Swift Message vs Purpose codes

SWIFT mechanism

Introduction

Before 1990 money was used to transfer electronically through cable message service from one bank to another using ‘Telegraphic Transfer’ mode. But unfortunately, this was found not secured and in absence of automated system SWIFT was founded in 1973 to replace the telex or telegraphic transfer. It was founded with 239 banks in 15 countries in 1973 but in 2022 there is more than 11,000 customers hailing from 200 countries joined the network. India is the 74th country to join SWIFT network on 2nd December, 1991. SWIFT enable banks to pass on remittance information with no loss of date and makes it easy for end users to reconcile incoming funds with invoices payable.

Precaution

Wire transfer is definitely safe and secure provide we know the person from whom the transfer is coming and who is receiving them. Each person involved in wire transaction should be required to prove their identity so that illegal transfer can be stopped and authorized dealer can freeze the fund. Further AD bank should make sure that the money sent overseas is not being used to fund terrorist activities i.e. the transfer should be made to safe- haven countries.

Advantages

• Wire transfers offer a convenient, quicker and easier way to send money. The settlement is done in faster way even across borders.
• Remittances are sent all across the globe in huge amounts.
• No physical money is transferred between banks or financial institutions when conducting a wire transfer.

Disadvantages

• Banks often charge a flat fee for wire transfers, which can range between $15 and $45 and make wires impractical and costly. They eat up a large percentage of the transferred amount, especially for smaller transactions.
• Wire transfers cannot be reversed so it’s important to make sure at the time of sending money that money has been sent to the intended recipient.

How does a SWIFT message work?

• A wire transfer is used to transfer funds from one bank or financial institution to another.
• The sender first pays for the transaction upfront at their bank.
• The sending bank sends a message to the recipient’s bank with payment instructions through SWIFT.
• The recipient’s bank receives all the necessary information from the initiating bank and deposits its own reserve funds into the correct account.
• The two banking institutions then settle the payment on the back end (after the money has already been deposited).

Format of SWIFT message

Swift messages consist of five blocks of data including three headers, message content and a trailer. Message types are crucial to identifying content. All SWIFT messages include the literal “MT” (message type/text). This is followed by a three-digit number that denotes the message category, group and type.

For example, the SWIFT code for Tashkent, Uzbekistan would look like this:

SWIFT categories

The table below shows the nine (9) different categories and the message type descriptions.

There are nine types of message under which SWIFT transaction happens. Out of nine message types here we are discussing swift message type MT101 and MT103 with the type designation MT1XX

MT101

Under MT01 message is sent from the Forwarding Bank to the Executing Bank. The request for transfer (MT101) is requesting the receiving financial institution or account servicing financial institution to initiate and settle a payment instruction (domestically or internationally) on behalf of the ordering customer.

This is the case where banks open accounts with each other (Nostro/Vostro) and settle funds directly. The prerequisite here is that banks need to open accounts with each other or in other words they need to have an accounting relationship with the other bank.

Now, let us try to understand the connection between sending/receiving SWIFT messages and the movement of funds from one party to another during the entire payment chain.

In this example, we will take a payment settle through correspondent banking

MT103

An MT103 is a standardised SWIFT payment message used specifically for cross border/international wire transfers. MT103s are globally accepted as proofs of payment and include all payment details such as date, amount, currency, sender and recipient.

The Serial method is simply a chain of single transactions between each bank in the chain with each bank having an account at the other bank. The payment information and the settlement instruction travel together in the MT 103 message (the most common SWIFT standard)

What is the difference between MT01 and MT103?

MT101 has been designed for corporates and allows for bulk payments. MT103 has been designed for a single customer credit transfer.

Components of SWIFT message

There are two main components in SWIFT message i.e., Tag and field. The field generally refers to the complete fields with its name and value. While the tag usually refers to the name of the field, including the number. All general information along with transaction details are mentioned against each tag based on which Authorised Dealer as well as end user can locate and identify the transaction along with sender’s details and the purpose under which payment is routed.

SWIFT MT101 Format:

SWIFT MT103 Format:

Purpose Code Declaration

A purpose code is a code issued by a country’s central bank that is required for successful cross-border transactions. The code is assigned to each transaction involving foreign currency and states the purpose for which the transaction is being made.

The “Purpose Code” has become mandatory for SWIFT cross-border payments effective 31 May 2021. All receipts for exports and re-exports between residents and non-residents of goods regardless of when the goods are shipped and the settlement type.

In India, the purpose codes issued by the RBI are of two categories:

Payments received by Indians or for inward remittances in foreign currency

Payments sent by Indians or for outward remittance in foreign currency

In other words, the purpose code assists regulators in determining the precise nature of a cross-border transaction. For example, if the purpose of your foreign transaction is ‘purchases for travel,’ you must use the code P0301 when processing the transfer.

The RBI has a specified list of Purpose codes that are required to be included in the details for every remittance so as to specify the nature of the transaction and the individual reason for which the transfer is being made. These codes allow the RBI to classify remittances.

Central Bank of India listed one hundred thirty six (136) purpose codes against seventeen incidents towards inward receipt of fund and similarly for outward payment listed one hundred forty two (142) purpose codes against seventeen incidents . The purpose codes against export and import transactions are mentioned below:

On receipt of SWFT message regarding inward remittance from abroad authorised dealer sends this message to customer to validate the transaction and asks them to declare inward remittance under proper purpose code template.

A purpose code is a code issued by a country’s central bank that is required for successful cross-border transactions. The code is assigned to each transaction involving foreign currency and states the purpose for which the transaction is being made.

If the customer doesn’t declare the remittance with purpose code , banks won’t be able to make the transaction secure . In that case bank do not accept the fund and returned the same to originating bank. Similarly the customer knowingly or unknowingly declare the inward receipt against wrong purpose code , bank has the authority to ask the customer to resubmit the declaration post receipt of corresponding supported documents.