The Global ISO 20022 Journey – Nuances, Complexities and Considerations

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Standards are a cornerstone of the financial industry. For over 40 years the SWIFT MT standard has enabled industry automation, reducing the cost and risk of cross-border business, and enabling the development of the correspondent banking system on which
world trade depends. Today, around 28 million MT messages are exchanged on the SWIFT network every day. But after forty years, MT is beginning to show its age. MT was designed at a time when storage and bandwidth cost more than they do today, so emphasizes
brevity over completeness or readability of data.

It predates the emergence of anti-terrorist financing regulation, which requires payments to be screened against sanctions lists, and the development of ‘big data’ technology, which can extract important business intelligence from transaction data. It limits
text to a Latin-only character set, which is no longer ideal now that many of the world’s fastest-growing economies are in Asia. While MT continues. SWIFT in collaboration with the industry, has worked to develop and promote ISO 20022, which addresses many
of the shortcomings of MT.

What Is ISO 20022?

ISO 20022 was introduced by the International Organization for Standardization in 2004. It is an open and general-purpose global financial electronic communications standard. The ISO 20022 message standard is a data library of business components from which
messages can be defined. It is used for the development of financial industry messaging covering payments, securities, trade services, cards, and foreign exchange industries. The ISO 20022 message standard covers a variety of communication between financial
institutions, FMIs and corporates, including:

•    end-to-end payment processing between the sender and receiver

•    standing payment authorities, such as direct debit authorisations for bill payments

•    account management, such as statements and account balance reporting

•    extended ‘remittance’ fields within payment messages, which allows more data such as invoice details.

The ISO 20022 message standard provides flexibility as payment messages can be adapted over time to evolving requirements. It supports structured, well-defined, and data-rich payment messaging. This improves the quality of payment information contained in
the message.

The general features of the ISO 20022 standard are:

•   Open standard – the message definitions are publicly available from the ISO 20022 website.

•   Flexible – definitions can be adapted for new requirements and technologies as they emerge.

•   Enhanced data content – ISO 20022 messages have an improved data structure (e.g. defined fields) and expanded capacity (e.g. increased field size and support for extended remittance information).

•   Network independent – the adoption of the standard is not tied to a particular network provider.

Key Benefits of ISO 20022

The ISO 20022 message standard delivers benefits to all users throughout the payments chain. In the High-Value Payment Systems (HVPS) the benefits are realised by the financial institutions and their corporate clients who send and receive these messages.
Over time, customers are expected to benefit from data-rich payments, more efficient and lower-cost payment processing, and enhanced customer services such as improved remittance services. Among the benefits financial institutions may gain from the migration
to the ISO 20022 message standard are:

Adaptability and flexibility

The ISO 20022 library of business components supports a flexible range of information that is independent of the underlying data language of payment messages. It therefore can be adapted to new technologies and evolving requirements over time. This ability
to adapt to new technologies means that ISO 20022 could form the basis for financial system messaging globally over the long term. The flexibility of the ISO 20022 message standard enables payment system administrators to design messages that are fit for the
purpose of their payment system.

One downside of a flexible message standard is that the different designs of message sets across domestic and international payment systems can make it more difficult for those systems to interact seamlessly with each other. SWIFT and other coordinating
institutions, such as central banks, have promoted the development of more standardised ISO 20022 message guidelines by international committees. These include the High-Value Payments and Reporting Plus (HVPS)+) and Cross-Border Payments and Reporting Plus
(CBPR+) message guidelines that will be used for SWIFT cross-border payments. International alignment aims to support the easier end-to-end processing of cross-border payments from the sender of payment in one jurisdiction to the receiver in another jurisdiction.

Resilience

The payment messages used in some domestic payment systems can be aligned using the ISO 20022 message standard, and across common payment data fields. This is a step towards enabling payments to be more easily exchanged across alternate payment systems and
networks. With ISO 20022 compatible technologies, payments can be more easily redirected to an alternative payment system in the event of an outage. This improves the resiliency of the domestic payments system as a whole.

The international alignment will support resilience because it will be easier for each of these payment systems to accept and process messages as an alternative should the other system become unavailable.

