, of which there are several dozen types and formats. Here, for example, you can open correspondent accounts in other banks. There are also categories for working with securities, letters of credit, confirmations of interbank transactions, Forex. The average transmission time for a typical message is around two minutes, during which multiple mutual confirmations of delivery occur.

Of course, SWIFT has disadvantages. Firstly, the system is controlled by the Western community: after the terrorist attacks of September 11, 2001, the US Treasury Department received full access to it, ostensibly to combat international terrorism.

Secondly, connecting to the system is quite expensive. According to some data, in the mid-2000s, it was necessary to pay about $100 thousand for installing equipment, purchasing software and training employees. Banks pay an average of 18 euro cents for transmitting each international message via SWIFT. Messages between Russian banks cost 3-6 euro cents. This is quite expensive considering that banks can transmit hundreds of thousands of messages per day. Therefore, many countries are thinking about creating their own systems, primarily internal ones.

CIPS, CHIPS, ELLIPS, TBF, CHAPS, SEPA, RTGS plus and others​

These are all the names of messaging systems created and operating in different countries and regions: CHIPS (USA), ELLIPS (Belgium), TBF (France), CHAPS (Great Britain), SEPA (European Union), RTGS plus (Germany). The reasons for their appearance are indicated in the description of the shortcomings of SWIFT two paragraphs above - sending millions of transactions through someone else’s and expensive system is not the most attractive option.

In 2015, China introduced its system for foreign trade transactions CIPS (Cross-Border Interbank Payment System). Through the connector, it supports the universal ISO 20022 standard, but only works with one currency - the yuan.

In North America, only one organization is connected to CIPS, and 30 others use it as an intermediary

The creation of CIPS had two goals: to spread the influence of the yuan in the world and to hide the necessary transactions from American eyes.

SPFS​

In 2014, Russia very quickly made all the necessary decisions to create its own system, and in December SPFS (Financial Message Transmission System) was already working in test mode.

Its main feature is the reception of messages in the popular SWIFT and ISO 20022 formats, as well as free format messages with attachments of up to 5 MB. This is very convenient, since banks did not have to reconfigure their internal automatic systems to some new format, but only redirect the data to another gateway.

In addition, the rates are very low. Since 2018, one message costs 1 ruble, and if the daily volume of transmissions exceeds the threshold of 500 messages, then the cost drops to 80 kopecks. This is 3-5 times cheaper than SWIFT.

Connecting to SPFS looks relatively simple: an agreement is signed, a special communication channel is established, software is installed that integrates with the ABS (automated banking system), electronic signature keys, and off you go. From the ABS, all data is uploaded to the installed software in XML format, which processes and sends it.

If the system is deployed in a small organization, the software can be installed even on a simple Windows PC. It has an interface for manually downloading payments, which are also sent through the Bank of Russia transport gateway.

Messages are transmitted quickly - we're talking about minutes.

Is it possible to use paper, telex and email now?​

At the beginning of March, news broke that the EU allowed banks disconnected from SWIFT, but not under blocking sanctions, to carry out international transactions using alternative methods, such as fax or email. This is where all the questions about the relevance of these transmission methods came from.

When a bank enters into an agreement with another financial institution, it always specifies the methods for transmitting messages and instructions. Alternatives may include paper media, Telex and remote banking systems. Email and fax are considered unreliable channels and are not used in practice.

Telex, de facto, is also a thing of the past. Most European banks may simply not remember what it is.

In Russian banks you can still find telex message transmission systems operating via the Internet. Most of them are likely to function through the REX400, a universal platform that transmits messages in different formats and to different devices. However, you should not count on its integration with modern core banking systems of banks, because The time for such systems has passed.

Just in case, let's say a few words about Telex. This is an international network of telegraph machines - teletypes. Before SWIFT, all the work was entrusted to them. The operation of one of these devices – Siemens T1000S – can be seen in this video.

But the paper format is formally alive. For example, in the SPFS tariff table there is an option for transmitting data on paper, the processing of which costs 350 rubles.

But be that as it may, no one is going to seriously discuss these alternative transmission options.

Brief summary​

One of the main points is that no one physically transports money anywhere in trucks. All calculations are carried out electronically using all kinds of offsets and transfers of balances. This is a simplified explanation; in fact, there are many nuances and complexities.

In addition to the conditional SPFS and SWIFT, there are dozens of other systems in different countries that also transmit messages. How these messages will be processed by the recipient and what actions he will take (ignore, execute, reject) depends on the concluded interbank agreements or agreements with systems.

Systems can transmit not only information about payments, but also any other information that falls within the standards. You can at least send MP3 through SPFS, that would make sense. In addition to monetary transactions, they are used to conduct trading operations, conduct correspondence regarding investigations, and carry out transactions on securities, letters of credit and everything else that financial organizations deal with.