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Origins and development of SWIFT, 1973–2009

2012; Taylor & Francis; Volume: 54; Issue: 3 Linguagem: Inglês

10.1080/00076791.2011.638502

1743-7938

Susan Scott, Markos Zachariadis,

FinTech, Crowdfunding, Digital Finance

Abstract Research in this article traces the origins of a not-for-profit financial institution called the Society for Worldwide Interbank Financial Telecommunication (SWIFT). SWIFT is a core part of the financial services infrastructure and is widely regarded as the most secure trusted third party network in the world, serving 200 countries with over 8000 users. The analysis focuses on how the design and current state of SWIFT was influenced by its historical origins. In order to ensure widespread compatibility in a sector experiencing asynchronous technological development, legacy Telex specifications had to be accommodated in SWIFT's design. Over time, what began as a closed 'society' founded to reduce errors and increase efficiency in interbank payments grew into an industry cooperative supporting an enthusiastic community of practice and transformed into an unexpected network phenomenon. SWIFT achieved such success that it has been accused of being an installed base stifling innovation. In recent years, SWIFT has had to institute new categories of membership in an effort to counter concerns about its bank-dominated governance and it continues to search for ways to meet the requirements of key constituents in the financial supply chain. Keywords: SWIFTfinancial servicesdiffusion of innovationsnetworksstandardspayment systemselectronic funds transferICT in banking Acknowledgements The authors would like to acknowledge constructive feedback from the editors and reviewers. We are also very grateful for the support and help provided by: Stephanie H. Crowe (Charles Babbage Institute), Nicholas Webb (Barclays Group Archive), the staff at the Guildhall Library Manuscripts section and the London Metropolitan Archives, as well as the British Bankers Association for kindly giving their permission to access their archives and records. Thanks to Professor JoAnne Yates (MIT) for her encouragement and comments. Last but not least we would like to thank Peter Ware (SWIFT) and other anonymous interviewees who provided valuable insights and assisted us with the research. We would also like to thank SWIFT for their assistance with graphics in the article. A previous version was presented at the Association of Business Historians Conference, July 2010. The usual caveats apply. Notes 1. Organisation Bylaws for Society for Worldwide Interbank Financial Telecommunication (SWIFT), 14 July 1972, provided by Stanford Research Institute, Menlo Park, California (hereafter SRI), SRI Report accession No. L050042. 2. Garbade and Silber (1978) uncover statistically significant evidence illustrating that the introduction of three innovations in communications technology: domestic telegraph, the trans-Atlantic cable and the consolidated ticker tape led to the significant (in the first two cases) narrowing of inter-market price differences. 3. For a detailed review of the technological advances that led to the development of the Telex see Carré (1993). 4. Siemens and Halske (now Siemens AG) also provided the equipment for the early Telex network installations in the US and Canada. One of the early commercial models was the Siemens T 100 Page Teleprinter. For more technical information on the installations see Easterlin (1959, 1962). 6. This estimate was retrieved in December 2009, from 'Introduction to Data communications for "post-modern" SMEs', CORDIS archive, http://cordis.europa.eu/infowin/acts/ienm/products/ti/chap1.htm. Additional estimations for later dates can be found in Jeppesen and Poulsen (1994). 7. The International Telegraph and Telephone Consultative Committee (CCITT), Blue Books, Third Plenary Assembly (Geneva: 25 May to 26 June 1964). Among the recommendations of the 3rd plenary assembly was E.29, the international telephone numbering plan that defined the country and area codes. 8. Banker's Automated Clearing Services (BACS) is a 'not-for-profit, membership based, industry body' which is responsible for the clearing and settlement of automated payments in the UK. BACS, which is owned by 15 of the leading UK and European banks and building societies, started its operations in 1968. For more information see http://www.bacs.co.uk. 9. The Clearing House Interbank Payments System (CHIPS) is a privately (member-)owned clearing house in the US that mainly serves the needs of large financial institutions operating in the United States and dealing in US dollars. CHIPS started its operations in April 1970 with nine participants and in 2010 serves 48 banks. Both BACS in the UK and CHIPS in the US are bank-to-bank electronic transfers. For more information see http://www.chips.org. 10. Telex authentication procedures between corresponding banks were quite complex and time-consuming. A former installations engineer who is now a Senior Manager in Securities Market Infrastructures at SWIFT opined: '[On] a Telex machine you had two sets of tables, like logarithmic tables … then the Telex