Welcome to tex Stuff, a production from I Heart Radio. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with I Heart Radio and how the tech are you. First of all, if I sound a little different in this episode, part of that is because I came into the office because I have an interview I'll be doing for a future episode of tech Stuff later today, and I wanted to have the best possible connection I could for that. And secondly, I'm using a totally different microphone, So apologies to all of you out there. Just bear with me as I as I switched things up, but we'll be back to normal before you know it. However, let's get to today's show. I got a request on Twitter to cover Swift, particularly as it partend pans to the Russian invasion of Ukraine. So today we're going to learn what swift is and what a ban on Swift in Russia actually means. And um, I should credit the Twitter user, but they actually use a handle that's a mixture of letters and numbers, so I'm not positive on how they prefer that handled to be pronounced, but I'll give it a go and say it's Yazio. Now let's get to the meat of it. And first, uh, there's needs to be some clarification because there's actually different swifts in the tech world. For example, there is the SWIFT programming language, which was developed by Chris Latiner uh in for the Apple family of computer systems. But that's not what we're talking about here. Uh No, Our SWIFT is an acronym and it stands for the Society for Worldwide inter Bank Financial Telecommunication. So when you boil it all down, SWIFT refers to a communication system that allows banks and other financial institutions to handle stuff like transfers between those institutions and often that this can include spanning the borders of countries, so international transfers. And this is really all about moving money around. And typically we're talking about very large sums of money, oodles of cash, if you will. So how do you facilitate the transfer of money? As companies and customers make or accept payments, the money has to travel to the appropriate destination. Now we're not usually actually talking about physical cash, like moving physical money around. Uh, the physical stuff like paper notes, coins, you know, travelers, checks, all that kind of thing. Those are just the representation of the concept of money. Actually, if you go down that road long enough, you risk the possibility that you conclude that all money is just a big game, and that if we stop believing in it, it will go away. So head away from the light, Carol Ann. It will do you no good. Anyway. This gets way more complicated than just moving cash around. You know, it's really easy to understand how cash moves because you've got one party the hands over cash to another party in return for goods or services. But the concept of money that's trickier. However, it's also important to get a handle on this in order to understand what's with role is beyond just it's a way for financial institutions to communicate with each other. I mean, technically I could just say that and that would be it, but I don't feel like that gives you an understanding or an appreciation of what swift is and what it does. So first, let's talk about what money is in bank account oounts. So, when you, as a bank customer, make a deposit to your personal bank account, what you're actually doing is creating a liability for the bank. And that's because the you're not literally handing over notes, like to a bank. You know, if you're making a wireless transfer, you're not handing cash to a bank that then turns around and puts it in a big vault that just has all the cash for all the accounts in it. That's not what's happening. So they don't literally have a room full of cash and they just go in and scoop out some of it to represent your bank account. So what you're doing in a sense is you are loaning money to the bank, and the bank can then use that money to issue stuff like loans to other people, loans with interest, then in turn generate revenue for the bank. So you make a deposit and technically the bank owes you that amount of money, and it has to pay out that money whenever you want it, either because you're making a payment to someone else or you just want to withdraw your cash. On the flip side, if you withdraw more money than you actually have in your account, or you know, you spend more than you have, maybe you write a check for more money than is in your bank account as it were, then you become overdrawn and now you owe the bank that extra amount the amount that you overspent or overdrew, and of course there's usually a fee thrown on there as well, and that amount becomes an asset to the bank. So customer deposits are bank liabilities, and overdrawn accounts or loan payments those are assets. If two parties are using the same bank, any money transfers can be made pretty darned simply. So let's say that I want to pay you ten dollars, and I cannot be more clear, I am not paying all of you ten dollars. You would bankrupt me. But hypothetically I want to pay you ten dollars, and it just so happens that you and I use the same bank. So I tell my bank, hey, I want to transfer ten of my dollars what are in my account to my friends account, so that those dollars that were mine now become their dollars. And the bank first verifies that I actually have ten dollars in my account that I can transfer, and that you definitely have an account with that same bank, so that there's a place to transfer it to, and then the bank handles the transfer and the books are balanced, and all that is really easy because it's all in house. But what happens if you and I use different banks, Like I have one bank and you use a different bank. Well, then the money has to be moved around. And when banks move money around, they are not shipping cargo containers filled with cash. If you really take a step back, it just looks like banks are just kind of moving numbers around. Like the account for what's do when the paying that number goes down by whatever the amount was that was paid, and for the account what's receiving the paying that number goes up by that same amount. I am skipping over some stuff like I'm skipping the bit where during transfers you typically have parties that are charging for the transfer service, so it's never as simple as the same amount going in as coming out, which gets further complicated when we talk about international transfers because that also includes things like currency conversions as well as other fees. So on a simplified level, if I wire you ten bucks, my bank account goes down by ten bucks and yours goes up by ten bucks, or you know, the equivalent in whatever your currency is minus whatever fees were incurred along the way. But there is a lot more going on there because there has to be I mean, how does the actual money shift over from one institution to another. If we're using two different banks, how does the ten bucks and amount I have with my bank actually changed to an amount that you have with your bank. Well, if our two banks have reciprocal accounts, which is also called correspondent accounts, it's I think it's more common to hear correspondent accounts in Europe and reciprocal accounts in the United States. Anyway, That means they just settle the actual transfer on the back end. Usually the person that gets the money transferred to them has access to the funds pretty much right away, but the formal settlement might take a little bit longer between the two banks. This also means that if something were to go terribly wrong, you might find yourself ten bucks overdrawn if you grab the cash right away and something happened on the back end. Because there is risk here. If one of the two banks is unstable and goes under then any transfer represents a potential loss. But assuming everything's okay, here's how it works. So reciprocal accounts or uh, you know, the correspondent accounts, these mean that each of the banks actually has a bank account with the other bank, So We'll say. Let's use an example where