Banks and financial institutions globally are set to transition their payment systems from using SWIFT messages to the new, highly structured and data-rich ISO 20022 standard. By 2025 it will be the universal standard for high, or large-value payments systems of all reserve currencies, and will support 80% of transaction volumes - and 87% of transaction value globally. In Europe, SWIFT and the European Central Bank have announced ISO 20022 go-live dates of November 2022 for the standard.
So, what is ISO 20022 exactly?
ISO 20022, first introduced in 2004, is an international standard for relaying electronic messages between financial institutions. It was created to give the financial industry a common platform for sending payments messages and exchanging payments data, using a central dictionary, a standard modelling methodology, and a series of Extensible Markup Language (XML) and Abstract Syntax Notation (ASN.1 ) protocols.
Why standardization is important
Standards are a critical factor when initiating financial transactions and reporting financial activity. An international standard is a way to simplify interoperability between service providers and clients, and enable the efficient, consistent and secure exchange of files.
Traditionally, large global financial institutions have had tendencies to develop, approve and implement standards without seeking input from other organizations. This has resulted in inconsistency, and a lack of customization, leaving overwhelmed IT departments with the task of handling onboarding, testing and managing ongoing partner relationships.
ISO 20022 was designed to remedy this, as a flexible framework providing an internationally agreed business message syntax, where user organizations and developers will use the same message structure, form and meaning to exchange transaction information globally.
What are the benefits of ISO 20022?
Global adoption of ISO 20022 will create a common language and model for payments data. It will provide higher quality data which translates to better quality and faster payments for everyone involved in the payments chain. The implementation of ISO 20022 will create an open standard that can adapt to changing needs and new approaches within the payments industry. As it will not be controlled by a single interest, it can be used by anyone in the industry of financial services and implemented on any network.
Key benefits include:
- Richer, more granular data end-to-end across payments systems.
- More transparency with more remittance information which leads to better customer experience.
- Improved analytics, requiring less manual intervention, resulting in a more accurate compliance process, improved security and fraud prevention and higher resilience.
- Through automation, it will encompass all business domains and end-to-end business processes encouraging the creation of new services and faster straight-through processing.
- Using modern, mainstream XML technology ISO 20022 will reach every market infrastructure and payments system to pave the way for more efficient integration.
- Increased flexibility and better data means more competition in the financial sector, potentially leading to product innovation.
- ISO 20022 based transaction systems allow more efficient referencing and support for non-Latin alphabets.
Source: Bank of England
What will be the impact of the global adoption of ISO 20022?
By late 2022, banks and financial institutions globally will migrate from legacy SWIFT MT financial messaging system to the highly structured and data-rich ISO 20022 standard.
It's expected that this worldwide adoption will have a profound impact on financial institutions, corporations, and any business with a stake in financial services and the high value payments industry.
Over 70 countries have already adopted ISO 20022 in their payment systems including Switzerland, China, India and Japan. And with over 200 payment types in scope, ISO 20022 allows the harmonization of formats and data components from different payment methods that could not previously work together.
ISO 20022 will apply to domestic, ACH, real time, high value and cross border payments.
How will businesses cope with the challenges of a changing payments world?
What banks need to do
- An initial priority for banks will be to conduct a thorough analysis of their payments infrastructure and assess their payments processing capabilities. Kick-starting their migration early will ensure a smooth transition.
- ISO 20022 involves the processing of much larger data volumes compared to conventional legacy formats. Bank systems and databases will need to be capable of processing these larger volumes, and at higher speeds for real-time payments, daily liquidity management, compliance checks, and fraud detection and prevention.
- It's essential that there is enough of a time allowance for testing to ensure that all syntax and formatting information is correct, and that the data is mapped correctly within all associated payment and clearing systems. Ideally, testing should be ready too kick off no later than the second quarter of 2022.
- Legacy payments infrastructures were designed to store information in an unstructured way - for example, customer address information. Going forward, all parts of an address will need to be stored in separate fields.
- It's vital that banks communicate with their corporate clients about the additional data that will potentially become available, and how it will be used. In addition, those clients should be fully informed and included in end-to-end testing.
ISO 20022 and cross-border payments
As cross-border payments grow in both volume and complexity, the need for interoperability is increasing. Many geographic borders have all but disappeared, and markets have regrouped according to industry rather than geographic lines, and financial markets are adapting to reflect these changes.
The ISO 20022 standard will change the way banks relay cross-border payments instructions. Some banks are already prepared, while others have a lesser degree of readiness. Cross-border payments involve a chain in the payments system where one bank sends a message to another, who in turn passes the message on to another. All banks need to be fully equipped to to receive, process and exchange the full ISO 20022 information from one party to the next. A break in the chain could mean the potential loss of vital information. The consequences of this are a direct reflection on the bank seen to be the weaker link.
ISO 20022 and High Value Payments (HVPs)
SWIFT, along with major global banks and market infrastructures have formed the HVPS+ (High Value Payments Plus) market practice task force. With the impending implementation of ISO 20022 standards, the task force has created a road map to harmonization for high-value payments. Although it will provide a common foundation, the requirements of high-value payments systems and providers are complex.
"Harmonizing messaging standards across High Value Payments Systems will create efficiencies for payment system participants and establish the foundation to develop new services.” Michael Knorr, Head of Payments & Liquidity Management, Financial Institutions Group, Wells Fargo Bank
HVP systems play a crucial role in international finance as the ultimate settlement mechanism for cross-border markets in multiple currencies. So it goes without saying that monitoring these large value payments systems with the right monitoring solution is critical.
Key challenges of ISO 20022 implementation
As with any system migration, plans need to balance meeting deadlines, with solidifying a future-proof state. The complexities of ISO 20022, along with interdependencies of implementing new industry standards can create some challenges.
- Any legacy technology used by payments providers that pre-date ISO 20022 will need to be reviewed, mapped and translated to the new standard. This includes the correct rules for AML, fraud and compliance checks. In addition, outdated legacy systems that can't process or support the ISO 20022 format need to be updated, replaced or converted. This of course, involves budget, which needs to be agreed upon between financial institutions, stakeholders and partners.
- Even though all new payments formats refer to the ISO 20022 standard, there are differences in specifications for different payment schemes (for example HVPS+ and CBPR+).
- ISO messages can be hundreds of times longer than standard payments messages. This dramatic expansion of data means that infrastructures will need to be redefined to manage the additional ISO 20022 information.
The importance of real-time payments analytics
A definitive report by Worldpay, on the art and science of global payments shows some interesting payment statistics and insights into world payment trends. Real-time payments analytics are vital to measure, view growth and make decisions all the way through the payments chain, and across each different platform. This is even more important now with the impending global ISO 20022 migration.
Third-party monitoring solutions
Monitoring with an outboard, or third-party solution is non-intrusive, and integrates seamlessly into the existing enterprise environment, bringing real-time visibility to the entire payments ecosystem. It collects data from all silos across the payments system, filters, correlates and analyzes this information and brings it into a single application.
Keeping on top of emerging technologies, regulatory changes and the introduction of new international payments standards is challenging. With ISO 20022 migration imminent, turning information into intelligence will assure the safe, efficient operation of payments systems worldwide.
Contact us to discover how IR's payment monitoring solution can help your business.