Significant change is underway as the finance industry prepares to transition from traditional cross-border payments messaging structures to the ISO 20022 format.
Existing infrastructures—using SWIFT MT (message type) messages (a service established more than four decades ago) and their proprietary equivalents used by some clearing systems—are no longer suitable for supporting modern payment needs. Indeed, with technology innovation and globalisation occurring at a phenomenal rate in recent years, end-to-end speed and transparency in international payments is the order of the day. Ensuring client expectations can be realised, therefore, requires an overhaul of current messaging capabilities.
The introduction of ISO 20022 will create a messaging ecosystem that can facilitate an efficient, value-added payments experience for clients. Messages will be robust and data-rich, delivering the depth and structure of information that is required to allow banks to optimise cross-border payments. Having such quality, comprehensive data at the initiation stage of a payment will be transformational, resulting in fewer false positives (thereby enabling more focused, effective risk management), as well as facilitating payment pre-validation—both of which will ultimately help to drive 100-percent straight-through processing (STP) rates and reduce manual intervention and cost.
For beneficiaries, the data will help them carry out automatic reconciliation, which in turn could benefit their cash flow, counterparty risk management and potentially enable them to improve the transaction experience for their own underlying customers.
ISO 20022 is set to bring unquestionable benefits. But getting ready for the new standard will require substantial efforts and resources from banks. In fact, with multiple systems and business lines potentially impacted due to the broad reach of payments, the undertaking is equal to nothing else the payments space has ever seen. That is why it is crucial that banks be fully apprised of the impending developments, understand what is required and have effective strategies in place.
The ISO 20022 migration will occur in phases over the next five years. By 2025, 80 percent of global high-value payment volumes will use ISO 20022. The first to switch will be the euro clearing systems, including TARGET2 and EBA Clearing, with a deadline of November 2021. Meanwhile, SWIFT has recently updated its timeline, announcing that it will delay enabling its ISO 20022 messaging—effectively for universal use—by one year to November 2022. Elsewhere, many jurisdictions have yet to confirm precise deadlines. It is expected, for example, that the Bank of England (BoE) will set a timeline of early 2022, while in the United States, the Federal Reserve Bank just recently announced that due to the COVID-19 situation a revised timeline for Fedwire will likely not be published before the end of the year. While it had been anticipated that the revised timeline would not deviate materially from the initial proposed deadline of late 2023, the situation remains unclear.
Importantly, every individual bank should be mindful of each deadline and development—not just that of its own jurisdiction—as each separate rollout could have implications and present challenges for banks across the globe. This is due to the consequences of coexistence, when both legacy and ISO 20022 messages will be in use. As a result, payments could be originated according to the new ISO standard by a fully ISO 20022-ready bank but then have to be cleared through a market infrastructure that has not yet migrated. And as ISO messages—also known as MX (XML-based) messages—contain significantly more data than MT messages, this creates scenarios in which intermediary banks could be receiving information that they aren’t then able to pass along the payments chain via the MT format.
From November 2021, when coexistence begins, banks connected to EUR-clearing systems are facing a potential truncation risk if they receive payments in ISO format through TARGET2 or EBA-Clearing but cannot forward all data on the SWIFT network. SWIFT announced that it will publish market practice guidelines to address this challenge in June 2020. Non-European banks that make or receive payments in EUR will need to stay abreast of the changes and understand changes that their Nostro providers may have to make to adjust.
Complications could then increase further in November 2022—potentially affecting all currencies—when SWIFT begins to support network-wide use of ISO 20022 formats. This will be dependent on the strategies of banks operating in markets that have already adopted ISO 20022, such as those in Europe. As many banks use a single platform for all high-value payments, irrespective of currency, come the November 2022 deadline, some may decide to migrate all currencies at once. This would mitigate the complexity of operating across multiple standards and having to adopt a staggered approach, currency-by-currency, according to when each individual jurisdiction migrates.
