Smarter & Better Payments – How do Financial Institutions Migrate to ISO 20022, Hit Deadlines & Create New Business Opportunity?
DANIEL BARDINI, Managing Director – Financial Messaging at Bottomline Technologies
What is ISO 20022 & how will it transform payments?
In 2004 it was decided that the previous format of SWIFT’s message type (MT) wasn’t going to be ‘fit for purpose’ for the evolving demands of ambitious payments innovation, and so a new standard was needed. When MT was first created, payment messages didn’t have to carry a large amount of high-quality, expensive data. Besides which, we didn’t have the technology to cope with it. Even in 2008, when the UK Faster Payments Service launched, it used card standards and minimal data.
Fast-forward ten years and the payment community has decided the ‘heir apparent’ for messaging is now ISO 20022. This globally accepted format improves the quality and structure of financial messages, provides rich data with each transaction, enabling everything from enhanced analytics to status tracking, sanction checking and automated invoice reconciliation – all while delivering an improved experience for end customers. The ISO 20022 standard for financial messaging also reduces fragmentation. It improves interoperability on critical services such as instant payments – domestic and cross-border, Open Banking, API platforms and other overlay services.
Additionally, data is interpreted, translated, truncated, enriched and corrected multiple times while remitting funds from debtors to creditors. The value of automated reconciliation alone has a strong use case: a joint Payments Canada and EY Report in 2018 estimated the current payments processing procedures give rise to operating costs to Canadian businesses ranging from $3 to $6.5 billion per year ($14 to $32 billion over a five year period). Supporting evidence is provided by SWIFT, who stated that 10% of international payments are held-up for compliance checks that are mainly false-positives or avoidable investigations. The ISO 20022 Extended Remittance Information (ERI) helps to address issues by having more granular detail in the structured fields of the transaction. For example, the option to exclude a misleading country reference in the name of a business such as “Bar Cuba” that was flagged mistakenly as an Anti-Money Laundering (AML) and sanction alert.
Why do you need to prioritise migration to ISO 20022?
The most straightforward answer is that either regulation dictates it as a necessity or you can’t afford to lose your competitive advantage even if your hand’s not forced. ISO 20022 has already been adopted in 70 countries to replace domestic or legacy formats including China, India and Japan. The systemically important payment systems, Euro1 (for high-value payments systems) and STEP2 (SEPA) are on track. Target 2 (real-time gross settlement owned by the Eurosystem) has testing milestones in place, and SWIFT will adopt the rulebook of the Cross-border Payments and Reporting Plus (CBPR+) working group. Therefore, the new date of November 2022 is an essential date for the diary (the Target 2/EBA Clearing hard migration date). The next four years until the 2025 end date of migration will see the start of the co-existence period for SWIFT and the migration of all the remaining major markets with most reserve currencies (Euro, USD, GBP) onboard. This shift will represent the ‘new norm’ for high-value payments supporting a predicted 80% of volume and 90% of the value of transactions by 2025.
Although in the US the formal request by the Payments Market Practice Group has led to the Federal Reserve delaying the original November 2020 date for phase 1 and 2023 for completion while they re-evaluate and research the possibility of a same-day implementation, these banks can’t afford to be left behind their global cousins. SWIFT has mandated that ANY financial institution that processes SWIFT messages must be able to receive and process ISO messages by the now-delayed date of the end of 2022 from the original November 2021 deadline. Bearing in mind SWIFT currently has 17 million payments messages exchanged every-day. With numbers set to increase dramatically and imminently, it would be churlish to ignore this scale and reach.
In short, banks in these regions without strict regulatory deadlines still need to contend with the global shift and impact on pure correspondent banking which carries vast amounts of fraud and compliance-sensitive information that has a pre-requisite to be detailed and accurate in its delivery. Therefore, if you don’t have ISO 20022, you are in trouble, as MT can’t support the level of information accurately. This inaccuracy results in banks experiencing significantly degraded service quality involving inefficient manual interventions, issues with straight-through processing (STP), and detrimental impacts on fraud and compliance throughout the entire payment cycle.
What are the pain points, and how can they be resolved?
Without being too simplistic, here are a few over-arching points below:
- Many banks have underestimated the complexity of the necessary changes of the migration as the transition isn’t just a simple upgrade of process. Existing infrastructure and legacy systems are not sophisticated enough to deal with the speed of integration and transition required. Additionally, as stated by SWIFT: “data richness isn’t the only thing that needs to addressed; data collection is a key requirement via e-banking, treasury portals, ERP Machine-to-Machine connections, mobile apps, teller systems, ATMs and paper forms.”
- Education and different levels of support globally cause issues. For instance, EBA Clearing is working in-hand with SWIFT to educate and offer guidance to banks. At the same time, the European Central Bank has expressed irritation that SWIFT didn’t allow for a proper consultation of how this might impact their migration to Eurosystem’s RTGS, TARGET2 originally planned for November 2021, now moved to November 2022. And are these shifting dates the reason for the inertia? Either way, the wide range of regulatory deadlines for ISO 20022 migration (most of Europe & Singapore 2021, UK & Canada 2022, US 2023, Australia 2024). These deadlines, together with institution size and disparate education, have ramifications for both speed-to-market and interoperability – what is described by industry experts as “breaking the chain”. Therefore, government bodies and regulators globally need to ‘step-up’ and steward all institutions to reach a fruitful migration.
- The strategic product roadmap for 2020 and 2021 is intense for financial institutions with ISO, Real-Time, SWIFT gpi / Universal Confirmations, PSD2, Digital Overlays, and yet more new data-related regulatory requirements. So how do institutions juggle investment and resources effectively with so many commitments?
What can organisations do now to plan their IS0 20022 migration and build towards true payments modernisation?
Start with working with a partner to evaluate how to approach the challenge and where the responsibilities should rest. They’d consider your institution’s unique challenges, and your strategic needs to ascertain how your post-project architecture should look.
On the whole, there is value in financial institutions considering a phased approach or ‘minimal functional requirements’ remit for the ISO 20022 adoption. This strategy has the agility for you to optimise in the immediate future – especially for banks participating in different payment market infrastructures and correspondent banking schemes. To manage the processes, the resources and the costs, it helps to break the changes into manageable pieces of work that will run either concurrently or in sequence. However, banks need to plan to upscale to a more strategic approach incorporating scope for the new product offerings that ISO 20022 offers. This strategic outlook enables banks to remain competitive and ‘future-proof’ – after all, you only need to migrate ISO once to cover various regulations and prepare for new product offerings like real-time and cross border processing.