What is ISO 20022?
The payments industry is continually evolving, with change driven by various evolutionary business initiatives such as Open Banking, Real-Time Gross Settlement (RTGS) system renewal and Instant Payments. In addition, a number of revolutionary ideas have recently hit the financial services industry, including digital and cryptocurrencies, as well as distributed ledger technology and blockchain. All of these developments are affecting banks and market infrastructures, and adapting to them and absorbing their impacts requires resources and investments.
A number of these developments do not sound particularly exciting. Neither, in many cases, do they appear at first sight to involve any real improvement or substantial change to the previous state. One change that many people might include in this low-impact category is the migration to a new payment message format.
However, such an assessment would be wide of the mark. The reality is that the move to ISO 20022 by all major RTGS and high-value payments systems (HVPS) globally is one of the most far-reaching and widely underestimated initiatives currently underway in the financial services industry. As an international standard for all financial communication and data exchange between financial institutions, ISO 20022 has matured since the early days of the Single Euro Payments Area to become the dominant message format for real-time payments. And it’s now spreading into RTGS systems, securities and trade finance as well. As a result, it’s a migration that will have a profound effect on banks, corporates—and in fact, anyone—with a stake in the payments business.
Moving to ISO 20022 is definitely worth the effort—and banks should use this watershed moment in the industry to ensure they make the right turns.
Originally developed by the International Organization for Standardization (ISO) Technical Committee 68 (TC68) for financial services, and maintained internationally under ISO governance, ISO 20022 is now universally recognized as the “global, common language of financial communications” of the future. Following the announcements made in 2018 by a number of system operators, the proposed migration of all HVPS over next few years marks the biggest move to date towards this objective. And it will not take another decade to come about: SWIFT estimates that by 2023, 80 percent of high-value payments by volume and 90 percent by value will already have migrated to ISO 20022.
ISO 20022: The path to a common worldwide standard
Why is the switch over to ISO 20022 so significant? The main reason is that the ISO 20022 payments message, as defined since the early 2000s, carries much richer information than the SWIFT MT messages and other legacy formats commonly in use today. Also, the information in an ISO 20022 message can be grouped together based on common data components from different payments methods and can be further reused, resulting in increased interoperability. This attribute of ISO 20022 relates not only to interoperable routing of domestic and cross-border payments, but also across different types such as ACH, real-time and high-value payments.
What’s more, ISO 20022-based transactions provide additional functionalities, follow XML-based approaches, support non-Latin alphabets and offer improved remittance. As a result, the standard brings users the ability to harmonize formats that did not previously allow for cross-operation, thereby improving efficiency while also reducing costs and exposure to risk. Banks can now even leverage ISO 20022 and APIs as the standard for data exchange in payments within the applicable regulatory and compliance requirements.
In combination, all of this means that the key benefits of migrating to ISO 20022 include improved data quality and enhanced STP and reconciliation, as well as higher automation and reduced costs—together with a greater ability to develop value-added services, better operational resilience, and effective fraud detection and prevention measures.
Adoption of ISO 20022 as “the global language for financial messaging”
In search of these benefits, a number of HVPS across the world have already migrated to ISO—including those in Japan, Switzerland and China—and several other countries are now on track to adopt ISO 20022 messaging over the next five years. In the Eurozone, Eurosystem’s HVPS, TARGET2, will switch to ISO 20022 in a “big bang” migration in November 2021, in alignment with the private sector EURO1 system. In the UK, payments schemes such as Faster Payments and BACS (as part of the New Payments Architecture), and the renewed RTGS system are set to adopt the common ISO 20022 format, ensuring data interoperability across interbank payment systems. The UK’s Open Banking initiative also specifies ISO 20022-derived API specifications to ensure consistency of payments data across the value chain. Similarly, in the US, the Federal Reserve and The Clearing House are planning to roll out ISO 20022 for high-value transactions starting in Q1 2022 for their respective HVPS, Fedwire and CHIPS. Australia is still at a relatively early stage, with the Reserve Bank of Australia and the Australian Payments Council currently awaiting the results from a consultation paper seeking stakeholders’ views on the migration of payments messaging standards. They aim to complete the migration by the end of 2024 to be in sync with global adoption.
