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Unless they have been living under a rock for the last five years or so, every person remotely involved in global payments industry would have heard of the International Standards Organisation 20022 – (ISO 20022).
Alongside this Standard, innovative solutions such as payment pre-validation, real-time payments, or open banking to name a few, have emerged, prompting financial institutions to consider how they can thrive in this new technological era.
Banks, Industry coordinators, as well as SWIFT, are open to and wanting to innovate in the payment space. A blocker though, was the lack of standardisation.
ISO 20022 sets the ambitious goal of creating a ‘universal language’ by migrating from FIN (MT) messages to XML messages, which offers enhanced and consistent data exchange, presents an opportunity to revolutionise the industry and unlock numerous benefits.
Even without the impetus of the new global standard, the payment industry is undergoing a transformative revolution to meet evolving customer needs and address the perceived about the outdated and clunkiness nature of traditional global monetary transfer systems.
However, banks are missing “head space” as they face challenges due to constant regulatory pressures, competition from fintech companies as well as legacy systems that hinder cost-effective and efficient modifications.
To address these issues, standardisation is crucial.
The migration to the ISO 20022 standard, which offers enhanced and consistent data exchange, presents an opportunity to revolutionise the industry and unlock numerous benefits. Nonetheless, achieving critical mass adoption is essential to fully realise the potential of this new standard.
Drawing upon years of experience in the international payments industry - along with discussions with major commercial banks, regulators, industry stakeholders, and vendors - this article provides insights into the ISO 20022 migration journey, its implications for banks and corporates, and why institutions should view it as more than just another IT transformation or compliance project.
To cite US banking giant, JP Morgan Chase: “ISO migration is more than a technical project for tactical execution, unlocking potential for FIs to shift from passive to active payment processing. In other words, this is not just a standard which banks must comply with. It’s a unique opportunity to capture rich data benefits and embrace data-driven innovation.”
For the past 40 years international payments have been primarily facilitated through traditional methods, interchangeably called Telegraphic Transfers (TT) or Wire Transfers (US terminology) or even Electronic Funds Transfers, which rely on the SWIFT network for secure and somewhat standardised information exchange.
Daily, more than 11,000 global SWIFT member institutions sent an average of 44.8 million messages through the network in 2022, marking an increase of 6.6% over 2021.*
While the existing system is functional, there is room for improvement to meet the demands of a rapidly evolving world. Fintech companies have emerged as competitors, utilising similar payment infrastructures as banks but offering a more agile and cost-effective user experience. To remain competitive, banks need to embrace ‘co-opetition’ and leverage innovative solutions rather than solely focusing on competition.
For example, to modernise the cross- border payment industry, there has been talk of using Distributed Ledger Technologies (DLT), such as blockchain. User cases though have shown that DLT efforts would be better spent on the Trade Finance, where physical documentation and annual checking was needed to facilitate transaction, rather than on the Payment side, where most of the world payment traffic is already automated. Also, to create an efficient and fluid payment system, mass adoption is the key and not all banks had the appetite to invest in DLT for payment.
Hence, the industry shifted its focus to enhancing existing systems rather than reinventing the wheel.
For instance, SWIFT introduced initiatives like SWIFT gpi (Global Payment Initiative) that provides end-to-end tracking and transparency for customer credit transfers. SWIFT Go and Payments Pre-Validation are other examples of operational enhancements aimed at improving transparency and speed for customers. Some jurisdictions have also integrated international and domestic payments, simplifying interoperability and enhancing the customer experience. Australia's New Payment Platform (NPP) serves as a notable example of this.
NPP is a national infrastructure supporting real-time data-rich payments for the Australian digital economy. The already ISO 20022 compliant Australian system is based on SWIFT rails, operating 24/7, 365 days a year while allowing users to link easy-to-remember pieces of information, such as their phone number or email address, to their account (via PayID). Users can provide their PayID, instead of their account number, to people or organisations they wish to receive payments from in real-time.
