The Society for Worldwide Interbank Financial Telecommunication (SWIFT)

Front matter

The Society for Worldwide Interbank Financial Telecommunication (SWIFT)

This book traces the history and development of a mutual organization in the financial sector called SWIFT, the Society for Worldwide Interbank Financial Telecommunication. Over the last 40 years, SWIFT has served the financial services sector as proprietary communications platform, provider of products and services, standards developer, and conference organizer (Sibos). Founded to create efficiencies by replacing telegram and telex (or “wires’’) for international payments, SWIFT now forms a core part of the financial services infrastructure. It is widely regarded as the most secure trusted third-party network in the world serving 212 countries and over 10,000 banking organizations, securities institutions, and corporate customers. Through every phase of its development, SWIFT has maintained the status of industry cooperative, thus presenting an opportunity to study broader themes of globalization and governance in the financial services sector.

In this book the authors focus on how the design and current state of SWIFT were influenced by its historical origins, presenting a comprehensive account in a succinct form which provides an informative guide to the history, structure, activities, and future challenges of this key international organization.

Contents

List of illustrations vi Foreword ix Acknowledgments xii Abbreviations xiv Introduction 1 1 Origins of the society 7 2 How SWIFT works 27 3 SWIFT standards 55 4 Development of the SWIFT network 95 5 Current debates in historical perspective 119 6 Conclusion 151 Select bibliography 157

Illustrations

Figures

Foreword

The current volume is the 83rd title in a dynamic series on global institutions. These books provide readers with definitive guides to the most visible aspects of what many of us know as “global governance”. Remarkable as it may seem, there exist relatively few books that offer in-depth treatments of prominent global bodies, processes, and associated issues, much less an entire series of concise and complementary volumes. Those that do exist are either out of date, inaccessible to the non-specialist reader, or seek to develop a specialized understanding of particular aspects of an institution or process rather than offer an overall account of its functioning and situate it within the increasingly dense global institutional network. Likewise, existing books have often been written in highly technical language or have been crafted “in-house” and are notoriously self-serving and narrow.

The advent of electronic media has undoubtedly helped research and teaching by making data and primary documents of international organizations more widely available, but it has complicated matters as well. The growing reliance on the internet and other electronic methods of finding information about key international organizations and processes has served, ironically, to limit the educational and analytical materials to which most readers have ready access — namely, books. Public relations documents, raw data, and loosely refereed websites do not make for intelligent analysis. Official publications compete with a vast amount of electronically available information, much of which is suspect because of its ideological or self-promoting slant. Paradoxically, a growing range of purportedly independent websites offering analyses of the activities of particular organizations has emerged, but one inadvertent consequence has been to frustrate access to basic, authoritative, readable, critical, and well-researched texts. The market for such has actually been reduced by the ready availability of varying quality electronic materials.

For those of us who teach, research, and operate in the area, such access to information and analyses has been frustrating. We were delighted several years ago when Routledge saw the value of a series that bucks this trend and x Foreword provides key reference points to the most significant global institutions and issues. They were betting that serious students and professionals would want serious analyses, and they were right. We have assembled a first-rate team of authors to address that market, and the titles — in print and electronic form — are selling well. Our intention remains to provide one-stop shopping for all readers — students (both undergraduate and postgraduate), negotiators, diplomats, practitioners from non-governmental and inter-governmental organizations, and interested parties alike — seeking insights into the most prominent institutional aspects of global governance.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT)

As we have argued elsewhere — as have many books in this series — the growing salience of non-state actors in world politics is one of the dominant explanations for the increased prominence and salience of the framework of global governance rather than of international organization.! While non-state actors have received a good deal of our analytical attention, non-state forms of regulation — and the agents behind their creation — have attracted far less. Nonetheless, as Craig Murphy and JoAnne Yates show in their book on the International Organization for Standardization (ISO), non-state forms of regulation are often complex, extensive, and have a dramatic impact in shaping the world around us.*

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is both a non-state actor and the purveyor of one such form of regulation. SWIFT serves the financial services sector as a proprietary communications platform, a provider of products and services, a standards developer, and an organizer of conferences; and it has done so for the past four decades. Originally created to overcome the inefficiencies in, as well as to replace telegram and telex systems for international payments, SWIFT now forms a core part of the global financial services infrastructure. It serves some 212 countries and territories and provides services for over 10,000 banking organizations, securities institutions, and corporate customers.