you have Bank A and Bank B. I use Bank A, you use Bank B. And it turns out that Bank A has a reciprocal account of correspondent account with bank B, and bank B has a similar account with Bank A. Now I'm gonna send you ten bucks, and I tell Bank A to send ten dollars to your account in Bank B. Bank A reduces the amount in my account by ten dollars and then adds ten dollars to its own bank account that is with Bank B, so essentially is depositing ten dollars into its account in Bank B. Then Bank A tells Bank B, hey, yo, I just sent you a tenor could you drop that into the bank account for insert your name here. Bank B, after verifying the Bank A's account with them had in fact increased by ten dollars with then add ten dollars into your account. But here's another twist. It's not like every bank has an account with every other bank, which means sometimes we need another party in here. We need a third party bank that maintains lots of accounts with other banks, uh, sort of a banks bank, if you will. So here in the United States, the Federal Reserve serves that function for tons of banks, hundreds of them. So going back to our example, let's say Bank A and Bank B do not have reciprocal or correspondent accounts with each other, but they do each have accounts with the Federal Reserve. Well, now, when I tell my bank to wire you ten dollars, that communication must go through the Federal Reserve, where Bank A puts the money into its account with the FED. And the FED then, as kind of like our very first example, where you have two people using the same bank, it balances the books internally and moves the money from Banquet's account to Bank b's account that is also with the FED. And then Bank A tells Bank B, Hey, yo, check your account with the FED. There's a sweet tent spot in there that I need you to PLoP into the account of insert your name here, and voila money transfer. Now, these transfers often happen, you know, they happen over clearance systems that clear those those payments, they verify and validate them. Here in the US, the big one is FED wire. There are other systems for large money transfers in the United States, but there's no real need to dive into all of those just yet. We will touch on some of them a little bit later. And of course this can get more and more complicated. You start getting into a six degrees of separation kind of situation. You might actually need a fourth bank in the mix to facilitate a transfer right because there might not be a single common bank that links the senders bank account to the recipient's bank account. This becomes increasingly common when you're talking about banks that are in different countries. The two endpoints might not have that single third party bank in common, so the transfer kind of has to go through hop scotch through various connections in order for everything to be settled. Uh. Typically speaking, the more connections that has to go through, the more fees are incurred, and the less money is going to come out the other end when it finally gets there. Now, all I'm doing here is describing some very high level concepts when it comes to moving money around. There's a lot more that goes into all of this, with special identify irs for the accounts and banks that are all necessary so that the money from the correct accounts ends up at the correct destinations. So without those designations, without those guarantees. We would not have confidence in our financial systems because we would never be sure that the money we were sending to someone was actually going to right person. And when people lose confidence in financial systems, the systems collapse. So the whole house of cards depends upon people having this confidence in them. I have a lot more to say about all of this, but before we get into more of it, let's take a quick break. Okay, we're back. So in order to make money transfers work, particularly between banks that are in different countries, we have to establish protocols, that is, the rules that we use by which money can move around. We also have to establish the actual communication systems the infrastructure, so that will facilitate the movement of money at a speed that is useful. Uh. If it took days or weeks or months for customers to have a transfer go through, whether we're talking individuals or companies or countries, commerce would slow way down and that would not be acceptable. And um A big part of this is the actual messaging system that financial institutions will use to notify one another of payments. So in the old days, you could do this over telegraph wires. In fact, that's where we get the term wire transfers because in the old days, a customer could go to a telegraph office, they could pay an amount to that office and say, I want to wire this money to my cousin who's in across the country in California, and the telegraph operator would send a message to the appropriate destination, and then your cousin in California would go to their local telegraph office and once verified, that office would pay out the amount that you were wiring over, minus whatever fees you had to pay in order to do this. Now, this evolves slight lee over the years into more and more complex systems such as tell x Telex essentially involved using teleprinters to communicate across phone lines to send messages to destinations. So you could actually, you know, type out a message and it would send it over to telephone lines to a printer that would print out that message. And banks for using this in order to do big money transfers. But obviously, as the world became more interconnected and more complicated, and more and more businesses were expanding beyond the borders of their native countries, we needed a more sophisticated communication system to handle all that and it really became necessary as global banking grew and evolved. In addition, there was tensions within the financial industry there always are, uh. There were banks such as City Bank, based out of New York in the United States that created early proprietary messaging standards, but that proprietary bit meant that other banks really weren't too keen to have to adopt a standard that was created and potentially controlled by a single entity like City Bank. It would mean that if you know, City Bank was completely in charge of making changes and updates, they wouldn't really have a spot at the table to make suggestions, it would And so you know, no one wants to play by somebody else's rules. They want to be the ones to define the rules. Other methods that competed with City banks popped up and it all became a mess because one thing you really need in finance is interoperability, right. You want everyone to be playing by the same rules, Otherwise you run into these pain points where you have to switch from one rule set to another just in order to get the money to move from point A to point B. So there was a very real danger that different proprietary systems were gonna make international transfers more complicated, not easier, and really, when you boil it down, complicated often leads to being more expensive. Nobody wants that. So in Europe in the early nineteen seventies, nearly two d forty banks collaborated on finding a way to make this work and established both a communication infrastructure and a common messaging language for the purposes of money transfers. One decision they made was to locate the headquarters of their new organization, which was SWIFT, in Belgium. Specifically, it's headquartered in a suburb in Brussels, and you might wonder, well, why did they choose that location, And it's largely because you had two massive parties that were really playing tug of war here. You had the Finance District of New York on one side and the Finance District of London on the other side, and both of them really wanted to have, you know, more of a say in how this developed. So Brussels was kind of considered neutral territory where the parties could be assuaged. The No One arm of the financial industry would set all the terms, and then