SWIFT is also currently reassessing the tools and strategies it can deploy to support member banks during the coexistence phase. In March of this year SWIFT announced that it is redesigning how it operates payment messaging in order to provide an environment that is more suitable to banks migrating at different speeds. The timeline for the new infrastructure aligns with the new ISO 20022 timeline—November 2022. All banks—whether an intermediary bank or a beneficiary bank—will need to carefully assess how to deal with the additional data they receive and how they might rely on SWIFT’s new infrastructure strategy. Some information may need to be sent on to clients; some may need to be fed into sanctions and transaction monitoring systems as part of regulatory requirements. It may, therefore, be prudent for banks to reach out to their local regulators for direction as to what is expected of them.
Preparing systems for change
A primary element of any bank’s ISO 20022 strategy will be getting their systems ready and ensuring their platforms can cope with the new standard’s larger sets of data, with respect to capacity, storage and performance. Many banks are already leveraging new technology and digitising their platforms, so they may already have the capabilities in place to accommodate large sets of data and support ISO 20022-based data models.
For banks that still predominantly use legacy systems, the move to ISO 20022 will be more of a challenge. Such banks can take one of two routes: either update their existing legacy platforms to incorporate the data or build separate external systems from which to integrate and link the data. The approach that individual banks adopt will be influenced by how integrated they are in the ecosystem, how old their legacy systems are and the level of risk associated with touching those systems.
Essential to note is that banks will need to analyse their data models across the payment lifecycle, as any system that touches the flow of payment processing and settlement—including messaging, accounts data, sanctions screening, accounting entries, settlement reports, statements and reporting, billing and inquiries—will potentially be affected.
What’s more, given that businesses within large financial institutions are often intertwined, ISO 20022 will also force other functions, such as securities and markets, to revisit their processing architecture. Banks will, therefore, need to carefully consider all of the business components that could be touched by the ISO 20022 changes and plan accordingly.
Given that ISO 20022 will affect the core of major payments ecosystems and that it will be rolled out in phases, it is very important that testing is carried out by banks well in advance to ensure that the coexistence of existing and ISO 20022 implementations can occur without impacting clients. Automation of testing is going to be crucial, given the timeframes in which organisations will be required to make their ecosystems compliant.
Tools to help banks in this respect, and more widely on the migration, are being made available by SWIFT, such as the Readiness Portal and MyStandards tool.
Plugging data gaps
Comprehensive, high-quality data is the essence of ISO 20022. It is, therefore, paramount that the right information is included in a transaction to enable pre-validation, streamlined end-to-end payment processing and the benefits of ISO 20022 to be truly harnessed.
Banks will need to prepare for this in two ways. Firstly, they should assess their own records to determine if their customer static data has the level of granularity needed—in the required format and from the correct source—in order to be able to pass on details in a structured manner via outbound messages. Every bank currently has client information files, and how easy it will be to extract client data and put it into an MX message will depend on legacy architecture design.
Banks also need to consider the quality of the information that their clients have. With MX message fields being far more explicit than those of MT messages, more detailed information may need to be collected or clarity obtained regarding certain points, as omitting information or inputting data in the wrong format could affect the payment.
For instance, while inputting an address may seem to be a straightforward task, complexities may arise. Whereas MT messages have a broad field for address details—any text, in any order, can be inserted—MX messages specify each component. This degree of granularity could create challenges if the precise format of an address is unknown or incorrect. For example, a building name could be incorrectly interpreted and input as a street, especially in instances where less familiar languages and characters are present.
Both banks and clients will need to ensure that they have the level of information required, in that format, in their own systems. This will mean transferring existing, likely somewhat unstructured, data into a structured ISO 20022 format. In the case of client data, banks should evaluate how they can support their clients to ensure that they are ISO 20022 ready, including creating tools to help them make these changes and allow the transition to be as seamless as possible. Here, artificial intelligence (AI) could be of particular value as it can learn patterns within sets of data and generate effective automated results.
There are multiple factors to consider when becoming ISO 20022 ready, and the task—requiring attention, in-depth evaluation and action from banks throughout the migration process—should not be underestimated. Although ISO 20022 is a daunting prospect, it is important to remember that it brings opportunities, creating comprehensive data sets that will allow for greater efficiencies, standard practices, rich data analytics and ultimately greater customisation when it comes to the client experience. The journey to ISO 20022 has begun, and with such a vast task ahead, it is vital that each individual bank fully leverages the changes to deliver added value to clients.