Yet to construe SWIFT merely as a widely used provider of financial services would be incorrect. Moreover, it would provide an inadequate representation of the extent to which this non-state “society” has overseen the creation of an extensive and highly developed form of communication and regulation — the perfect instance of what we have called “creeping global governance”. SWIFT provides what Susan Scott and Markos Zachariadis call the “internet for financial services”, overseeing the sending and receiving of more than 4.5 billion messages — astonishing given that very few outside the financial services sector have even heard of it. Indeed, SWIFT’s own estimates put daily message traffic for 2013 at around 20 million.

Foreword xi

These messages deal with financial transactions, though as the authors, and SWIFT itself, point out, it is not a payment system but rather a transport network for virtually all major payment and securities infrastructures.

That actors like SWIFT have significant clout, or that the system that it has created has strong effects in shaping how global finance is conducted, is without doubt. What is less clear — particularly to those unfamiliar with bodies like SWIFT or indeed global finance — is the extent to which non-state forms of regulation and governance are advanced and continue to advance. This is reason alone to recommend that all those interested in global governance read this book. Our recommendation is made all the more easier by the strength of the pages that follow. Susan Scott and Markos Zachariadis’ book on SWIFT is first-rate. It combines incisive analysis with factual data to offer the reader a compelling guide to one of the many forms of “creeping global governance” for which we have yet to find an adequate analytical handle. Susan is a Reader in the Information Systems and Innovation Group, Department of Management, at The London School of Economics; and Markos is an Assistant Professor in the Information Systems and Management Group at Warwick Business School. They make a formidable team.

We are pleased to publish their current book in the series, which should be especially useful for the classroom as well as to our understanding of non-state forms of regulation. We wholeheartedly recommend it and, as always, welcome comments from our readers.

Thomas G. Weiss, The CUNY Graduate Center, New York, USA Rorden Wilkinson, University of Manchester, UK July 2013

1 Thomas G. Weiss and Rorden Wilkinson, eds., International Organization and Global Governance (London: Routledge, 2014); Thomas G. Weiss and Rorden Wilkinson, “Rethinking Global Governance: Complexity, Authority, Power, Change”, International Studies Quarterly, 58, no. 2 (2014 forthcoming); Peter Willetts, Non-Governmental Organizations in World Politics: The Construction of Global Governance (London: Routledge, 2011); James G. McGann with Richard Sabatini, Global Think Tanks: Policy Networks and Governance (London: Routledge, 2011); Oliver F. Williams, Corporate Social Responsibility: The Role of Business in Sustainable Development (London: Routledge, 2013); and Catia Gregoratti, The UN Global Compact (London: Routledge, forthcoming).

2 Craig N. Murphy and JoAnne Yates, The International Organization for Standardization: Global Governance through Voluntary Consensus (London: Routledge, 2009).

3 Thomas G. Weiss and Rorden Wilkinson, “International Organization and Global Governance: What Matters and Why”, International Organization and Global Governance.

4 www.swift.com/assets/swift_com/documents/about_swift/SIF_2013_04.pdf.

Acknowledgments

This book was inspired by JoAnne Yates (MIT) who suggested that the material we had gathered about SWIFT might be of interest to this series. We are grateful to the series editors, Thomas G. Weiss and Rorden Wilkinson, for their support and interest in our research. Thanks also to Bernardo Batiz-Lazo, Mark Billings, and the anonymous reviewers who provided feedback for our article about the origins of SWIFT published in the journal Business History. The Information Systems and Innovation Group (Department of Management) at The London School of Economics and Political Science (LSE) provided Susan Scott with the seed-corn funding that originally enabled her to initiate the research on SWIFT many years ago. This effort was extended in Markos Zachariadis’ PhD research on the “History, economics, and diffusion of SWIFT” published at The London School of Economics (2011) and funded through work at the Centre for Economic Performance (CEP). We thank all those past and present financial services professionals who proved to be a constant source of information and inspiration.