Data structure and capacity

The ISO 20022 message standard addresses some drawbacks of SWIFT’s existing MT message standard used for over 20 years, including:

•    limited data carriage, which restricts the amount of payment information that can be included in a message

• data string format, which limits the capability of automated technologies to read the information contained in the payment message.

The improved structure and data capacity of ISO 20022 can be used in several ways to drive efficiencies and deliver improved quality of service in the payment system.

Efficiency

The efficiency gains from the ISO 20022 message standard stem from the ability of automated technologies to collect, read and integrate ISO 20022 structured and data-rich payment messages into other services. This may include new customer services provided
by financial institutions to their corporate customers. For instance, integrated services with Application Programming Interfaces (APIs) could provide corporates with the ability to initiate payments, as well as obtain improved transaction and account reporting
services. Additionally, improved reporting, analytics and reconciliation processes are made possible for financial institutions with ISO 20022 messaging-based data. Reconciliation processes benefit from using structured data, while reporting and analytics
are improved because specific payment data can be more easily retrieved.

More generally, the enhanced data structure and data carrying capacity of ISO 20022 messages improve the efficiency of the end-to-end payment processing and payment transfers. ISO 20022 payment messages allow automated technologies to read and target specific
information. This automation can be used to speed up end-to-end payment processing (sender to the recipient) and reduce the amount of manual intervention required for payment processing. There is also the potential to enable easier transfer across systems
as more payment systems migrate to ISO 20022 and standardise across common payment information fields. As noted above, this can support the resilience of the domestic payments system.

For international payments, the alignment of payment messages helps facilitate the easier processing of cross-border payments between international and domestic payment systems.

ISO 20022 Structured Data

Unstructured messaging formats present information (in this case, an address) in a single uninterrupted string of characters. Structured content in ISO 20022 separates the address into its distinct components using tags (e.g., <Ctry> to identify the country).
This level of precision makes it easier for automated payment processing systems to identify and select specific data from within the payment message to process the payment.

The ISO 20022 messaging standard also caters for the investigation and reconciliation of messages between financial institutions. This can aid efficiency by automating processes such as the investigation of incorrect payments (e.g., by using investigation
and payment cancellation messages), lowering processing costs and improving resolution times for customers.

Innovation

By using the additional information in ISO 20022 messages, financial institutions may offer customers new services and improve the quality of existing services. One potential area for innovation is sending enhanced remittance information with the payment,
such as including invoice details. Currently, remittance advice, or invoices, are exchanged separately from the underlying payment in a different format (e.g., email) because of the limited data capacity of the current MT message standard. This lack of integration
can make reconciling invoices and payments manual, time-consuming and error-prone for businesses. Additional data carried in payment messages can be used by financial institutions to offer new value-add services to their customers. These data could include
tax information, URL links to documents, defined payment purpose codes and payment and remittance advice.

Fraud and financial crime management

Implementing ISO 20022 can increase automation and enhance a range of compliance activities related to the management of fraud and other financial crimes. By using the enhanced data structure and capacity of ISO 20022 messages, fraud and financial crime
management systems are better able to target specific information (such as the payment’s sender and receiver) to perform the required screening. Not only does this capability result in increased efficiency and lower costs compared with manual exception checks,
but it also improves the quality of monitoring and screening.

International Developments

Over the past decade, there has been an international push to migrate to ISO 20022 messaging from several key FMIs. SWIFT estimates that by 2025, 87 per cent of the value and 79 per cent of the volume of high-value domestic payments messaging worldwide will
use ISO 20022. A number of the migration projects are being completed as part of a larger infrastructure refresh.

United Kingdom – The Bank of England plans to migrate high and low-value domestic payment systems by 2023. The key drivers are to improve resiliency, strengthen risk management, reduce fraud, and promote competition and innovation. To meet these objectives,
the Bank of England will introduce a Common Credit Message across its domestic payment systems.

US – The US Federal Reserve Banks have proposed a plan for the migration of the Fedwire Funds System on March 10, 2025, while CHIPS the largest private sector USD clearing and settlement system in the world, remains on schedule to implement the ISO 20022
message format in November 2023 as planned. Key drivers for this project include maintaining consistency with cross-border messaging standards (due to migration as part of the SWIFT cross-border project); improving the end-to-end efficiency of payments; and
enabling richer and more structured data.

