By Srii Srinivasan
Chargeback Gurus
Russia's invasion of Ukraine has brought a particular aspect of banking and payment technology into sharp focus on the world stage. Amid the calls for sanctions against Russia, an option continually presented as one of the most severe was blocking Russia from access to SWIFT, the Society for Worldwide Interbank Financial Telecommunications. On Saturday, the United States and European allies announced their intention to ban the Russian central bank as well as certain commercial banks from SWIFT, a move anticipated to have major consequences for the Russian economy.
Trade and ecommerce function best in a world at peace, but when events beyond our control begin to take shape, one good thing we can do is educate ourselves about them. On the first day of the invasion, many called for a SWIFT ban to be added to the existing sanctions against Russia, notably the Baltic states of Estonia, Latvia and Lithuania. However, the United States did not include a SWIFT ban in the list of new sanctions announced that day, and cited reluctance from EU countries as the reason why.
Not surprisingly, SWIFT has become a subject of interest and debate, with some arguing that the harshest penalties need to be imposed immediately and others worrying that losing SWIFT access might cause too much harm to Russian civilians, international businesses and countries that use Russian exports. Then there are those claiming that the impact of a SWIFT ban has been hyped up too much and there are plenty of ways around it.
To better understand what's at stake here, let's take a step back and talk about exactly what SWIFT is and how it works.
Based in Belgium, SWIFT is an international cooperative that serves as a messaging network for financial institutions. SWIFT allows banks located in different countries to transfer money and engage in other transactions. It was launched in 1977 as a successor to the older, less accurate Telex system, and it has a reputation for speed, accuracy, and security that has kept it as the dominant service for international money transfers up to the present day, despite competition from new technologies like the blockchain.
Though primarily used to send money, SWIFT can also be used for security, treasury, trade, and system transactions. They also offer add-on services like business intelligence dashboards, cloud-based tools for payment tracking, and report generation for regulatory compliance (such as Know Your Customer laws—or sanctions).
When the average person wants to send money overseas, they think of a service like Western Union—SWIFT isn't really a consumer-facing service. They do, however, make the underlying transactions possible in a lot of cases. SWIFT's customers are banks, clearing houses, treasuries, brokers, and currency exchanges.
SWIFT starts by assigning unique eight- to 11-digit codes to bank branches. The codes are designed to be legible, with the first four characters identifying the institution, the next two the country, then two more for the city or other specific location, and three optional characters at the end that the bank can use for internal identification purposes.
When two banks need to communicate with each other, SWIFT can create a shared "yours and ours" account on their network that provides a secure, trusted space in which they can negotiate transactions. For banks that haven't yet established a relationship and created a shared account, SWIFT can route messages through connected intermediary banks—their mutuals, as you'd say on Instagram.
Once the recipient receives their funds, they can decide whether or not they want their bank to convert the currency.
As a neutral, jointly-owned organization with a robust infrastructure underlying it—SWIFT has submarine cables connecting its data centers in the United States and Europe—SWIFT effectively makes the thorny problem of international money transfers a solved problem. While there are alternatives, they would all be more costly and less convenient in the aggregate and would cause a slowdown in commerce and trade.
Because of its policy of neutrality, SWIFT resists calls for sanctions, but they can be legally compelled to enact them by the EU. Iranian banks were removed from SWIFT in 2012 as a sanction against the country's nuclear program enforced by EU law. Most of them were allowed to reconnect after four years or so, although there was another, limited round of removals in 2018.
While losing SWIFT access could put a costly drag on any economy that relies on cross-border trade, it is true that sanctioning the banks themselves can be just as effective, if not more so, in bringing financial activity to a grinding halt—with the added benefit that it can be applied selectively to more problematic or strategically important banks. That's the route the EU took initially, leaving the more severe option of cutting off the entire country as a way to potentially escalate sanctions in the future.
The banning of Russian banks from SWIFT should have only tertiary effects on the majority of merchants. The merchants most impacted would be those who deal directly with Russian banks or businesses. There are ways to make international payments without SWIFT for the determined, but they require a certain level of time and effort to arrange.
It seems possible, in theory, that chargebacks could result from clearing houses and other institutions getting cut off from SWIFT before transactions can be fully settled. Merchants who find themselves in a situation like this aren't likely to get their money back, but they should document everything and consult with their acquirer or chargeback management firm if they have one.
SWIFT serves a vital role in the international payments ecosystem, and to bar any country from participating in it is a serious action. SWIFT is also not the only game in town when it comes to facilitating messaging between international banks or simply exchanging funds. The move to ban a number of Russian banks from SWIFT will have a severe impact on the Russian economy and on the companies that use those banks, as well as significant consequences for any merchant who does business with those companies. Any merchant that buys Russian exports or has partnerships with Russian companies could be affected. 
Srii Srinivasan is the CEO of Chargeback Gurus, a company she co-founded in 2014 that has grown to become a global leader in chargeback management services. Srii holds a Bachelor's degree in computer science engineering from Annamalai University and is an active member of the Electronic Transactions Association.
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