Many thanks to Gottfried Leibbrandt at SWIFT who organized the modest amount of independent research funding which was essential in enabling the authors to consult archive data and conduct interviews at locations in Europe, including the SWIFT headquarters in La Hulpe, Belgium. We are most grateful to the staff and executives at SWIFT for their commitment to this project and for respecting our editorial control over the book contents. We would like to thank all those at SWIFT who found the time to give us feedback on our draft. Special thanks go to Peter Ware at the SWIFT Institute for his erstwhile support over the years and Maria-Eugenia Forcat for being a commensurate communications professional and our organizational genie. We are grateful to SWIFT’s legal department who helped us identify and gain access to original historical documents; also to the professional archivists who helped us to find original documents at the Charles Babbage Institute (Center for the History of Information Technology),

Acknowledgments xiii

Bank of England, Stanford Research Institute, Guildhall Library, LSE Library, and Barclays Group archives.

This project has been an entirely collaborative effort by the two authors. If, however, for academic reasons, individual responsibility must be assigned for the composition of the book, Susan Scott led on the Introduction, and Chapters 1, 2, 5, and 6 while Markos Zachariadis led on Chapters 3 and 4. We would like to acknowledge the research assistance of Carolyn Paris and express our appreciation for her contribution to the preparation of our final manuscript. Susan Scott is grateful to Wanda Orlikowski (MIT) for her comments on draft chapters. Thanks to Natanya Paris for her help with interview transcription. Thanks also to our loyal colleagues for their patience with us while we worked on this project alongside our regular university duties, especially Chrisanthi Avgerou (LSE), Michael Barrett (University of Cambridge), and Joe Nandhakumar (Warwick Business School). Finally both of us would like to profoundly thank our respective families for constantly believing in us and our academic endeavours.

Abbreviations

ABECOR ABN AMRO

ANSI ATM BBA BGA BIC BINS BIS BP BSC CBI CBT CEDEL

CEPT CHAPS CISADA

CLS CPSS

CSV CUG

Associated Banks of Europe Corporation

Algemene Bank Nederland

Amsterdamsche and Rotterdamsche Bank (became ABN AMRO after merging with Algemene Bank Nederland in 1991)

American National Standards Institute

Automated Teller Machine

British Bankers’ Association

Barclays Group Archives

Bank Identifier Code or Business Identifier Code Barclays Integrated Network System

Bank of International Settlements

Board Paper

Binary Synchronous Communication

Charles Babbage Institute

Computer-Based Terminal

Leading bank-owned securities and depository system in bond clearing (merged with Deutsche Börse Clearing in 2000 to form Clearstream)

Conference of European Post and Telecommunications Clearing House Automated Payment System

US Comprehensive Iran Sanctions, Accountability, and Divestment Act 2010

Continuous Linked Settlement

Committee on Payment and Settlement Systems of the Bank of International Settlements

Comma Separated Values

Closed User Group

Abbreviations xv

DFD Data Field Dictionary

DNS Designated-time Net Settlement

DTCC Depository Trust & Clearing Corporation

DWG Development Working Group

EBIC European Banks’ International Company

ebXML E-Business XML

ECB European Central Bank

EDIFACT Electronic Data Interchange For Administration, Commerce, and Transport

EMI European Monetary Institute

ER Executive Report

ETHZ Swiss Federal Institute of Technology in Zurich

FATF Financial Action Task Force

FAX Facsimile

FIN FINancial

FISD Financial Information Services Division

FIX Financial Information eXchange

FNCB First National City Bank of New York (was shortened to “First National City Bank” in 1962, it then became “Citibank” in 1976)

FPL FIX Protocol Ltd

FpML Financial products Markup Language

GEISCO General Electric Information Services CO.