EU – The European Central Bank (ECB) is proposing to have a ‘big-bang’ implementation of its consolidated TARGET2 and TARGET2 Securities systems in November 2022. Both systems will use ISO 20022 messaging. The key driver for the project is the consolidation
of the two systems, though the ECB has also noted the benefits of ISO 20022 supporting extended remittance information.

SWIFT ISO 20022 migration for cross-border payments

SWIFT as a registering authority has been working with SWIFT participants worldwide as part of its decision to facilitate an industry migration of cross-border payments. The key drivers for this work include the increased adoption of ISO 20022 in domestic
payment systems; enabling consistent customer experience across domestic and international payment systems; supporting the development of new services due to enhanced message capabilities; and assisting with compliance activities (e.g., increasing the efficiency
of AML monitoring).

SWIFT’s cross-border migration is planned to begin in November 2022 and will include all users of payments and cash management messages (MT Categories 1, 2 and 9). The migration will involve a coexistence phase, lasting approximately four years. The coexistence
phase will allow a mix of old and new messaging while members are completing their migration to ISO 20022.

The coexistence of old and new messages is facilitated by translation services, provided by SWIFT as part of the In-Flow Translation service or by SWIFT-certified vendors, enabling users to translate messages between ISO 20022 and their MT equivalents. To
smoothen the journey, SWIFT also plans to launch SWIFT Transaction Management Platform in March 2023. With this, SWIFT put business transactions at the centre ensuring participants get complete and enhanced data at any point.

At the end of the coexistence phase, all users are expected to have migrated to ISO 20022 and translation services will be removed. However, SWIFT note that internal translation can continue to occur while back-office systems are upgraded. At this time,
SWIFT also plans to withdraw support for the MT message Categories 1, 2 and 9 used in cross-border and correspondent banking payments.

The ISO 20022 message standard has enabled several fast payment systems across various jurisdictions to deliver data-rich and flexible and efficient payment processing. This includes the NPP in Australia, Singapore’s FAST and Sweden’s Swish. These fast payment
systems are generally designed to process high payment volumes in near real-time and maximise the efficiency of payment processing.

Migration Drivers

The success of ISO 20022 amongst market infrastructures has led to increasing community demand for ISO 20022 for cross-border business. There are several reasons for this, particularly for international payments:

•   Consistent Experience for Customers: Complete data needs to be transported end-to-end through a business process that involves an ISO 20022 MI, or a transaction originated by an ISO 20022-enabled customer.

•   New Customer Services: ISO 20022 enables new capabilities that can be used to deliver new services.

•   Compliance Concerns: ISO 20022 is better adapted to carry the full party information (payer and payee) that regulation demands, plus the enhanced data definitions of ISO 20022 promise more efficient AML and sanctions screening.

•   Modernisation – Modernise the payment messages used in the High-Value Payment System (HVPS) to a more flexible messaging standard that positions the payment system for the future.

•   Simplification – Simplify payments processing and deliver efficiencies by facilitating automation through structured information, and, where possible, consistent service delivery across domestic payment systems

•   Use of enhanced content – Take advantage of the enhanced data structure and capacity in ISO 20022 messages to improve fraud and financial crime screening and monitoring and increase competition in the delivery of payment products and services by enabling
greater innovation.

•   Streamlining Of Data Models and Reporting: The ISO 20022 data model supports all securities processing-related flows, which can help organizations comply with reporting obligations.

Key considerations and challenges

1.     Data Integrity Loss

Data integrity loss is expected in two forms:

• Data is truncated, where the data that is present in the ISO 20022 message cannot fit completely in the MT

• Data is missing where there is not enough space in the target MT Field.

Both the domestic High-Value Payment System (HVPS) and SWIFT’s cross-border ISO 20022 migrations will support coexistence periods for several years, where both MT and ISO 20022 messages can be exchanged in parallel. To facilitate this, some financial institutions
may need to translate incoming payment messages from one message standard to another until they have upgraded their back-office systems to fully support ISO 20022.