Apart from individual payments systems, SWIFT has announced yet another comprehensive migration with a multi-dimensional, multi-year roadmap: all cross-border payment messages (MT1XX, MT2XX and MT9XX) will migrate to SWIFT’s version of ISO 20022, MX, during a transition phase over the next four to five years. SWIFT’s ultimate goal is to fully migrate all payments and reporting traffic to ISO 20022, allowing the community to use the same standard for all payments flows in alignment with various MI programs. This move will require SWIFT participants to support MX messages—at least on the receiving side—from November 2021 onward. In terms of industry engagement, SWIFT has convened the first Cross-Border Payments and Reporting Plus (CBPR+) group—a working group of international payments experts that will formulate guidelines for the harmonized rollout and implementation of ISO 20022 for cross-border payments beginning in November 2021, with a four-year period of coexistence and final switchover by the end of 2025.
How to speed up learning a new language?
All of the benefits outlined come with a price tag: Communication channels for financial messages contain format validation at several steps along the chain, and therefore for all processing applications on the sending and receiving side, each and every character has to be correct and aligned with the specifications. It follows that getting the migration to ISO 20022 right means 100 percent alignment with the implementation guidelines—and here the devil literally lies in the detail. A single colon missing, one service code misspelled, and a 200 million-dollar funds transfer request could be rejected and executed too late or only on the next day. Also, in some cases the go-live happens between one business day and the next, creating a “big bang” migration for hundreds of banks and other stakeholders, including corporates, at exactly the same time.
In combination, these factors mean that the high number, diversity and complexity of the ISO 20022 migration programs listed above present major challenges for financial institutions around the globe—and particularly for those connected to several domestic and cross-border payment schemes. Updating the key banking infrastructure environment to handle the new format may require a multi-year replacement of legacy systems, since these are often not suited to be upgraded based on old technology. In many cases the full scope of changes required will only become apparent after a thorough gap analysis, meaning a deeper understanding of the ISO 20022 specifications is needed.
- So, an initial priority for banks should be to take a long term view, invest strategically in a thorough analysis now to screen their core payments processing capabilities and work with their payments software providers (where applicable) to kick-start their migration journey early.
- As a second step, banks should ensure they truly understand the benefits of ISO 20022, and capitalize on them by developing streamlined processes, new products and enhanced services for their customers. The new format provides the benefits of managing nostro reconciliation, exception handling, billing reporting and anti-money laundering (AML) checks with higher efficiency. However, to realize these opportunities, banks will need to further adapt and improve their wider infrastructure and make significant investments in processes to handle the large volumes of rich ISO 20022 payments data at a faster rate.
- A third priority for banks’ ISO 20022 migration efforts results from the need for many of their corporate clients to be educated, managed, monitored and included in end-to-end testing. A motivating factor here may lie in the opportunities for corporates to benefit from ISO20022 as well, through improvements including standardization of their payments, cash and treasury operations across multiple business units globally, lower information technology and maintenance costs, improved reconciliation, increased STP and smoother cash transfer worldwide.
To realize all these benefits, the multi-year ISO 20022 change program will need to be backed by solid support from top management, along with active participation from the operational and technology departments and project teams. To see it as “just another IT project” is to dramatically underestimate the key components and overall importance of the migration.
Preparing for the future of payments with ISO 20022
Today, we can say with certainty that ISO 20022 has been identified as the common international language for financial messaging in the future. In many jurisdictions, implementing ISO 20022 as an almost regulatory change will force the industry to comply with a strict timeline and help generate the reach and ubiquity needed to achieve all the potential benefits of standardization. Conversely, implementing the standard without leveraging the full benefits would be costly and make it virtually impossible to establish a robust business case.
Realizing the benefits in full will require the banking industry to dedicate time and resources over a sustained period—and combine this investment with a parallel upgrade of knowledge and expertise in areas ranging from the business strategy for the ISO 20022 migration to infrastructure design—and beyond this, to field-level understanding of payments messages.
So, in summary, the migration to ISO 20022—involving a degree of complexity and challenge far beyond any technological transformation—will ultimately offer banks the opportunity to re-evaluate their business models and market positioning, as well as finally get their infrastructures ready for the digital future of payments. As all these benefits underline significant undertaking, however moving to ISO 20022 is a watershed moment for the payments industry and well worth the effort.