GLM Guildhall Library Manuscripts

HSM Hardware Security Modules

HTML HyperText Markup Language

HVPMI High Values Payment Market Infrastructures

IFT Interbank File Transfers

IMF International Monetary Fund

IP Internet Protocol

ISAE International Standard on Assurance Engagements

ISITC International Securities Association for Institutional Trade Communication

ISO International Organization for Standardization

LVFTS Large-Value Funds Transfer Systems

LVPS Large-Value Payment Systems

MAC Message Authentication Code

MA-CUG Member Administered—Closed User Group

MARTI MAchine Readable Telegraphic Input xvi Abbreviations

MDDL MI

SEG SEPA SGB SGML SIA Sibos (previously SIBOS) SID SHA SIPN SIPS SITA

SR SRI

Market Data Definition Language

Market Infrastructures

Memorandum of Understanding

Message Switching Project

Message Type

Maintenance Working Group

Message Type XML

National Aeronautics and Space Administration Banque Nationale de Belgique

National Central Banks

National User Group

Open Applications Group, inc.

Organization for the Advancement of Structured Information Standards

Organization for Economic Cooperation Over-The-Counter

Public Key Infrastructure

Post, Telegraph, and Telecom authorities Registration Authority

Research Information eXchange Markup Language Registration Management Group

Real-Time Gross Settlement

Société Anonyme

Sub-Committee

Standards Evaluation Group

Single Euro Payments Area

Société Générale de Banque

Standard Generalized Markup Language Securities Industry Association

SWIFT International Banking Operations Seminar

SWIFT Interface Device

Software & Information Industry Association Secure Internet Protocol Network Systemically Important Payment Systems Société Internationale de Télécommunications Aéronautiques

Special Recommendations

Stanford Research Institute

SSCP ST STP STS SVFT SVPS SWG SWIFT

TARGET2

TC TCP/IP TFTP TNB TWIST UANI

U UCLA

UGC

UML UN/CEFACT

UNCITRAL UNIFI UNIVAC VISA

W3C

WG

WPS

XBRL XML

Abbreviations

SWIFT Security Control Policy

SWIFT Terminal

Straight-Through Processing

SWIFT Terminal Services SA

Small-Value Funds Transfer

Small-Value Payment Systems

Standards Working Group

Society for Worldwide Interbank Financial Telecommunication

Trans-European Automated Real-time Gross Settlement Express Transfer system

Technical Committee

Transmission Control Protocol/Internet Protocol Terrorist Finance Tracking Program TransNational Banks

Treasury Workstation Integration Standards Team United Against Nuclear Iran (New York-based

XVII advocacy group founded in 2008 by US Ambassador Mark D. Wallace, the late US Ambassador Richard Holbrooke, Former CIA Director Jim Woolsey, and

Middle East expert Dennis Ross)

nion Bank of Switzerland

ser Group Chairperson

nified Modelling Language

nited Nations Center for Trade Facilitation and lectronic Business are

€E He € € e

JNIversal Financial Industry message scheme INIVersal Automatic Computer

Visa International Service Association

World Wide Web Consortium

Working Group

Wholesale Payment Systems

eXtensible Business Reporting Language eXtensible Markup Language

(æ

Jnited Nations Commission on International Trade Law

Introduction

This book traces the history and development of a mutual organization in the financial sector called SWIFT, the Society for Worldwide Interbank Financial Telecommunication. Over the last 40 years, SWIFT has served the financial services sector as proprietary communications platform, provider of products and services, standards developer, and conference organizer (“Sibos”). Founded to create efficiencies by replacing telegram and telex (or “wires”)! for international payments, SWIFT now forms a core part of the financial services infrastructure. It is widely regarded as the most secure trusted third-party network in the world, serving 212 countries and over 10,000 banking organizations, securities institutions, and corporate customers.? Through every phase of its development, SWIFT has maintained the status of industry cooperative, thus presenting an opportunity to study broader themes of globalization and governance in the financial services sector.

