Home Banking Europe’s Payment System’s Big Bang: Inside the ISO 20022 Migration

Europe’s Payment System’s Big Bang: Inside the ISO 20022 Migration

by internationalbanker

By Ingrid Weißkopf, Head of FI Cash Advisory, and Dr. Roland Nehl, Programme Manager, Commerzbank





Rolling out a new common language for global payment data is no small feat. However, the transition is gathering momentum, with one domestic payment system after another converting to ISO 20022 (a standard for financial-information interchange between financial institutions developed by ISO, the International Organization for Standardization) over the past two years, including in countries such as Singapore. This year, it was Europe’s turn, with all three of its payment systems—Eurosystem’s TARGET2, EBA Clearing’s EURO1 and Swift’s (or SWIFT’s, Society for Worldwide Interbank Financial Telecommunication’s) CBPR+ (cross-border payments and reporting plus)—opting to migrate in March in what the industry termed a “big bang” approach.

Nearing migration

Before March 2023, conscious of the task’s stakes and scale, financial institutions (FIs) across the region dedicated significant time, resources and efforts to perfect the migration and minimise disruptions to client payments.

Trial exercises provided valuable data showing that banks were largely aligned on their interpretations of the new standards while flagging any discrepancies or further issues. As the migration date approached, penny tests grew in volume, from just a few payments to hundreds of daily transactions. Commerzbank, for example, made extensive use of the voluntary penny-testing facility made available by Swift—not only performing the first transaction of this kind but also achieving the highest volume of penny testing of any bank.

But the often-difficult task of sourcing partner banks for penny tests revealed that in the runup to the migration, much of the market was still not ready—with many FIs scheduled to complete their ISO 20022 preparations at the 11th hour. Certainly, it was a close call for some banks, not least because the migration had overhauled legacy structures, requiring changes to existing processes.

During the weekend leading up to migration day, many banks ensured hundreds of personnel were on site or on call, ready to coordinate to deal with any unforeseen issues. From processing to completion, each payment-processing checkpoint was scrutinized, with teams on hand to intervene manually if a message stalled or was rejected by a clearing system. In a remarkable show of cooperation, banks reached out to each other across correspondent networks to establish emergency-communication lines.

The moment of truth

The big day arrived on Monday, March 20, 2023, when TARGET2 replaced TARGET as Europe’s real-time gross settlement (RTGS) system. As planned under the “big bang” approach, liquidity transferred from the old system to the new in a single day. By Monday, every major bank in the eurozone could effectively process payments—enabling their corporate clients to go about their business as usual. At the same time, Swift also launched its new messaging standard, ushering in a coexistence phase between the new MX messages and the older MT (message text) format.

With about 10,000 FIs relying on the Swift network, and given the scale of the migration, some challenges were, however, inevitable. Small pain points did emerge—the TARGET2 and Swift standards adopted in March were not completely compatible, and some transactions consequently halted between correspondent banks. This did not affect a large number of payments, and the standards only diverged in five or six places. Across our correspondent network, we observed that banks had laid strong foundations, enabling them to resolve problems quickly.

Indeed, efforts are underway to improve compatibility and implement checks to ensure both systems can handle transactions. Achieving this, however, will take time. In the meantime, payments may be outright rejected for failing to meet the right requirements. Banks are on hand to assist in these cases, massaging these payments through the system to complete the transactions if possible due to compliance rules and regulations.

Another operational hurdle emerged when the new TARGET2 system apparently did not incorporate all necessary Bank Identifier Codes (BICs). Around 400 were soon added so that all parties in the eurozone could be reached. Swift’s Relationship Management Application (RMA), associated with audit and access rights in connection with other banks, also presented a few issues, but they were expected and well accounted for. Once resolved, we saw more or less regular payment flows within the Swift ecosystem.

Ultimately, the new systems need time to develop the resilience developed by Swift’s MT standard over decades of use. Therefore, it is understandable—expected, even—that the standards and their interpretations have yet to be fully reconciled.

ISO underway: Banks must help guide corporates into this new data-rich ecosystem

Despite these relatively minor hiccups, by Tuesday, it was certain: The ISO 20022 migration was a clear success. After several well-publicised delays, the process was completed.

Or was it? While the March migration was successful, it was only one stage of a larger journey. The process of incorporating ISO 20022 on a wider scale and realising its various benefits has only just begun.

The central promise of ISO 20022 is to deliver connectivity, efficiency and added functionality for users—both FIs and corporates. But the full capabilities of the new messaging system will only be realised when more banks make use of its rich data. We expect FIs to begin experimenting with more use cases as more market infrastructures complete their transitions to the new standard.

So far, the migration has left corporates largely untouched because the initial processes have been concentrated among banks. Indeed, corporates are certainly not obliged to migrate immediately and can continue using MT messages until 2025 under Swift’s coexistence phase. At this stage, as standards evolve and inter-bank processes are being ironed out, there’s a clear case for corporates to wait until later in the coexistence phase—and, therefore, undertake the efforts to update their internal systems only once. As the migration period progresses and the standard matures, market players will optimise their processes, and we will see an increasing number of corporates embracing the benefits. FIs must work closely with their clients to help them assess potential applications of rich payment data. Banks’ expertise and global reach can help corporate clients identify the nuggets of information that demonstrate the value of incorporating rich data.

These new data-driven capabilities will not necessarily be useful for all corporates; the increased complexities and associated costs could instead constitute a hurdle. Independent of their specific industry, the corporates with the greatest potential to benefit are those with large volumes of cross-border transactions, significant cash pools and complex reconciliation processes, which rich data can help streamline.

Looking ahead

What’s next for ISO 20022? Despite the number of systems that have now migrated, not 100 percent of Swift’s total payment volume currently uses the new messaging standard. There is, therefore, a long way to go to full adoption.

The United States, for instance, has yet to start the transition. The US migration process is somewhat complicated because market infrastructures have adopted different timelines. The Clearing House Payments Company plans to migrate its CHIPS (Clearing House Interbank Payments System) infrastructure in April 2024, while the Federal Reserve (the Fed) has delayed its planned migration to March 2025.

So far, the migration has followed a “like for like” approach intended to limit overall disruption. Moving forward, banks could accelerate adoption by promoting it to clients, and corporates could create further momentum by embracing its functionalities more wholeheartedly.

Alternatively, and more likely, regulators and standardisation bodies may set the pace of new initiatives, perhaps by requiring greater transparency regarding payments. This could take the form of either international or local compliance standards.

In 2025, the coexistence phase will close with the discontinuation of MT messages. Ahead of this key deadline, work is underway among industry bodies to ensure that the new specifications are fully compatible and interoperable. Global migration to the new messaging standards is an ongoing journey, and its steps will be accomplished over years rather than days. The combined events of March 2023 can, however, be regarded as a crucial and successful step.


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