the members of SWIFT began to work to build out the protocols and communication system that would support what they wanted. Now to be clear, Swift's purpose is not to actually serve as a financial institution. It is not balancing the books, it is not clearing transactions. No actual money passes through Swift, so that all of that, the actual clearing of transactions that gets handled by some other service such as fed wire. There's one that's called CHIPS, which isn't just an old TV show about motorcycle cops. It's also an acronym for clearing House Interbank Payment System, which is out of New York. Fedwire and CHIPS are just two clearing systems. Fedwire being a US federally regulated system, CHIPS being operated by a private company called the New York clearing House Association. But there's also other ones. There's like the Bankers Automated Clearing System or b ACS BACKS that is a very similar type of organization. It operates out of the United Kingdom. These are the types of institutions that are actually moving the money around. But what SWIFT is doing is serving as a communications system between banks and financial institutions, so it can carry the message that says, hey, bank A, you need to transfer X amount of money to bank b and Swift has to do this in an efficient, fast, and critically a secure way. And that's actually the real value of Swift that it allows for financial institutions to send these messages about moving money around in a way that is dependable and safe. Part of that security is that Swift also doesn't really maintain financial information on an ongoing basis. It's what is called a store and forward operation, meaning it holds onto information really only as long as it is necessary to complete a transaction. Swift the organization set up a private international communications network specifically dedicated to financial transaction messages. So if you think of the Internet as a network of networks, Swift is a network, a specific network for the sole purpose of financial institutions sending these messages in order to make money move around the world. Uh. The need for a private network was clear because the demands of finance were increasingly growing as globalization increased as well, and if the financial institution was just relying on leasing out some some network infrastructure from other providers, they would be hitting up against their limits pretty quickly on a regular basis, and that just didn't make sense. It made more sense for them to build out a system that was solely dedicated for the financial industry. A year after the organization's founding, so this is nineteen seventy four, the members of Swift decided to contract with a company called Burroughs Corporation based of Detroit, Michigan, here in the United States. That company would supply the computer equipment that would handle these electronic messages, and also the company installed the systems around the world, so these would be the backbone, the infrastructure, the actual hardware that carries the electronic messages across the Swift system. And it took four years for the Swift organization to design and and bring online the Swift system. It officially launched in nineteen seventy seven when Prince Albert of Belgium sent the first message over the Swift system. UM. I'm not sure what he sent, Maybe it was where's my money? Anyway, at launch, Swift had more than five member banks across fifteen countries, and two years later, in nineteen Swift was handling more than a hundred twenty thousand transfer messages per day, and a major part of Swift was the standardization of those messages. See back in the tell X days when people were using teleprinters, there was no international standard. People would use forms, and forms could vary from institution to institution. They all covered the same stuff, but they were laid out differently, right, so you would have to really look over the form and say, all right, well, now I found the account number, for example, and here's where the amount is. All those sort of things would be different from one institution to another, and that was a bit of an issue. Swift standardized that. However, the members of Swift also wanted to create a protocol for electronic message formats that was at the same time backwards compatible with the old telex system, because in the early days a lot of institution were still dependent upon tell x, so it's not like everyone switched over to Swift on day one. It would take a while, which meant they wanted to make sure that any messages sent over Swift could also travel over tell X in order to minimize the impact. Otherwise, like if you change everything overnight and you require everyone to get on the same page, it just takes forever for that to actually happen. So this was a pretty important part of their decision. Tell X designated banks using a bank Identify R code, which is a unique code for each bank, Like you have to have a specific individual code so that you not only know what bank it is, but what branch, you know what location you're talking about. So these are kind of like fingerprints. They are unique to specific banks or financial institutions. Swift would adopt that same approach, but they called it the Swift code. Swift has evolved over the years and has been at the center of various tugs of war between different members of the organization. The current version of Swift dates to two thousand five, at least that's when it was completed. It actually started a little bit earlier, but you know, they regularly go in and tweak things and make changes to make things work more smoothly, and to get into all the intricacies of Swift protocols would get really dry, and I argue it would also be really hard to follow. Like pretty quickly I would reach a point where I know I wouldn't be completely aware of what it was I was saying. The smart folks out there, they might listen to me and go, well, I know what he's trying to say, but he clearly doesn't understand it. I'd rather just sidestep that and tell you it gets more technical and more complicated than I am comfortable covering. However, it is important to understand that SWIFT has rules in place that define things like the kinds of transactions that can happen between different parties. Um away of identifying specific banks, including specific branches and locations, it has ways of providing a secure means of communication between all the members of the system and thus makes it simpler for these big organizations to move money around while minimizing the potential for errors. Okay, well, all that is kind of the basics on the Swift system. When we come back, I'll talk about what it means to quote unquote ban Russia from Swift. But first let's take another quick break. All right, what does it mean to cut off a nation from Swift? First of all, it has happened before. Russia is not the only country to have been effectively uh blacked out in the Swift system. That has happened previously with Iran. So what does this actually mean. Well, by denying certain major Russian banks in this case, and financial institutions in Russia the use of Swift, those organizations are not able to engage in international money transfers. At least they can't do it as easily as they could before. They can no longer send or receive communications over this network. And since those communications are kind of what instigates the transfer of moneies, that really is an enormous economical impact on not just the targeted nation, but everyone else too. And uh yeah, that that that can have a massive impact well beyond just the country that gets blacked out because of that, you know, international component. Blacking out one region has this ripple effect on others. In fact, the United States is one of the countries that sees international transfers to and from Russia a lot, like when you're looking at where money is moved to and from United States is one of the big ones with Russia. So that means that if Russia can't engage in these kinds of transfers anymore because