China is pushing through with plans to abandon the international SWIFT (Society for Worldwide Interbank Financial Telecommunications) financial transfer system to migrate to an the alternative system currently being developed by Russia.
Founded in 1973, SWIFT is a popular global messaging network used by banks and financial institutions to quickly, accurately, and securely send and receive money transfer instructions and other data. Nearly 10,000 SWIFT member institutions send 24 million messages over the network daily.
China said it still plans to connect its financial system called CIPS (Cross-Border Interbank Payment System) to the Russian system, whose Russian initials when translated into English is SPFS. The literal English translation of the Russian name for the system is System for Transfer of Financial Message.
SPFS, which is the Russian equivalent of the SWIFT, was developed by the Central Bank of Russia in 2014. It was created after the United States threatened to disconnect Russia from the SWIFT system in the wake of Russia's invasion and annexation of Crimea.
The first transaction on the SPFS network involving a non-bank enterprise was executed in December 2017. The Central Bank of Russia said it had only 392 clients for its SPFS system as of Nov. 1, which is way below SWIFT's total clients numbering 10,000.
SPFS was initially plagued by serious problems, especially higher transaction costs compared to SWIFT. In March 2015, however, the transaction fee was radically reduced. The system initially only worked within Russia, but plans were later developed to integrate the network with CIPS. The Russian government is also in talks to expand SPFS to third countries such as India, Turkey, and Iran.
Western financial experts see SPFS as a "last resort" rather than a replacement for SWIFT. SPFS now accounts now some 15% of all internal financial trafficking inside Russia despite having fewer than 400 clients.
India is now also looking to join the network. The country hasn't developed its own SWIFT-like system and is exploring options on how to connect to SPFS.
Cost-wise, SWIFT and SPFS have similar fee structures. SPFS, however, doesn't have an initial connection fee. SWIFT charges an initial fee typically amounting €15,000 to €20,000 ($16,500 to $22,000).
China's CIPS offers clearing and settlement services in cross-border RMB payments and trade. It doesn't facilitate funds transfer. Instead, it sends payment orders that must be settled by correspondent accounts its member institutions have with each other.
The People's Bank of China (PBOC) said CIPS is intended to be used to support cross-border goods and services trade settlement, direct investment, and financing and individual fund transfers. It described CIPS as a "payment superhighway." China still wants global integration for the yuan or renminbi. A key part of this goal is encouragingthe use of the renminbi by more financial and non-financial institutions. Streamlining clearing and settlement supports this aim.
