China, Russia & India Push Forward on SWIFT Alternative
- Russia developed a financial messaging system in 2014 as an alternative to SWIFT which is currently the world’s largest player in this space.
- China plans to connect its financial system CIPS to bypass SWIFT’s international money transfer network
- India is also looking to join the network. They currently do not have their own domestic messaging system and are exploring options on how to connect to Russia’s system.
The Need for an Alternate
Russia initially developed an alternate financial message system in 2014 when it was facing threats from Washington of removal from the SWIFT network. Although these threats are no longer present today, Russia has continued to press forward and is gaining momentum in establishing partners in some of the world’s biggest economies.
The literal translation for the system from Russian is System for Transfer of Financial Messages. The commonly known acronym for this system is SPFS.
The BRICS trade bloc consists of five major economies – Brazil, Russia, India, China, and South Africa. Collectively, this group represents about 42% of the world’s population and roughly 23% of the world’s GDP. Considering the size, there is certainly potential for this group to disrupt SWIFT’s financial messaging operation.
Over the summer, Bloomberg reported that the central bank of Venezuela is considering switching to the SWIFT alternative in anticipation of further US sanctions.
Cost-wise, both systems have a similar fee structure. However, SPFS does not have an initial connection fee where SWIFT charges an initial fee that is typically around 15,000 – 20,000 euros.
As of November 1st, the central bank of Russia shows 392 clients for its SPFS system.
SWIFT Has Several Major Improvements in the Pipeline
The central bank of Russia might have its work cut out as SWIFT has some innovative ideas to improve its network.
The biggest threat to SPFS might be SWIFT gpi, an initiative to streamline their existing service.
SWIFT has reported the biggest roadblock to their network is incomplete or incorrect fillings. This requires manual intervention which is tedious and costly. But more importantly, it causes delays in payments.
The new SWIFT gpi system will have checks in place before the payment is sent to avoid such scenarios. SWIFT requires that all financial institutions confirm payments to the gpi Tracker by the end of next year.
Trials of the new system have been conducted in Australia, Singapore and in Europe with Target Instant Payment Settlement (TIPS). The results have shown that the new system can deliver end to end payments within seconds.
This will tend to open up the market for SWIFT who is currently losing a large market share of the payment processing industry due to its lack of speed. This could pose a threat to other big players in the payment processing industry such as PayPal.