it's been blacked out through SWIFT, that has an impact on my country as well in the United States because it also you know, it's it's a party to those transfers. Now, the goal of putting in this band is to squeeze Russia by hindering its financial system. It wasn't until Russia had really committed to invading Ukraine that we actually saw some movement on this front. A lot of nations, including the United States, were initially really reluctant to ban Russia from Swift And you could say, well, maybe that's because of these ripples I'm talking about. That's that these economic ripples that go through the rest of the world. How it's not just Russia that's quote unquote being punished. But I'm also sure there is no shortage of conspiracy theories out there that have a more sinister explanation for it, like idea that certain parties in power have economic interests that are going to be directly impacted by this ban, and that is why they were reluctant to commit to it, because it would have a direct consequence on their personal wealth. I'm sure there are tons of those theories out there. I don't know of any offhand, but I would be shocked to learn that there aren't any of those out there. Um, but yeah, that that's the stuff they don't want you to know topics, So I'll leave it there. Ultimately, the choice was made to ban certain Russian institutions from Swift, So it's not like every bank in Russia is necessarily affected by this, but the major ones certainly are. Now, Russia does have its own internal payment system similar to Swift. Like it does the same it fulfills the same purpose as Swift UH. This one is called SPF S and that has around four hundred member organization and according to Russia's Central Bank, it handles about a fifth of all of Russia's domestic transfers UH. And that's a good opportunity to mention that Swift isn't just used for international money transfers. It could be used within a nation as well in order to move money between banks, and in fact, some individual banks have adopted Swift standards for internal use. They're not directly porting the Swift system to use in house, but they typically will wrap the Swift system within whatever their you know, own banking system is, and they rely on that because, of course, it makes way more sense to just use the same system as much as possible, rather than have to deal with potentially competing systems. Now, interestingly, Russia really invested in the creation of this spf S system around two thousand and fourteen. And you might say, well, what's significant about that? Why did Russia start creating its own sort of a payment system in internal payment system around that time. Well, two thousand fourteen was when the United Kingdom was trying to convince Swift to cut off access to Russian banks. So why was the UK arguing that back in two thousand fourteen, Well, that just happened to deal with an earlier Ukrainian invasion, because, as we have learned many times, history repeats itself. Then there's also another system called the Cross Border inter Bank Payments System or SIPs c i p S that originates out of China. That system isn't nearly as widely adopted as Swift and others, and it's also pretty young. It's a pretty recent system, but potentially could serve as a kind of lifeline for Russia's banking industry if this band stretches on for a really long time. There's also been talk of Russia potentially leaning on cryptocurrency to work around sanctions, like the idea of moving money around by converting stuff into crypto, doing crypto transfers and then converting that back into other currencies, or just keeping it in crypto and using transfers that way. That is theoretically possible, but it's largely impractical. And the main reason I say that isn't like to slag off crypto. Y'all know I'm not big on crypto, But this doesn't have to do with that. No, it has to do with adoption. Uh, despite what true believers might have you think, adoption for crypto is not that widespread. And if if, if you don't have the right parties invested in a particular system, then you can't really transfer money around. So it has very limited utility and it adds in a lot of extra steps. And as I said, the more steps you add when you're talking about money transfers correlates with extra costs. So generally speaking, no one wants to see significant amounts of the money they're trying to transfer get gobbled up in various types of fees. So what are the long term implications here? That's kind of hard to say. It all depends really on how this Russian Ukrainian situation pans out. Uh. The longer these sanctions are on Russia, the harder it's going to be for oligarchs who depend upon large transfers from outside the country getting at that money. Um, we have heard that a lot of Russian oligarchs are traveling all over the place. Part of that might just be for them to access wealth that they have stored in various locations that they otherwise can't easily move, Like if they can't move the money to them, they'll move to where the money is. That's a possibility, but we'll have to see how this rolls out. Uh, there's a good chance that this is going to have a really negative impact on Russian citizens who are going to find it increasingly difficult to do things like send money internationally or purchase things from stores that are based in other countries. Um, maybe even doing some basic banking stuff like a lot of that's going to be hard on people, And that's kind of a shame because it's not really the people who are necessarily responsible for the reason for the sanctions. Uh. Sometimes these sanctions really put the hurt on innocence in an effort to build pressure on political entity in order to convince them to stop whatever it is they're doing. The message being if you don't do that, your own people are going to rise up against you. But that's really unfortunate because what it really means is you have to put the squeeze on people who don't necessarily deserve it and who can least afford to be squeezed. So that's the downside to these I'm not saying that economic sanctions don't work, and I'm not saying that they're not necessary at time. I'm just pointing out that the reality of economic sanctions often means that you've got a lot of collateral damage that is dealt to people who don't have a direct relationship with the underlying issue that that necessitated the sanctions in the first place. But that's because the world is a complicated place, and if you're trying to convince governments to to not take certain actions without resorting to you know, violence and war, then you know you've got some limited options, especially if you have a country that is led by a you know, authoritarian and belligerent government, and there are there's no shortage of those in the world unfortunately. But anyway, that is the underlying story behind Swift and what it is they're Like I said, there are lots of different systems that connect in with Swift that actually do the movement of money, but the Swift system itself is in valuable when it comes to facilitating these messagings so that we can actually have these transfers take place. Without it, we would be reliant on outdated modes that are not nearly as efficient or fast or safe. So I hope that's helpful. I hope you have learned something about Swift. It is very interesting because it is a an extremely focused niche network. Like most of the time when I think of networks, I think of more general purpose networks. I don't think about something as specific as this, so it was interesting for me to go in and really read up on the history and the evolution of Swift. So I appreciate the suggestion. If you have a suggestion for a topic I should cover in a future episode of tech Stuff, the best way to reach out to me is on Twitter. The handle for the show is text Stuff hs W and I'll talk to you again really soon. Text Stuff is an I Heart Radio production. For more podcasts from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you listen to your favorite shows.

