How do banks talk to each other and what are the different types of messages used by SWIFT?

Banks talk to each other for a variety of reasons, including to transfer funds between accounts, to exchange information about transactions, to confirm the validity of transactions, and to comply with regulatory requirements.

In order to communicate with each other, banks use a messaging system called SWIFT (Society for Worldwide Interbank Financial Telecommunication), which provides a standardized and secure way to exchange information.

There are several different types of SWIFT messages that banks use for various purposes.

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Here is a brief overview of some of the messaging types that are commonly used in trade finance, letters of credit, and Uniform Customs and Practice for Documentary Credit (UCP):

11 SWIFT MTXXX message types used within trade finance

1. MT700: This message is used for issuing a letter of credit. It contains details of the letter of credit, including the terms and conditions, the parties involved, and the amount of the credit.
2. MT701: This message is used for amending a letter of credit. It contains details of the changes to the original letter of credit, including the new terms and conditions.
3. MT707 – This is the SWIFT message used for advising a letter of credit. It is sent by the issuing bank to the advising bank to inform the beneficiary that a letter of credit has been issued.
4. MT710: This message is used for confirming letters of credit. It is sent by the advising bank to the beneficiary bank to confirm that the letter of credit has been issued.
5. MT711: This message is used for advising a letter of credit. It is sent by the issuing bank to the advising bank to confirm that the letter of credit has been issued and to instruct the advising bank to notify the beneficiary.
6. MT720: This message is used for transferring a letter of credit. It is sent by the transferring bank to the beneficiary bank to transfer the letter of credit from one bank to another.
7. MT740: This message is used for presenting documents under a letter of credit. It is sent by the beneficiary bank to the issuing bank to request payment under the letter of credit.
8. MT742: This message is used for discrepant documents under a letter of credit. It is sent by the issuing bank to the beneficiary bank to notify them that the documents presented do not comply with the terms of the letter of credit.
9. MT760: This is the SWIFT message used for a bank guarantee or standby letter of credit. It is sent by the issuing bank to the beneficiary’s bank to confirm that funds are available.
10. MT798: This message is used for communicating bank-to-bank guarantees. It contains details of the guarantee, including the terms and conditions, the parties involved, and the amount of the guarantee.
11. MT799: This is the SWIFT message used for a simple bank-to-bank message, such as a confirmation of funds or a bank guarantee. It is not a payment, but rather a message that confirms the availability of funds.

These are just a few examples of the many different types of SWIFT messages that banks use to communicate with each other in trade finance, letters of credit, and UCP. Each message type has a specific purpose and contains specific information, which helps banks to exchange information in a standardized and efficient manner.

Updates to SWIFT MT760 and MT767 for 2021

There are several proposed changes to the new and updated SWIFT messaging standards, specifically MT760 and MT767, that are changing in November 2021. Here are some of the key updates:

1. MT760: The new version of MT760, which is used for standby letters of credit, will include updated fields and options to support electronic documents, such as electronic bills of lading. The updated version of MT760 will also allow for multiple drawdowns under the same standby letter of credit, which will simplify the process for banks and their customers.
2. MT767: The updated version of MT767, which is used for guarantees, will also include updated fields and options to support electronic documents. In addition, the new version of MT 767 will allow for partial releases of guarantees, which will provide greater flexibility for banks and their customers.
3. Harmonization of fields: Both MT760 and MT767 will be updated to align with other SWIFT messaging standards, including MT700 (used for letters of credit) and MT758 (used for demand guarantees). This harmonization will make it easier for banks to process and reconcile different types of financial messages.
4. Digitalization: The updated versions of MT760 and MT767 will also support the growing trend towards digitalization in the banking industry. The new messaging standards will allow for the use of digital signatures and authentication methods, which will increase security and streamline the processing of financial messages.

Overall, these updates to the SWIFT messaging standards reflect the ongoing evolution of the banking industry and the increasing importance of digitalization and electronic documentation. By providing greater flexibility and support for electronic documents, the updated standards will help banks and their customers to more efficiently and securely manage their financial transactions.

Perfect solution?

SWIFT messaging types for bank to bank financing do, however, face some challenges within the industry, including limited optionality and standards. Some of the key drawbacks are:

1. Limited optionality: SWIFT messaging types are designed to provide a standardized format for communicating financial messages between banks. While this standardization ensures that messages can be processed and understood by different financial institutions, it also means that the options for customization and flexibility are limited. Banks may find it difficult to include specific details or requirements in their messages that are not covered by the standard format.
2. High cost: While SWIFT messaging is widely used in the banking industry, it can be expensive for banks to implement and maintain. There may be fees associated with using the SWIFT network, and banks may need to invest in specialized software and infrastructure to support SWIFT messaging.
3. Lack of real-time processing: SWIFT messages are processed in batches, which means that there may be a delay of several hours or more between the time a message is sent and the time it is received and processed by the recipient bank. This can be a disadvantage in situations where real-time processing and settlement are required.
4. Limited integration with other systems: SWIFT messaging types are primarily designed to be used within the banking industry, and may not integrate well with other financial systems or technologies. This can make it difficult for banks to integrate SWIFT messages with other types of financial data, such as trade finance or supply chain financing.

Overall, while SWIFT messaging remains a widely-used and important tool for bank-to-bank financing, there are some limitations and drawbacks to consider when choosing a messaging solution. Banks may need to weigh the benefits of standardization and widespread adoption against the potential costs and limitations of the SWIFT system.