SWIFT’s primary role is that of a message carrier, an international network analogous to the “internet for financial services”. In 2012, the SWIFT network was used to send and receive more than 4.5 billion messages? ranging from traditional payments to securities confirmations. In 2013, message traffic grew to around 20 million financial transaction messages per day.‘ It is important to clarify that SWIFT is not a payment system but serves as a transport network for a large number of major payment and securities infrastructures. This makes it the most significant provider of global financial messaging and processing services in the world today, a position that its cooperative status is designed to mitigate.> SWIFT’s Bylaws (2012) state that “the object of the Company is for the collective benefit of the Shareholders of the Company, the study, creation, utilization and operation of the means necessary for the telecommunication, transmission, and routing of private, confidential and proprietary financial messages”.6 It is important to emphasize that SWIFT is not a bank or a clearing and settlement institution; it does not manage accounts on behalf of

2 Introduction customers nor does it hold funds. The majority of financial institutions use SWIFT to send and receive information about financial transactions. However, SWIFT does not maintain financial information on an ongoing basis and data are only held for a limited period of time. Rather SWIFT is responsible for providing the network, standards, products, and services that allow member institutions to connect and exchange financial information. It distinguishes itself from public Internet Protocol networks by accepting limited liability for defined categories of loss resulting from transaction message delays that have arisen as a consequence of technical issues within SWIFT.’ Financial service professionals say that the most critical part of SWIFT’s role is achieving the secure exchange of proprietary data — in other words: reliability, confidentiality, and integrity. While some practitioners recognize the SWIFT infrastructure as a key-operating asset, others simply regard it as the necessary but fundamentally uninteresting sector-wide “plumbing”. The history of SWIFT, leading up to its current status as “essential but taken for granted”, is a compelling account of institutionalization, codification of practice through standards, and industrialization of financial services. In this book, we chart SWIFT’s evolution from an efficiency initiative driven by a closed “society” of banks to a network innovation of world-class standing whose standards continue to shape financial services.

As McKenney and Copeland note, “few firms have broken the mold of history and transformed their industries with a new dominant design for information processing”. SWIFT is one of those firms, and a historical analysis of SWIFT is justified from this perspective alone. However, as a mutual organization that has brought to bear a transformative influence in a competitive sector, SWIFT’s story is especially provocative. Most accounts of sector change overlook the role of industry cooperatives, focusing instead on profit-seeking organizations and the entrepreneurial individuals within them. In such cases it is the few, not the many, who are credited with seeking out new and improved products, processes, and redesigning organizational structures which will reduce costs, better satisfy customer demands, and yield greater profits. These efforts are cast as part of in-house corporate strategy formulation, internal research, and development programs, or the result of informal “tinkering” or trial-and-error efforts by staff within commercial organizations.” However, as this book bears witness, at particular junctures in the development of financial services, projects and initiatives have been taken out of organizational contexts dominated by profit-maximization imperatives, and been sequestered within a cooperative setting in order to achieve a step-change. The motivation, funding, organization, and effectiveness of such moves are integral to the existence of an organization like SWIFT.

Introduction 3

Organizational arrangements are not the only influence on processes of innovation; prior literature rightly emphasizes technological, management, organizational, and industrial conditions.!° For example, there is a level at which progress in computer-based advances like the SWIFT network and its standards are inseparable from specific national histories!! and also related to various degrees with changes in regulatory policy.!? As will become apparent, we suggest that understanding specific details of SWIFT’s development over time, from its origins to current pressures, reveals insights into particular dynamics characterizing organizational change and business transformation in this economically critical sector. This is important because surprisingly little is known about innovation in financial services despite widespread acknowledgment that they play a crucial role as “a facilitator of virtually all production activity and much consumption activity”. Lack of research in this area is thus a concern since we know that “improvements in the financial sector will have direct positive ramifications throughout an economy”. !4

During the 1970s, when SWIFT was initiated, the dominant management literature portrayed organizations as the planned outcome of rational decisions made by senior management pursuing mission statements that reflected a grand design. For the most part the role ascribed to computer-based information and communication technologies was deterministic: whatever capabilities technology afforded, organizations would adopt. In practice, business development is a far more situated process: rarely technologically-led, usually historically contingent, and frequently politically entangled. Pausing for a moment to consider what research has already taught us about the nature of techno-innovation in this sector, we know that financial services organizations have tended toward “solution technologies [in response to] the perception of risks and opportunities in given circumstances”.!5 These have been based upon models and architectures that are “with relatively few exceptions not proprietary to this sector”.!° Moreover, their status as “solutions” shifts; today’s engine of innovation becomes folded into emergent strategies and over time sediments into an installed base, thus necessitating further calls for change. In the case of SWIFT, while its status as the trusted third-party infrastructure goes largely unchallenged, questions about its future do emerge and such challenges have to be proactively addressed. Indeed, we would argue that as globalization unfolds, the status of “global institution” carries with it positional vulnerabilities that require constant vigilance and management.