Welcome to tex Stuff, a production from I Heart Radio. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with I Heart Radio and how the tech are you. First of all, if I sound a little different in this episode, part of that is because I came into the office because I have an interview I'll be doing for a future episode of tech Stuff later today, and I wanted to have the best possible connection I could for that. And secondly, I'm using a totally different microphone, So apologies to all of you out there. Just bear with me as I as I switched things up, but we'll be back to normal before you know it. However, let's get to today's show. I got a request on Twitter to cover Swift, particularly as it partend pans to the Russian invasion of Ukraine. So today we're going to learn what swift is and what a ban on Swift in Russia actually means. And um, I should credit the Twitter user, but they actually use a handle that's a mixture of letters and numbers, so I'm not positive on how they prefer that handled to be pronounced, but I'll give it a go and say it's Yazio. Now let's get to the meat of it. And first, uh, there's needs to be some clarification because there's actually different swifts in the tech world. For example, there is the SWIFT programming language, which was developed by Chris Latiner uh in for the Apple family of computer systems. But that's not what we're talking about here. Uh No, Our SWIFT is an acronym and it stands for the Society for Worldwide inter Bank Financial Telecommunication. So when you boil it all down, SWIFT refers to a communication system that allows banks and other financial institutions to handle stuff like transfers between those institutions and often that this can include spanning the borders of countries, so international transfers. And this is really all about moving money around. And typically we're talking about very large sums of money, oodles of cash, if you will. So how do you facilitate the transfer of money? As companies and customers make or accept payments, the money has to travel to the appropriate destination. Now we're not usually actually talking about physical cash, like moving physical money around. Uh, the physical stuff like paper notes, coins, you know, travelers, checks, all that kind of thing. Those are just the representation of the concept of money. Actually, if you go down that road long enough, you risk the possibility that you conclude that all money is just a big game, and that if we stop believing in it, it will go away. So head away from the light, Carol Ann. It will do you no good. Anyway. This gets way more complicated than just moving cash around. You know, it's really easy to understand how cash moves because you've got one party the hands over cash to another party in return for goods or services. But the concept of money that's trickier. However, it's also important to get a handle on this in order to understand what's with role is beyond just it's a way for financial institutions to communicate with each other. I mean, technically I could just say that and that would be it, but I don't feel like that gives you an understanding or an appreciation of what swift is and what it does. So first, let's talk about what money is in bank account oounts. So, when you, as a bank customer, make a deposit to your personal bank account, what you're actually doing is creating a liability for the bank. And that's because the you're not literally handing over notes, like to a bank. You know, if you're making a wireless transfer, you're not handing cash to a bank that then turns around and puts it in a big vault that just has all the cash for all the accounts in it. That's not what's happening. So they don't literally have a room full of cash and they just go in and scoop out some of it to represent your bank account. So what you're doing in a sense is you are loaning money to the bank, and the bank can then use that money to issue stuff like loans to other people, loans with interest, then in turn generate revenue for the bank. So you make a deposit and technically the bank owes you that amount of money, and it has to pay out that money whenever you want it, either because you're making a payment to someone else or you just want to withdraw your cash. On the flip side, if you withdraw more money than you actually have in your account, or you know, you spend more than you have, maybe you write a check for more money than is in your bank account as it were, then you become overdrawn and now you owe the bank that extra amount the amount that you overspent or overdrew, and of course there's usually a fee thrown on there as well, and that amount becomes an asset to the bank. So customer deposits are bank liabilities, and overdrawn accounts or loan payments those are assets. If two parties are using the same bank, any money transfers can be made pretty darned simply. So let's say that I want to pay you ten dollars, and I cannot be more clear, I am not paying all of you ten dollars. You would bankrupt me. But hypothetically I want to pay you ten dollars, and it just so happens that you and I use the same bank. So I tell my bank, hey, I want to transfer ten of my dollars what are in my account to my friends account, so that those dollars that were mine now become their dollars. And the bank first verifies that I actually have ten dollars in my account that I can transfer, and that you definitely have an account with that same bank, so that there's a place to transfer it to, and then the bank handles the transfer and the books are balanced, and all that is really easy because it's all in house. But what happens if you and I use different banks, Like I have one bank and you use a different bank. Well, then the money has to be moved around. And when banks move money around, they are not shipping cargo containers filled with cash. If you really take a step back, it just looks like banks are just kind of moving numbers around. Like the account for what's do when the paying that number goes down by whatever the amount was that was paid, and for the account what's receiving the paying that number goes up by that same amount. I am skipping over some stuff like I'm skipping the bit where during transfers you typically have parties that are charging for the transfer service, so it's never as simple as the same amount going in as coming out, which gets further complicated when we talk about international transfers because that also includes things like currency conversions as well as other fees. So on a simplified level, if I wire you ten bucks, my bank account goes down by ten bucks and yours goes up by ten bucks, or you know, the equivalent in whatever your currency is minus whatever fees were incurred along the way. But there is a lot more going on there because there has to be I mean, how does the actual money shift over from one institution to another. If we're using two different banks, how does the ten bucks and amount I have with my bank actually changed to an amount that you have with your bank. Well, if our two banks have reciprocal accounts, which is also called correspondent accounts, it's I think it's more common to hear correspondent accounts in Europe and reciprocal accounts in the United States. Anyway, That means they just settle the actual transfer on the back end. Usually the person that gets the money transferred to them has access to the funds pretty much right away, but the formal settlement might take a little bit longer between the two banks. This also means that if something were to go terribly wrong, you might find yourself ten bucks overdrawn if you grab the cash right away and something happened on the back end. Because there is risk here. If one of the two banks is unstable and goes under then any transfer represents a potential loss. But assuming everything's okay, here's how it works. So reciprocal accounts or uh, you know, the correspondent accounts, these mean that each of the banks actually has a bank account with the other bank, So We'll say. Let's use an example where