Also, some solutions such as the iPiD; a suite of proxy addressing, request-to-pay and payment-to-wallet services for banks, fintech, wallets and other payment services providers; would make international payments easier by only using a proxy for the beneficiary’s identity.
To a trained eye, there is a staggering lack of standardisation in cross-border payment systems. For example, a payment that is handled within the same jurisdiction by different banks will often be processed on different systems or alternate versions or configurations of the same system before passing on to other jurisdictions where the story often repeats.
The migration to ISO 20022 aims to address this issue by providing a standardised framework with enhanced data. SWIFT considers this migration as an opportunity to enhance the customer experience and benefit all participants in the payment chain. But realising the full potential of ISO 20022 requires a mindset change within banks to utilise the messaging in the right way.
ISO 20022 is here to stay and will become the new standard for international payments after November 2025.
Over 70 countries have already adopted ISO20022, so messages will be harmonised with payment systems around the world. The standard brings several benefits to users throughout the payments chain:
It goes without saying that this is a significant IT change, which will have a significant impact on many, if not all, departments within a financial institution. It will also impact on the bottom line and due to this, SWIFT allowed 5 years for banks to fully migrate.
Shifting to the new standard requires careful consideration of the bank's overall strategy, as the transition will vary according to the jurisdiction, maturity and client base of each institution.
Europe is ahead in this journey as the ISO20022 standard is already well-established within the Single Euro payments Area (SEPA). North America lags behind due to a fragmented market with numerous banks and payment systems. In APAC, banks are well-positioned to deliver the Minimum Viable Product (MVP) but the lack of long-term vision is common trend.
One large Australian commercial bank interviewed for this project, for instance, went live with a minimum compliant solution in 2022 but has also mapped out a multi-year series of enhancements to embed the standard across its operations. The challenge for this institution is not in the scope of the project but rather juggling the schedules of the upgrades across multiple vendors and concurrent programs already underway.
One bank in New Zealand though has a long-term plan and is quite advance on the journey in terms of knowing the changes they want to bring to their customer channels. This bank is leveraging the requirements of the BS11 – Outsourcing Policy for registered banks to embed ISO20022 capabilities but also future innovation capabilities into their system repatriation project.
However, most of the banks in APAC only have tactical translation goals as they are generally treating ISO20022 migration as a compliance project.
In New Zealand, most international payments are processed via Real-Time Gross Settlement (RTGS), a system that enables immediate and irrevocable fund transfers.
ISO 20022 adoption in RTGS systems will benefit financial institutions and corporate clients, offering data-rich payments, streamlined processes, improved remittance services, and enhanced clarity and predictability. Within each jurisdiction there are also some divergences in the way financial institutions understand the migration.
SWIFT confirms that “Real-time gross settlement systems (RTGSs) in several key domestic markets, like Australia (RITS), Canada (LYNX), Europe (EURO 1 and T2), and New Zealand (ESAS), also started their migration to ISO 20022 on 20 March, with others set to go live over the coming months and years. While the two European systems migrated in ‘big bang’ mode; Australia, Canada and New Zealand began with a coexistence period”.
Leading banks perceive the migration as an opportunity to simplify and modernise legacy payment platforms, develop new products for corporate customers, and harness the power of intelligent automation. Differentiating themselves in the market by offering enhanced data insights, improved client experiences, and predictive analytics on payments can be a game-changer for banks.
A Frankfurt-based commercial bank, one of the largest in the world, told researchers for this paper that the ISO20022 focus, funding and resourcing project served as a catalyst for changing its legacy infrastructure. Due to historical mergers, the institution’s payments platform applications are fragmented and will be replaced with more agile micro services architectures.
The change will enable a greater customer experience as well as improved reconciliation system, reduced fraud, enhanced AML/CFT processes and so on.
For another large commercial bank based in Canada, the ISO 20022 migration will not have a significant operational impact as its payments offering is already well embedded with the new standard. But the Canadian bank sees an opportunity to provide greater insights and build new products and services around data in what should be a game-changer for clients.