Where translation is required from ISO 20022 to more restrictive SWIFT MT messages, some ISO 20022 payment information may be removed or shortened – referred to as ‘truncation’. 

According to Payments Market Practice guidelines,

– Truncated data refers to the partial transportation of business data in the MT message, where a + (plus) character identifies that the data string is incomplete.

– Missing data refers to business data which could not be transported in the MT message, due to field size constraints.

Truncated message data or Missing data can potentially cause issues for financial institutions’ compliance obligations if the data used for screening and monitoring is incomplete. Financial institutions should perform all screening and monitoring using the
complete payment messages, regardless of how the payment is processed in their back-office system. Financial institutions are expected to maintain this practice during the coexistence period and to continue to comply with regulatory obligations.

The industry has agreed that from November 2022, High-Value Payment System (HVPS) participants that act as an intermediary and receive incoming ISO 20022 messages for cross-border payments must pass on the full ISO 20022 message for High-Value Payment System
(HVPS) processing. Since the ISO 20022 messages will be richer in data content and more structured, data would be truncated if these messages were to be translated into an MT message for processing through the High-Value Payment System (HVPS). Aligning the
launch of the High-Value Payment System (HVPS) with SWIFT’s launch of ISO 20022 for cross-border payments in November 2022 avoids the need for message translation.

2.     Scale, timing and competing priorities

The migration involves significant work for financial institutions and potentially their corporate customers over an extended period. The new data structure and rich payment information will impact a range of processes, including monitoring, screening, and
analysis of payments, with flow-on effects for a range of support systems. These systems may need to be modified to process ISO 20022 transactions and enhanced to be able to fully reap the benefits offered by the new message standard.

The domestic migration also coincides with a range of other industry projects and international initiatives currently underway.

With the extent of this concurrent work in progress in the payments industry, it is important that the domestic migration is appropriately managed to ensure that it does not place undue pressure on participants, which could give rise to additional risks.

3.     Alignment

The straight-through processing of SWIFT cross-border payments relies on the alignment of High-Value Payment System (HVPS) messages with those that will be used for SWIFT cross-border payments. Domestic alignment between the payment systems should be considered,
particularly with the longer-term objective to create resilience between the systems.

 4.     Awareness and understanding

Building Internal Competency Education is fundamental to the ISO 20022 implementation program. The educational and training program needs to be in place from the onset and happen across different stakeholders with varying capabilities throughout each stage
of the implementation project:

Adoption Phase – the learning curve can be steep as decisions on how the bank will implement the development of the technical roadmap. Adopting ISO 20022 involves understanding its formats, processes, and its impact on underlying technology and business
flows. It is dramatically different hearing success stories at conferences and in the trade press compared to implementing the same in practice. 

Implementation Phase – when physical changes to the systems are made and standards are rolled out, IT and other technical resources are necessary to update the applications and systems dealing with the new standards, which require a different educational
program.

Go Live Phase – a separate, coordinated training effort is needed across the enterprise when the migration has to go live. An educational program should include areas such as Products, Customer Implementation Teams, and Sales to develop and deliver consistent
customer (or partner) education, onboarding processes, and exchange of data between the bank and corporate clients. 

5.     Organisational Structure

Successful Knowledge Management ISO 20022 projects share a common feature—a centralized organizational approach.

Today, many departments still act in silos. Establishing a centralized management team helps ensure that tasks are streamlined, and best practices are documented and shared across different business domains. A single point of contact facilitates the engagement
of internal business partners and creates a favourable environment to incubate ideas for further application. Generally, this area also serves as a critical resource and internal consultant partner for groups less familiar with the standard in the transition
to ISO 20022.

6.     Testing

ISO 20022 is not a messaging standard; it is a methodology for making and maintaining financial standards across multiple domains. Payment Market Infrastructures across the globe are dealing with a near-constant cycle of changes as ISO 20022 messages start
to spread across the global Swift network (more than 90% will have shifted by 2025) over the coming years. 

In addition to learning a new data language at their core, Banks participating in these Market Infrastructures have a substantial workload to manage during the planned harmonization program and co-existence phases. 