sender would basically perform some calculations based on the valued A currency and amount, and then bringing these tables and work out the keys and come up with a tested Telex result … for every single Telex that was sent had to manually calculate what this Telex test key was … So you can imagine, not only were there hundreds if not thousands of these messages being sent every day from some of these banks, the chances of human error, of getting the result wrong or when it was received at the other end, if it was from one small bank to another small bank, this would be a manual process to transmit and it would also be a manual process to receive. So when you received the tested Telex you then have to do the reverse calculation to make sure that the Telex hadn't been tampered with during transmit and receive cycles. So it was incredibly labour intensive, it was incredibly prone to human error … imagine the costs' (Interview, 31 March 2009, London). 11. Incorporated in April 1967, Société Financière Européenne (SFE) was a conglomerate of six major banks: Algemene Bank Nederland, Banca Nazional del Lavoro, Bank of America, Banque National de Paris, Barclays Bank Ltd, and Dresdner Bank (Ross, 2002). It was initially founded to finance investments in Europe that were growing rapidly at that time. The SFE, 'a typical consortium bank', had operational and legal independence and largely reflected the strategy of its shareholders towards the European competition (for more information on this subject see Ross, 2002). In the holdings of the Charles Babbage Institute, University of Minnesota, Minneapolis, Minnesota (hereafter CBI), Burroughs Corp. records (CBI 90), Tray 21, Video No. M36, it is claimed that the driving force behind the idea, which goes back to 1969, was the first Board Chairman of SWIFT, Johannes Kraa. 12. Manuscripts Section, Guildhall Library, London (hereafter GLM), M32326B, File No. 253, British Bankers Association (BBA), Private and Confidential Communication, 27 February 1979. 13. Barclays Group Archives, Manchester (hereafter BGA), 80-4134. A talk delivered at the Computer Conference of Barclays Banks International, June 1975. 14. CBI, Burroughs Corp. records (CBI 90), Videotapes and films, Tray 21, Video No. M36, SWIFT presentation given by Charles Rodeshaw in opening speech at the 3rd Annual International Banking Operations Seminar (SIBOS) held September 1980 in Copenhagen, Denmark and attended by over 1000 bankers from 37 countries. Additional information was obtained from 'Organisation By-Laws for Society for Worldwide Interbank Financial Telecommunication (SWIFT)', 14 July 1972 provided by SRI, SRI Report accession No. L050042. 15. According to private communication between the BBA and SWIFT (UK) Ltd, Logica delivered its final report at SWIFT on 4 February 1972 (GLM, M32326B, File No. 253, BBA, 13 March 1978). 16. BGA, SWIFT presentation, June 1975 (see note 13 above), p. 2. 17. We have checked the naming convention with the Society and they have confirmed that they have shifted from using the acronym S.W.I.F.T. to the word 'SWIFT'. 18. According to a Burroughs Corp. press release (CBI Press Releases 1947–87, 90:72, Box 1, Folder 17, 7 March 1974), the initial value of the equipment was more than US$6 million, and included two dual central processor B 3700 computer systems, four data communications processors and 14 data concentrators. 19. Our discussion of the early stages of SWIFT network design and technology development has been edited but can be found in Scott and Zachariadis (2010) and Zachariadis (2011). This includes technical details about: the switching centres; data concentrators; network interface issues; the SWIFT Interface Device known as SID, ST100, ST 200; the founding of SWIFT Terminal Services SA (STS); and the emergence of a supporting software market. We also discuss the development trajectory from central switches to distributed networks and packet switching. 20. GLM, M32326B, File No. 253, BBA, Private and confidential communication, 23 February 1979. Up to then SWIFT had a theoretical capacity of 200,000 messages per day; however, there were concerns regarding its capability to deal with the transactions' load in the near future. 21. Unpublished document on SWIFT standards, Brussels, circa January 2001. 22. Each 'Message Type' (MT) was codified using a three-digit number. The most common message type was MT100, which was an instruction for a customer fund transfers. Other commonly used messages were the MT200 for bank transfers, and the MT300 for foreign exchange transactions. 'Fields', which had a distinct business meaning, were identified by a two-digit number. An additional alphanumeric character could be added at the end of the number to specify additional options. Not all fields were mandatory for a transaction to take place. 23. The SWIFT code (or SWIFT address) consisted of 12 characters: the primary four were to identify the bank, the next two were identifying the country (based on the ISO standard), the next two were identifying the location, and the last four consisted of the terminal code (1) and the branch code (3) (BGA, 80-4134). 