you have Bank A and Bank B. I use Bank A, you use Bank B. And it turns out that Bank A has a reciprocal account of correspondent account with bank B, and bank B has a similar account with Bank A. Now I'm gonna send you ten bucks, and I tell Bank A to send ten dollars to your account in Bank B. Bank A reduces the amount in my account by ten dollars and then adds ten dollars to its own bank account that is with Bank B, so essentially is depositing ten dollars into its account in Bank B. Then Bank A tells Bank B, hey, yo, I just sent you a tenor could you drop that into the bank account for insert your name here. Bank B, after verifying the Bank A's account with them had in fact increased by ten dollars with then add ten dollars into your account. But here's another twist. It's not like every bank has an account with every other bank, which means sometimes we need another party in here. We need a third party bank that maintains lots of accounts with other banks, uh, sort of a banks bank, if you will. So here in the United States, the Federal Reserve serves that function for tons of banks, hundreds of them. So going back to our example, let's say Bank A and Bank B do not have reciprocal or correspondent accounts with each other, but they do each have accounts with the Federal Reserve. Well, now, when I tell my bank to wire you ten dollars, that communication must go through the Federal Reserve, where Bank A puts the money into its account with the FED. And the FED then, as kind of like our very first example, where you have two people using the same bank, it balances the books internally and moves the money from Banquet's account to Bank b's account that is also with the FED. And then Bank A tells Bank B, Hey, yo, check your account with the FED. There's a sweet tent spot in there that I need you to PLoP into the account of insert your name here, and voila money transfer. Now, these transfers often happen, you know, they happen over clearance systems that clear those those payments, they verify and validate them. Here in the US, the big one is FED wire. There are other systems for large money transfers in the United States, but there's no real need to dive into all of those just yet. We will touch on some of them a little bit later. And of course this can get more and more complicated. You start getting into a six degrees of separation kind of situation. You might actually need a fourth bank in the mix to facilitate a transfer right because there might not be a single common bank that links the senders bank account to the recipient's bank account. This becomes increasingly common when you're talking about banks that are in different countries. The two endpoints might not have that single third party bank in common, so the transfer kind of has to go through hop scotch through various connections in order for everything to be settled. Uh. Typically speaking, the more connections that has to go through, the more fees are incurred, and the less money is going to come out the other end when it finally gets there. Now, all I'm doing here is describing some very high level concepts when it comes to moving money around. There's a lot more that goes into all of this, with special identify irs for the accounts and banks that are all necessary so that the money from the correct accounts ends up at the correct destinations. So without those designations, without those guarantees. We would not have confidence in our financial systems because we would never be sure that the money we were sending to someone was actually going to right person. And when people lose confidence in financial systems, the systems collapse. So the whole house of cards depends upon people having this confidence in them. I have a lot more to say about all of this, but before we get into more of it, let's take a quick break. Okay, we're back. So in order to make money transfers work, particularly between banks that are in different countries, we have to establish protocols, that is, the rules that we use by which money can move around. We also have to establish the actual communication systems the infrastructure, so that will facilitate the movement of money at a speed that is useful. Uh. If it took days or weeks or months for customers to have a transfer go through, whether we're talking individuals or companies or countries, commerce would slow way down and that would not be acceptable. And um A big part of this is the actual messaging system that financial institutions will use to notify one another of payments. So in the old days, you could do this over telegraph wires. In fact, that's where we get the term wire transfers because in the old days, a customer could go to a telegraph office, they could pay an amount to that office and say, I want to wire this money to my cousin who's in across the country in California, and the telegraph operator would send a message to the appropriate destination, and then your cousin in California would go to their local telegraph office and once verified, that office would pay out the amount that you were wiring over, minus whatever fees you had to pay in order to do this. Now, this evolves slight lee over the years into more and more complex systems such as tell x Telex essentially involved using teleprinters to communicate across phone lines to send messages to destinations. So you could actually, you know, type out a message and it would send it over to telephone lines to a printer that would print out that message. And banks for using this in order to do big money transfers. But obviously, as the world became more interconnected and more complicated, and more and more businesses were expanding beyond the borders of their native countries, we needed a more sophisticated communication system to handle all that and it really became necessary as global banking grew and evolved. In addition, there was tensions within the financial industry there always are, uh. There were banks such as City Bank, based out of New York in the United States that created early proprietary messaging standards, but that proprietary bit meant that other banks really weren't too keen to have to adopt a standard that was created and potentially controlled by a single entity like City Bank. It would mean that if you know, City Bank was completely in charge of making changes and updates, they wouldn't really have a spot at the table to make suggestions, it would And so you know, no one wants to play by somebody else's rules. They want to be the ones to define the rules. Other methods that competed with City banks popped up and it all became a mess because one thing you really need in finance is interoperability, right. You want everyone to be playing by the same rules, Otherwise you run into these pain points where you have to switch from one rule set to another just in order to get the money to move from point A to point B. So there was a very real danger that different proprietary systems were gonna make international transfers more complicated, not easier, and really, when you boil it down, complicated often leads to being more expensive. Nobody wants that. So in Europe in the early nineteen seventies, nearly two d forty banks collaborated on finding a way to make this work and established both a communication infrastructure and a common messaging language for the purposes of money transfers. One decision they made was to locate the headquarters of their new organization, which was SWIFT, in Belgium. Specifically, it's headquartered in a suburb in Brussels, and you might wonder, well, why did they choose that location, And it's largely because you had two massive parties that were really playing tug of war here. You had the Finance District of New York on one side and the Finance District of London on the other side, and both of them really wanted to have, you know, more of a say in how this developed. So Brussels was kind of considered neutral territory where the parties could be assuaged. The No One arm of the financial industry would set all the terms, and then