Testing ISO 20022 changes can be extremely challenging and critical. As for banks, many of their internal processes and daily operations will be impacted and these changes will have to be introduced with no adverse impact on their customers.

To avoid any critical issues, it is suggested that banks complete the 4 phases of industry testing i.e., 1. unilateral testing 2. Bilateral Testing 3. Multi-Lateral testing and 4. Non-functional testing.

With any standards or specification project, eventually the discussion turns to “how will we know if an application conforms to our standard or specification? Thus, conformance testing is much recommended. Conformance testing is testing to see if an implementation
meets the requirements of a standard or specification.

 7.     Infrastructure Demands

Under the general umbrella of competitiveness and effectiveness, financial institutions often have multiple objectives in mind when putting a large transformation initiative such as ISO 20022 into motion.

The most common goal for payment transformation initiatives is to boost operational efficiency, develop new innovative products, develop new data centric products, and develop an entirely new business model.

To achieve these targets, banks need simple, flexible storage infrastructures. They want tools that help them to optimize and simplify operations today and make it easier to integrate new on-premises technologies and cloud services in the future.

Given the growth of real-time and cross border payments, and that most systems are being built using IS020022, increasingly data from the stores will be used to generate reports for regulatory reasons. 

This will create multiple issues, such as

  • Can the data be stored quickly enough? This will be a key determinant for banks of any size, but particularly larger ones, as they see growth in real-time payments which are generally single message. 
  • Can the data be audited? Banks will increasingly need to be able to ensure that the integrity of the data is both intact and auditable.
  • Third, given that all the data has account-level detail for both the payee and payor, is the store secure?

Bandwidth and processing of ISO 20022 data are not discussed much at this stage. As the ISO 20022 file is considerably larger than any other format, organisations must increase the bandwidth and processing power to cope.

Storage of messages is also widely overlooked, as most organisations plan to use their existing warehouses. The most obvious question with this approach is scalability and second, these old school warehouses are not ISO 20022 native to store canonical data.

ISO 20022 is once in a century transformation and optimisation opportunity for banks. However, optimization should outline not only the most obvious technology and process requirements but also look for opportunities to transform processes to reduce waste,
enhance self-service, and improve customer experience and speed outcomes, not simply automate processes or move them from one platform to another. It’s also critical to consider key people issues, including fungibility of customer support resources, level
of knowledge and back-office infrastructure required to address exceptions. 

A comprehensive review of payments processes would identify a set of services and processes that are common across parts of the value chain that can easily be consolidated into a common utility or process.

Ultimately, the goal is for each bank to understand the end-to-end customer requirements for each payment path, with a view to creating shared infrastructure and processes wherever possible while preserving the appropriate customer-driven distinctions for
specific channels, segments and offerings. This will enable the development of business services that can be initially created and shared across each payment path. When payment processing functions are similar, they can be handled as utilities, with rules
to accommodate differences. 

Footnotes

•   SWIFT cross-border migration programme <https://www.swift.com/standards/iso-20022-programme>.

•   Data language refers to the rules, form, and structure regarding the arrangement of data in a message. Extensible Mark-up Language (XML) is a commonly used data language.

•   High-Value Payment System (HVPS+) is a task force formed by SWIFT, major global banks and market infrastructures tasked with the ongoing evolution of global best practice message usage guidelines for high-value payments. CBPR+ is a SWIFT working group
with responsibility for developing global message usage guidelines for cross-border payments. 

References

  • SWIFT (Society for Worldwide Interbank Financial Telecommunication) (2020), ‘ISO 20022 Programme’, Available at <https://www.swift.com/standards/iso-20022-programme>.
  • RBA Publications <https://www.rba.gov.au/publications/bulletin/2020/sep/modernising-payments-messaging-the-iso-20022-standard.html>
  • https://www.swift.com/about-us/our-future/swift-platform-evolution/enhanced-swift-platform-payments
  • https://www.bankofengland.co.uk/news/2018/november/consultation-response-a-global-standard-to-modernise-uk-payments-iso-20022
  • https://www.nthexception.com/2020/10/iso-20022-translator-swift-gpi-plugins.html

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