Within their “Guide to ISO20022 migration” series, Deutsche Bank notes that the following areas of an organisation will be typically impacted during the migration process: top management; transaction banking (payments and securities); treasury; IT (process management, IT infrastructure, etc); sales/relationship management; vendor management; operations; service; risk management and legal.
But achieving success in the ISO 20022 migration requires institutions executive leadership teams to understand what is at stake for their bank and therefore be prepared to support and sponsor such a transformation.
The Corporates Perspective
Regulatory and technological changes in the financial sector impact not only banks and third-party providers but also corporates. As businesses become increasingly global, treasurers face pressure to efficiently manage cash and seek greater visibility.
Taking Fonterra as an example, when a company exports about 95% of their local production to more than 130 countries, we can easily imagine a lack of standardisations in their payment’s patterns.
ISO 20022 adoption would enable corporates to make faster payments, improve straight-through processing rates, enhance data-quality in enterprise resource planning (ERP) and treasury management systems (TMS), and streamline account management inquiries.
Not to mention the improved reconciliation and invoice management with the newly structured element dedicated specifically to remittance information. Corporates will now be able to add information, in a structured format, such as invoice contract details, reference number and invoice itemised details.
All these benefits would be unlocked since enriched and standardised data will enable automation of processes where manual processes were/are heavily relied upon.
Unsurprisingly, to unlock such benefits, Corporates would also have to innovate and update their systems.
For example, while corporates can currently upload csv files to automatically translate into a MT101 payment order, under the new standard the process will require banks to use translation tools to process such data.
Some jurisdictions are even contemplating removing the cost of processing international payments but charging corporates for the ML/XML translation service offered to encourage businesses to update their systems faster.
ROI and Board-level Importance
The return on investment (ROI) for ISO 20022 migration does not lie in increased revenue but rather in the necessity to stay relevant in the international payments space.
The results of a poll organised by Finextra during one of its latest webinars on ISO20022 highlight what matters the most for both banks and corporates: spoiler alert, it is not transaction costs.
Risk management, compliance, improved customer experience, and innovation are key drivers for embracing ISO 20022. However, financial and human resources pose challenges for banks already dealing with numerous competing priorities.
Compliance requirements and the influence of corporates have shifted the perspective of leadership teams, recognising the opportunities the migration presents instead of focussing on the potential problems generated by an IT migration.
As an example, some of the banks spoken to for this paper contacted corporates in their markets to discuss the advantages of moving to ISO 20022. The corporates then lobbied for the banks to embrace the whole project.
This was also the case for SWIFT gpi in Switzerland where six leading Swiss corporates with international operations issued an open letter, stating their support and encouraging banks worldwide to use gpi in order to improve cross-border payments.
ISO 20022 serves as a catalyst for banks and corporates to prepare for the future of payments.
If banks take this opportunity to stop and design long-term payments strategy, they will be able to retain clients, provide enhanced data analytics to their corporate clients and also their internal departments, such as credit risk, treasury… and drive process improvements.
Despite competing priorities, banks must invest in their infrastructure and offerings to remain competitive in the international payments landscape as there is little doubt institutions have no choice but to properly invest in their infrastructure and offers if they want to stay in the international business.
Competition is fierce and will only get stronger.
Yes, transitioning to ISO 20022 will be expensive. Yes, it will need a significant investment in resources.
Over the long run, however, adopting the new standards will enable cheaper and quicker innovation, enhanced compliance, streamlined processes, improved operational resilience while strengthening the ability of banks to fight fraud and to respond to AML and compliance obligations.
Recognising the long-term opportunities and securing support from executive leadership teams is crucial for banks to achieve a successful ISO 20022 transformation and reap the rewards promised by a global financial language that everyone can understand.
* https://www.swift.com/about-us/discover-swift/fin-traffic-figures
Contact us at Mosaic to assist with your preparation for the adoption ISO 20022.