the members of SWIFT began to work to build out the protocols and communication system that would support what they wanted. Now to be clear, Swift's purpose is not to actually serve as a financial institution. It is not balancing the books, it is not clearing transactions. No actual money passes through Swift, so that all of that, the actual clearing of transactions that gets handled by some other service such as fed wire. There's one that's called CHIPS, which isn't just an old TV show about motorcycle cops. It's also an acronym for clearing House Interbank Payment System, which is out of New York. Fedwire and CHIPS are just two clearing systems. Fedwire being a US federally regulated system, CHIPS being operated by a private company called the New York clearing House Association. But there's also other ones. There's like the Bankers Automated Clearing System or b ACS BACKS that is a very similar type of organization. It operates out of the United Kingdom. These are the types of institutions that are actually moving the money around. But what SWIFT is doing is serving as a communications system between banks and financial institutions, so it can carry the message that says, hey, bank A, you need to transfer X amount of money to bank b and Swift has to do this in an efficient, fast, and critically a secure way. And that's actually the real value of Swift that it allows for financial institutions to send these messages about moving money around in a way that is dependable and safe. Part of that security is that Swift also doesn't really maintain financial information on an ongoing basis. It's what is called a store and forward operation, meaning it holds onto information really only as long as it is necessary to complete a transaction. Swift the organization set up a private international communications network specifically dedicated to financial transaction messages. So if you think of the Internet as a network of networks, Swift is a network, a specific network for the sole purpose of financial institutions sending these messages in order to make money move around the world. Uh. The need for a private network was clear because the demands of finance were increasingly growing as globalization increased as well, and if the financial institution was just relying on leasing out some some network infrastructure from other providers, they would be hitting up against their limits pretty quickly on a regular basis, and that just didn't make sense. It made more sense for them to build out a system that was solely dedicated for the financial industry. A year after the organization's founding, so this is nineteen seventy four, the members of Swift decided to contract with a company called Burroughs Corporation based of Detroit, Michigan, here in the United States. That company would supply the computer equipment that would handle these electronic messages, and also the company installed the systems around the world, so these would be the backbone, the infrastructure, the actual hardware that carries the electronic messages across the Swift system. And it took four years for the Swift organization to design and and bring online the Swift system. It officially launched in nineteen seventy seven when Prince Albert of Belgium sent the first message over the Swift system. UM. I'm not sure what he sent, Maybe it was where's my money? Anyway, at launch, Swift had more than five member banks across fifteen countries, and two years later, in nineteen Swift was handling more than a hundred twenty thousand transfer messages per day, and a major part of Swift was the standardization of those messages. See back in the tell X days when people were using teleprinters, there was no international standard. People would use forms, and forms could vary from institution to institution. They all covered the same stuff, but they were laid out differently, right, so you would have to really look over the form and say, all right, well, now I found the account number, for example, and here's where the amount is. All those sort of things would be different from one institution to another, and that was a bit of an issue. Swift standardized that. However, the members of Swift also wanted to create a protocol for electronic message formats that was at the same time backwards compatible with the old telex system, because in the early days a lot of institution were still dependent upon tell x, so it's not like everyone switched over to Swift on day one. It would take a while, which meant they wanted to make sure that any messages sent over Swift could also travel over tell X in order to minimize the impact. Otherwise, like if you change everything overnight and you require everyone to get on the same page, it just takes forever for that to actually happen. So this was a pretty important part of their decision. Tell X designated banks using a bank Identify R code, which is a unique code for each bank, Like you have to have a specific individual code so that you not only know what bank it is, but what branch, you know what location you're talking about. So these are kind of like fingerprints. They are unique to specific banks or financial institutions. Swift would adopt that same approach, but they called it the Swift code. Swift has evolved over the years and has been at the center of various tugs of war between different members of the organization. The current version of Swift dates to two thousand five, at least that's when it was completed. It actually started a little bit earlier, but you know, they regularly go in and tweak things and make changes to make things work more smoothly, and to get into all the intricacies of Swift protocols would get really dry, and I argue it would also be really hard to follow. Like pretty quickly I would reach a point where I know I wouldn't be completely aware of what it was I was saying. The smart folks out there, they might listen to me and go, well, I know what he's trying to say, but he clearly doesn't understand it. I'd rather just sidestep that and tell you it gets more technical and more complicated than I am comfortable covering. However, it is important to understand that SWIFT has rules in place that define things like the kinds of transactions that can happen between different parties. Um away of identifying specific banks, including specific branches and locations, it has ways of providing a secure means of communication between all the members of the system and thus makes it simpler for these big organizations to move money around while minimizing the potential for errors. Okay, well, all that is kind of the basics on the Swift system. When we come back, I'll talk about what it means to quote unquote ban Russia from Swift. But first let's take another quick break. All right, what does it mean to cut off a nation from Swift? First of all, it has happened before. Russia is not the only country to have been effectively uh blacked out in the Swift system. That has happened previously with Iran. So what does this actually mean. Well, by denying certain major Russian banks in this case, and financial institutions in Russia the use of Swift, those organizations are not able to engage in international money transfers. At least they can't do it as easily as they could before. They can no longer send or receive communications over this network. And since those communications are kind of what instigates the transfer of moneies, that really is an enormous economical impact on not just the targeted nation, but everyone else too. And uh yeah, that that that can have a massive impact well beyond just the country that gets blacked out because of that, you know, international component. Blacking out one region has this ripple effect on others. In fact, the United States is one of the countries that sees international transfers to and from Russia a lot, like when you're looking at where money is moved to and from United States is one of the big ones with Russia. So that means that if Russia can't engage in these kinds of transfers anymore