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1 Origins of the society
⢠Correspondent banking and expanding international trade
⢠Information communications and globalizing bank services
⢠Network projects and governance
⢠Achieving critical mass and global usage
⢠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.1 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 banksâ 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 SWIFTâs 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 SWIFTâs 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 âindustrializationâ 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
SWIFTâs early history is indivisible from the rising importance of correspondent banking, the term used when a financial institution acts as an agent for another â 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 Robertsonâs definition of globalization as âthe compression of the world and the intensification of consciousness of the world as a whole.â2 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. 1870â1914), capital movements were free and flows reached new highs. Despite measures taken to reconstruct international finance in the intervening years,3 the two world wars truncated financial services, firmly retrenching and bounding capital markets within the borders of nations.
Immediately post-World War II, international finance was restricted to national policy arenas in order to contain them within a controlled framework of social purpose.4 As Rawi Abdelal puts it: âAt that time members of the international financial community collectively shared a set of beliefs about the destabilizing consequences of short-term, speculative capital flows, or âhot money,â and the need for government autonomy from international financial markets.â5 Subsequently, keystone agreements were put in place to regulate international trade which was then further boosted in the 1950s by the emergence of London as the centre of the euro-dollar market and the development of business within the British Commonwealth. However, far from assuming that a process of globalization was afoot, it was generally assumed that each country would flourish but within its own version of capitalism.6
So what drove the expansion in international business with which SWIFT is associated? It has been argued that the quickening of international trade during this era was consumer-led, rather than policy-led. In other words, commercial organizations outgrew domestic markets and searched for opportunities to expand. It was further fuelled by the need to raise capital for major multinational projects that were emerging, such as the European Airbus which was founded in 1970 and whose production was contingent on raising an estimated $1 billion. This is indicative of the way in which finance internationalized on an ad-hoc basis during this period, without the proactive establishment of a global regulatory framework of multilateral rules.7
European banks were under greater pressure during this period than their North America competitors who benefited from a federal trade region and network arrangements that had improved the speed and accuracy of payments.8 In contrast, many commercial activities in Europe were necessarily both cross-border and, prior to the euro, cross-currency. European banks attempted to mitigate this through greater cooperation, forming âclubsâ9 such as the EBIC (European Banksâ International Company).10 This served as a stepping stone for banks, enabling them to engage in international business; by joining EBIC, a bank could become a shareholder in consortium banks established within the EBIC framework, thus avoiding the cost of setting up branches in overseas countries.11
Although there was notable concern in Europe about âthe challenge of American banking penetrationâ,12 internationalization put pressure on all the TNBs to act regardless of their shareholding or headquarters. The sector was compelled to innovate because within a relatively short timeframe the existing telex infrastructure would have been overwhelmed. This ultimately motivated banks to organize private initiatives to establish communication network projects.
Thus, we place the founding of SWIFT within what historian Geoffrey Jones has termed the âSecond Globalizationâ,13 a period that witnessed the restarting of internationalism after a period of profound disruption. During this period corporations would be called upon to answer distinctive pressures to converge: rationalizing processes, codifying professional practices, harmonizing rules, and clarifying governance. Organizations such as SWIFT played an important role in this by drawing together key knowledge resources and developing standards which simultaneously acted as carrier, flow, and source for best practice. In so doing, they drew back-office professionals together and stimulated new support industries.
In our conclusions, we will return to this discussion of globalization and consider how SWIFT is positioned in relation to current trends14 such as the resurgence of anxiety about cross-border movement activities; a renaissance in regulation; and the persistence of geopolitics. Next, we turn to a phenomenon widely recognized as being entangled with the past, present, and future of globalization: communications technology. If we are to understand the legacy of SWIFTâs original technological footprint and its achievement of global usage, we need to explore the on-going interdependency of information and communication technologies and international banking practices.
Information communications and globalizing bank services
Telecommunications in banking can be traced back to the late 1840s when the electrical telegraph was introduced to improve the speed of inter-market communications and reduced differences in securities prices between remote stock exchanges in the United States.15 The introduction of the first trans-Atlantic submarine cable in 1866 greatly facilitated the integration of securities trading between New York and London.16 Further advances in telegraphy and cable technology subsequently gave rise to domestic point-to-point networks17 capable of transmitting signals representing alphanumeric characters, thus enhancing communications between head offices and branches in internal bank networks. By the end of the century, international communications technology was thus in its âearly adoption periodâ18 as individual banks began to carry out international transactions with correspondent banks.
Once advances in message routing and switched-network technology were combined with the use of the typewriter keyboard, the foundations for the first teleprinter exchange â or telex â networks were laid. During the 1920s, Germany led the field in research and development, producing an operational teleprinter service in 1933. Automatic dial subscriber-to-subscriber services were first introduced in Germany before the Second World War using a switching system from Siemens and Halske. Soon after, the United Kingdom, France, the United States, and Canada followed.19 Serving as a privileged teleprinter network, the telex was initially based on the use of the existing telephone and telegraph networks that allowed speech and teleprinter signals on the same connection.20
Telex soon surpassed the telegram for business subscribers21 and by 1957 it connected 19 European and 18 Latin-American, African, and trans-Pacific countries with the United States and Canada, giving access to more than 30,000 se...