24. For example, SWIFT messages are limited by the need to conform to the four-line 35-character format institutionalised during the Telex era (Interview, Head of Standards Initiatives, SWIFT Headquarters, Brussels, 7 May 2009). 25. Unpublished document from unknown author on SWIFT standards titled 'Message standards evolution in the securities industry: From paper-based to XML communications', Brussels, circa January 2001. 26. Unless otherwise stated, this paragraph borrows freely from unpublished document (unknown author) on SWIFT standards entitled 'Message standards evolution in the securities industry: From paper-based to XML communications', Brussels, circa January 2001. 27. These message types covered the securities areas of post-trade, pre-settlement, settlement, reconciliation, corporate actions and reporting. 28. Even though SWIFT brought together a set of recent (at that time) technologies, it was never based on a distinct ground-breaking technological improvement. From our discussions with experienced bankers and SWIFT executives we were told that in some instances large banks with superior equipment even had to degrade their networks in order to be able to use SWIFT. 29. The initial financial proposition for SWIFT involved loans granted from member companies during the 'development period' (before message processing began). These were repaid afterwards either as credits against message transmission charges, or in cash at the option of the Board of Directors. In addition, an entrance fee was charged to all members joining for the first time (this was $3200 for all members that joined before 30 September 1972, and $5000 afterwards). Information obtained from 'Organisation By-Laws for Society for Worldwide Interbank Financial Telecommunication (S.W.I.F.T.)', 14 July 1972 provided by SRI, SRI Report accession No. L050042. These loans, which were repaid with a fixed interest assigned by the Board of Directors, were later abandoned when the company started its operations in 1977. 30. Information obtained from GLM, M32326B, File No. 253, SWIFT general information booklet, circa 1979, and BGA, 80-3056-2. Services and Security seemed to be closer to sales, whereas, Administration and Engineering was in charge of the maintenance of the installed base and technical support. 31. SWIFT 'Company Plan', Executive Report Number: ER 109, 25 January 1979, GLM, M32326B. 32. Evidence suggests that, even though SWIFT messages were not implying any legal transfer of funds from one bank to another, they were gradually accepted by banks as authentic and authoritative (US Congress, 1992), although this would not preclude the settlement of the transaction through a large EFT. 33. Our discussion of SWIFT's pricing negotiation with PTT and the achievement of reduced tariffs has been edited but can be found in Scott and Zachariadis (2010) and Zachariadis (2011). Achieving connectivity on SWIFT's terms was key to the development of SWIFT's strategy and linked to the cooperative nature of the society. In parallel to the negotiations with the local telecommunication providers, SWIFT also leveraged the ongoing technological developments to reduce the costs of its network operations globally. 34. CREST Co. was the central securities depository for the UK until August 2002, when it was acquired by Euroclear UK and Ireland Ltd. For more information see http://www.euroclear.com. 35. CLS (Continuous Linked Settlement) is the 'largest multi-currency cash settlement system' founded to reduce and control the risks of foreign exchange (FX) transactions ( http://www.cls-group.com). 36. The 'big' banks came to realise that they 'can no longer push their proprietary networks on to investment managers as an alternative to SWIFT' ('SWIFT lets in fund managers', 1992). 'The big US banks led the opposition', along with some German, French and Japanese banks, but their resistance was expected to be reversed ('Global custody', 1992). 37. In the entrance of SWIFT's headquarters in Brussels there is a digital screen that welcomes visitors with the message 'More, Together' (observed on 7 May 2009). This was also part of SWIFT's marketing campaign in 2007 and it was used as a cover for the 2006 SWIFT Annual Report (SWIFT Annual Report, 2007). 38. Research participants gave us examples of the programmes of change that might be stimulated by SWIFT adoption: automating nostro statement generation; reconciliation systems; routing of domestic payments; automating of dealing systems. The aim was to remove manual processing and intervention wherever possible to achieve 'straight-through-processing' (STP). In addition to internal programmes of process re-engineering, there is evidence that connectivity events such as the adoption of SWIFT (or other core infrastructure such as CREST and CLS) stimulate internal process innovation and have a domino effect through related functional areas particularly when they reveal duplication of effort or avoidable operational risks. 39. A substantial extant literature examines the role of standards and standardisation in shaping organisations (for example, Bowker & Star, 1999; Hanseth & Monteiro, 1997; Law, 1992; Monteiro & Hanseth, 1995; Star & Ruhleder, 1996; Timmermans & Berg, 2003).