because it's been blacked out through SWIFT, that has an impact on my country as well in the United States because it also you know, it's it's a party to those transfers. Now, the goal of putting in this band is to squeeze Russia by hindering its financial system. It wasn't until Russia had really committed to invading Ukraine that we actually saw some movement on this front. A lot of nations, including the United States, were initially really reluctant to ban Russia from Swift And you could say, well, maybe that's because of these ripples I'm talking about. That's that these economic ripples that go through the rest of the world. How it's not just Russia that's quote unquote being punished. But I'm also sure there is no shortage of conspiracy theories out there that have a more sinister explanation for it, like idea that certain parties in power have economic interests that are going to be directly impacted by this ban, and that is why they were reluctant to commit to it, because it would have a direct consequence on their personal wealth. I'm sure there are tons of those theories out there. I don't know of any offhand, but I would be shocked to learn that there aren't any of those out there. Um, but yeah, that that's the stuff they don't want you to know topics, So I'll leave it there. Ultimately, the choice was made to ban certain Russian institutions from Swift, So it's not like every bank in Russia is necessarily affected by this, but the major ones certainly are. Now, Russia does have its own internal payment system similar to Swift. Like it does the same it fulfills the same purpose as Swift UH. This one is called SPF S and that has around four hundred member organization and according to Russia's Central Bank, it handles about a fifth of all of Russia's domestic transfers UH. And that's a good opportunity to mention that Swift isn't just used for international money transfers. It could be used within a nation as well in order to move money between banks, and in fact, some individual banks have adopted Swift standards for internal use. They're not directly porting the Swift system to use in house, but they typically will wrap the Swift system within whatever their you know, own banking system is, and they rely on that because, of course, it makes way more sense to just use the same system as much as possible, rather than have to deal with potentially competing systems. Now, interestingly, Russia really invested in the creation of this spf S system around two thousand and fourteen. And you might say, well, what's significant about that? Why did Russia start creating its own sort of a payment system in internal payment system around that time. Well, two thousand fourteen was when the United Kingdom was trying to convince Swift to cut off access to Russian banks. So why was the UK arguing that back in two thousand fourteen, Well, that just happened to deal with an earlier Ukrainian invasion, because, as we have learned many times, history repeats itself. Then there's also another system called the Cross Border inter Bank Payments System or SIPs c i p S that originates out of China. That system isn't nearly as widely adopted as Swift and others, and it's also pretty young. It's a pretty recent system, but potentially could serve as a kind of lifeline for Russia's banking industry if this band stretches on for a really long time. There's also been talk of Russia potentially leaning on cryptocurrency to work around sanctions, like the idea of moving money around by converting stuff into crypto, doing crypto transfers and then converting that back into other currencies, or just keeping it in crypto and using transfers that way. That is theoretically possible, but it's largely impractical. And the main reason I say that isn't like to slag off crypto. Y'all know I'm not big on crypto, But this doesn't have to do with that. No, it has to do with adoption. Uh, despite what true believers might have you think, adoption for crypto is not that widespread. And if if, if you don't have the right parties invested in a particular system, then you can't really transfer money around. So it has very limited utility and it adds in a lot of extra steps. And as I said, the more steps you add when you're talking about money transfers correlates with extra costs. So generally speaking, no one wants to see significant amounts of the money they're trying to transfer get gobbled up in various types of fees. So what are the long term implications here? That's kind of hard to say. It all depends really on how this Russian Ukrainian situation pans out. Uh. The longer these sanctions are on Russia, the harder it's going to be for oligarchs who depend upon large transfers from outside the country getting at that money. Um, we have heard that a lot of Russian oligarchs are traveling all over the place. Part of that might just be for them to access wealth that they have stored in various locations that they otherwise can't easily move, Like if they can't move the money to them, they'll move to where the money is. That's a possibility, but we'll have to see how this rolls out. Uh, there's a good chance that this is going to have a really negative impact on Russian citizens who are going to find it increasingly difficult to do things like send money internationally or purchase things from stores that are based in other countries. Um, maybe even doing some basic banking stuff like a lot of that's going to be hard on people, And that's kind of a shame because it's not really the people who are necessarily responsible for the reason for the sanctions. Uh. Sometimes these sanctions really put the hurt on innocence in an effort to build pressure on political entity in order to convince them to stop whatever it is they're doing. The message being if you don't do that, your own people are going to rise up against you. But that's really unfortunate because what it really means is you have to put the squeeze on people who don't necessarily deserve it and who can least afford to be squeezed. So that's the downside to these I'm not saying that economic sanctions don't work, and I'm not saying that they're not necessary at time. I'm just pointing out that the reality of economic sanctions often means that you've got a lot of collateral damage that is dealt to people who don't have a direct relationship with the underlying issue that that necessitated the sanctions in the first place. But that's because the world is a complicated place, and if you're trying to convince governments to to not take certain actions without resorting to you know, violence and war, then you know you've got some limited options, especially if you have a country that is led by a you know, authoritarian and belligerent government, and there are there's no shortage of those in the world unfortunately. But anyway, that is the underlying story behind Swift and what it is they're Like I said, there are lots of different systems that connect in with Swift that actually do the movement of money, but the Swift system itself is in valuable when it comes to facilitating these messagings so that we can actually have these transfers take place. Without it, we would be reliant on outdated modes that are not nearly as efficient or fast or safe. So I hope that's helpful. I hope you have learned something about Swift. It is very interesting because it is a an extremely focused niche network. Like most of the time when I think of networks, I think of more general purpose networks. I don't think about something as specific as this, so it was interesting for me to go in and really read up on the history and the evolution of Swift. So I appreciate the suggestion. If you have a suggestion for a topic I should cover in a future episode of tech Stuff, the best way to reach out to me is on Twitter. The handle for the show is text Stuff hs W and I'll talk to you again really soon. Text Stuff is an I Heart Radio production. For more podcasts from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you listen to your favorite shows.