The prevailing strength of SWIFT is its capacity to provide opportunities for cooperation within a competitive sector. The way in which SWIFT has achieved its mandate to serve its member community in financial services over the last four decades reflects the extent to which influence can be

4 Introduction achieved through consultation and committee: designing the rules that govern a core infrastructure and setting standards. SWIFT’s remarkable sector-wide adoption and diffusion is an achievement that should not be downplayed. After all, this degree of institutionalization has eluded alternative initiatives which have aspired to similar status.

SWIFT?’s status as a core financial services infrastructure and its standing in the community as a “resilience assured” secure network has placed additional pressure on both its governance and design. In addition to demands for contingency planning and robustness that all major financial institutions have addressed since 9/11, SWIFT has found itself drawn into global affairs through its involvement in the Terrorist Finance Tracking Program and calls to exclude Iranian institutions. This has created a complicated outlook for SWIFT as a global institution and stimulated much debate.

We begin, in Chapter 1, by describing the origins of SWIFT in order to put its status as a cooperative society in historical perspective. Chapter 2 focuses on “how SWIFT works” and provides an overview of its organization, structure, operations, and management. Chapter 3 examines the development of SWIFT standards, giving a detailed description of what those standards are and how they reflect different interests in the financial services community. Defining standards goes hand-in-hand with network design and development, so in Chapter 4 we provide an account of the evolution of the SWIFT network and the cross-country diffusion that led it to become a global infrastructure. This brings us to a discussion of the challenges faced by SWIFT, particularly with regard to its cooperative governance. We also explore how and why SWIFT has been implicated in global affairs as well as its entanglement in ongoing processes of globalization. In the conclusion, we reflect on the central themes in the SWIFT study and consider key issues for further research.

1 “Wire” was originally used to refer to a cablegram (a message sent by a submarine telegraph cable). However, it eventually became the generic term for all payments made by either telegram or telex.

2 From http://www.swift.com/assets/swift_com/documents/about_swift/SIF_ 2013_04.pdf. See the following website for updated figures: http://www.swift. com/about_swift/company_information/swift_in_figures.

3 http://www.swift.com/assets/swift_com/documents/about_swift/SIF_2012_12. pdf.

4 http://www.swift.com/assets/swift_com/documents/about_swift/SIF_2013_04. pdf.

5 Dominique Rambure and Alec Nacamuli, Payment Systems: From the Salt Mines to the Board Room (Houndsmill: Palgrave Macmillan, 2008): 48.

13 14 15 16

Introduction 5

SWIFT 2012, SWIFT Bylaws, 2012, June, Article 3: 4 (https://www2.swift. com/uhbonline/books/public/en_uk/swift_by_laws/swift_by_laws.pdf). Responsibility and liability for SWIFT’s core (‘FIN’) is defined in their User Handbook. SWIFT accepts liability for direct loss. Direct loss is defined as: “A non-recoverable loss of funds representing the principal amount of authenticated payments or transfers, whatever the category or type of message sent through the FIN service.” SWIFT liability for direct loss is EUR 150,000,000 in the aggregate for each annual period.

James McKenney, Duncan G. Copeland, and Richard Omason, Waves of Change: Business Evolution through Information Technology (Boston, MA: Harvard Business School Press, 1995): 1.

W. Scott Frame and Lawrence J. White, “Empirical studies of financial innovation: lots of talk, little action?” Journal of Economic Literature, 42 (2) (2004): 118.

JoAnne Yates, Structuring the Information Age: Life Insurance and Technology in the Twentieth Century (Baltimore, MD: Johns Hopkins University Press, 2005); Craig N. Murphy and JoAnne Yates, The International Organization for Standardization (ISO): Global Governance through Voluntary Consensus (London: Routledge, 2008).

Alfred D. Chandler Jr. and James W. Cortada, A Nation Transformed by Information (Oxford: Oxford University Press, 2000).

