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The Language of Foreign Exchange

Stephen Kuhl
Director of Client Management, FX International Payments
American Express®

The terminology and acronyms used in foreign exchange can be confusing from SWIFT to IBAN and BIC to SEPA. Here is some of the language that can help you understand the activity and life cycle of international transactions.

Connecting the international banking community from a communicational perspective is the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. SWIFT is a secure messaging network that provides a standardized code for financial institutions and member participants to share information regarding international transactions, trade finance and other related global banking activities.

SWIFT was established in the early 1970’s in Brussels by a consortium of approximately 200 banks across 15 countries. Today, SWIFT encompasses over 9,000 financial institutions, spanning more than 200 countries.

One common misunderstanding regarding SWIFT relates to the actual movement of funds around the world. SWIFT, contrary to common belief is not responsible for the actual transfer of money, but is more focused on the message. SWIFT communicates the transaction instructions to the various banks involved. The term “correspondent” is often used to denote the affiliated overseas bank in this process.

Participating institutions within the SWIFT network receive a unique BIC number, or Bank Identifier Code. This SWIFT-BIC is comprised of 8 or 11 alphanumeric characters, including:

  • Initial 4 letters indicating institution or bank
  • 2 letters identifying the relevant country (i.e. CA for Canada, US for the United State or DE for Germany)
  • 2 letters specifying the location
  • An optional 3 letters or numbers indicating primary branch

SWIFT mandates a structured and uniform approach for payment instructions, so participants can be confident in the processing of international wire transfers. In addition, as millions of messages flow through SWIFT on a daily basis, process efficiencies and economies of scale are realized.

A more contemporary development in the area of global bank account identification is the International Bank Account Number, more commonly referred to as IBAN. Originally, the IBAN was earmarked for cross border payment use in the European Union but over the course of the past decade, it’s been adopted by a majority of European and Middle Eastern countries.

IBAN formats vary across countries, but are generally between 16 and 30 characters in length. Common to all IBANs, irrespective of the country, is account number and bank code. In addition, the ability to validate the accuracy of the IBAN is based on an established algorithm that is used by all participating institutions.

With the advent of the Euro as a common currency, a Pan-European initiative was introduced to create Single Euro Payments Area, or SEPA. SEPA was created with a directive to improve the efficiency of cross border payments, standardize pricing and increase the uniformity of the disparate clearing infrastructures across 32 adopting countries.

SEPA’s principal objectives are to:

  • Provide uniformity with Euro payments, including clearing cycles
  • Decrease costs associated of Euro transactions by ensuring adequate completion, electronic transfer and standardization
  • Enhanced money laundering and illicit activity capabilities

International payments are frequently initiated in the foreign currency of the destination country. The respective currency is delineated based on a three letter symbol referred to as an ISO code, or International Standards Organization. Common currency ISO symbols include:

  • USD U.S. Dollar
  • CAD Canadian Dollar
  • MXN Mexican Peso
  • JPY Japanese Yen
  • EUR Euro
  • GPB British Pound

Upon first glance, the terminology associated with foreign exchange as a whole can appear confusing.
Understanding the ABC’s outlined above provides a foundation for deciphering and navigating your way through the international payments arena and joining the conversation.

Stephen Kuhl, CFA
Steve is the Director of Client Management and Foreign Exchange Trading for American Express FX International Payments. He has 20 years of senior management experience in foreign exchange and capital markets. He has served as an adjunct faculty member of Creighton University in the area of international finance.