See Alexandros-Andreas Kyrtsis, ed., Financial Markets and Organizational Technologies: Systems Architectures, Practices and Risks in the Era of Deregulation (Houndsmill: Palgrave Macmillan, 2010).

Frame and White, “Empirical studies:” 118.

Ibid.

Kyrtsis, ed., Financial Markets: 14.

Ibid., 9.

e Correspondent banking and expanding international trade e Information communications and globalizing bank services e Network projects and governance

e Achieving critical mass and global usage

e Co-opetition

SWIFT is among a select few organizations that established the core operational foundations for international trade, increasing interaction across boundaries and contributing to our experience of a global world. This has made it subject to both external pressures from groups conscious of the privileged access that it offers and internal calls from its own membership to continuously improve its performance. Understanding its organizational response to current and future demands necessitates understanding its past. The purpose of this chapter is to take a historical perspective on the development of SWIFT. This helps establish a context for better understanding its defining characteristics: the choice of a cooperative legal form, reinforced by a set of rules and responsibilities that support the position of SWIFT as it negotiates programmes of action (such as standards development) among organizations engaged in financial activities.

We begin by briefly reviewing how the convergence of pressures in three areas, international trade, telecommunications technology, and banking services, led to the founding of SWIFT. While it was apparent that existing market practices needed to be surpassed if banks were to meet growing demand for international services, there were many potential ways to organize a response. In this chapter, we consider the conditions that enabled this major, self-organized inter-bank initiative to emerge.! SWIFT currently occupies such an established position in the sector that the circumstances surrounding its founding and the precarious days of network growth seem distant. We provide a close examination of events leading up to the launch of the society and show that in part it succeeded because it offered a negotiated compromise at a competitively tense time.

SWIFT was one of many options being cultivated by a small group of transnational banks (TNBs) keen to capture new business opportunities arising from the expansion of international trade. The decision to adopt a cooperative governance structure proved pivotal and ensured that when SWIFT jockeyed for position with competitive alternatives, it became the banks’ preferred choice. As a consequence, competitive tensions were superseded by an era of collective effort that cumulated in an unprecedented network effect, landmark standards, and knowledge exchange.

The success rate of large-scale information systems projects in the 1970s was low. In the next part of our discussion, we show that SWIFT’s progress depended on the willingness of a critical mass to share existing practices, define common standards, develop interfaces, adopt security protocols, and adapt their back-office systems. This challenge was further heightened by unwritten international trade agreements, shortfalls in multi-jurisdiction regulation, and protectionism by incumbent state-owned Postal, Telephone, and Telegraph authorities (PTTs).

If SWIFT’s initial achievement was connectivity, its lasting contribution to financial services has been the development and diffusion of standards. This has enabled automation of international services on a scale that is best regarded as the “industrialization” of global financial services. Providing a secure and reliable basis for realizing extraordinary growth in financial transactions has given SWIFT its standing as the most significant network innovation in the history of international banking.

Correspondent banking and expanding international trade

SWIFT’s early history is indivisible from the rising importance of correspondent banking, the term used when a financial institution acts as an agent for another — conducting business transactions, accepting deposits, or gathering documents. In the early 1970s, unprecedented levels of international trade highlighted discrepancies between correspondent banking services and the communication systems that supported them. In this section, we will place the race to provide systems able to cope with the growth in correspondent banking services in the context of developments in international trade in order to show that the emergence of SWIFT took place at a particular juncture in the history of globalization.

The starting point for our discussion is Roland Robertson’s definition of globalization as “the compression of the world and the intensification of consciousness of the world as a whole.”? From our current vantage point, globalization may appear inevitable but for those living in nations experiencing colonial legacies and post-world war recovery, it was far from obvious that if trade and transactions increased we would see the emergence of a global economy that takes into account all the economies of the world accompanied by flows of national and cultural resources. The trajectory of international trade has been uneven, marked out by phases of acceleration and deceleration. During the gold standard period (c. 1870-1914), capital movements were free and flows reached new highs. Despite measures taken to reconstruct international finance in the intervening years,’ the two world wars truncated financial services, firmly retrenching and bounding capital markets within the borders of nations.