ISO 20022 - 101

Introduction

The ISO 20022 standard itself and surrounding documentation is described in hundreds of pages on the ISO.org website. Here is a brief overview of what it entails: At its core, ISO 20022 is a standard for creating financial messages for use between financial institutions and other market participants. It includes both the methodology for creating consistent messaging standards as well as a maintained and updated metadata repository (read: dictionary) of message descriptions and business processes.

The standard currently covers payment transactions, securities trading, settlement information, credit, and debit card transactions. ISO 20022 is organized so that common business processes are identified independently of messaging standards and referenced in message definitions to ensure consistency and reduce ambiguity in financial communications. The standard includes a robust governance process that puts control of the evolution of the standard with the users.

This ensures that messaging standards created by different users across different segments are compatible in terms of both syntax and semantics. It also allows certain sets of ISO 20022 users to develop their own specific rulebooks and guidelines, while maintaining overall compatibility with other user communities and their standards.

Standardizing the Industry:

Different segments of the market have moved at different speeds, but the overall shift to ISO 20022 has been consistent. As of January 2019, there were over 100 completed or in progress ISO 20022 migration initiatives across the global financial industry, and likely many more that were not explicitly publicized. Specifically, in the payments space, much of the focus has been on ACH, real-time payments, and high-value payment systems.

ACH:

The Single Euro Payments Area (SEPA) was launched in 2008 and was an ISO 20022 front-runner, incorporating the standard into the initiative from the start. The STEP2 Pan-European Automated Clearing House (PE-ACH) had been initially setup in 2003. It was then made SEPA compliant in 2008 and moved onto the ISO 20022 standard. The STEP2 infrastructure initially supported automatic clearing for credit transfers and later added support for direct debits, and card payments.

All Euro countries had to move their domestic ACH infrastructure to ISO 20022 based SEPA schemes. Non-Euro countries like Switzerland also moved their domestic ACH infrastructure to ISO 20022. The UK Bankers’ Automated Clearing Service (BACS) had previously been using a “Standard 18” file format for its ACH payments, but as part of the New Payments Architecture (NPA), BACS will be shifting to ISO 20022 as well. Similarly, Canada is pursuing a national payments modernization plan that incorporates ISO 20022 for the Canadian ACH platform.

ISO 20022 provides a standardized ACH message structure for processing credit and debit messages and supports automatic translation from different message formats, including CCD, CTX, PPD, IAT and SAME Day ACH to one consistent and standard messaging format.

Domestic Real-time Payments:

The implementation of the Faster Payments Service (FPS) in the U.K. in 2008 unofficially kicked off a wave of global payment infrastructure modernization. More than 38 countries have made the shift to modern, real-time, domestic payment platforms in the past decade.

The FPS and many of its contemporaries have gone through many updates in their lifespan. Under the New Payments Architecture initiative, a new ISO 20022 central infrastructure will be developed for FPS, BACS, and potentially Clearing System transactions.

In the Nordics, P27, a brand-new multi-currency cross-border payment infrastructure, is being developed across Sweden, Denmark, Finland, and Norway. The new jointly owned platform will serve 27 million customers and will transform direct debits, e-invoicing and real-time payments in the region, while simultaneously reducing payment costs significantly.

Japan has also made a move to ISO 20022 for its national payment infrastructure. Zengin was established in 1977 to handle low-value payment transactions and introduced ISO 20022 in 2011 to provide better real-time payment services. This was driven by the Bank of Japan’s stated focus on improving global interoperability, and the benefits ISO 20022 provides in terms of data capabilities.

In addition to modernizing existing systems, nearly every new domestic payment system globally is launching with ISO 20022 support by default. Australia’s New Payments Platform (NPP), as an example, was designed around ISO 20022, as was Singapore’s G3. Thailand’s PromptPay, which went live in 2017 on the 8583 standards will move to ISO 20022 in 2019, as will the UK Faster Payments platform in the near future. As centralized payment infrastructure development typically comes at a significant cost, governments are keen to ensure that the platforms are futureproofed. 

Regulators and governments often look at real-time payments in the context of the broader market, for the potential economic benefits they may bring, and to balance out the market power of third-parties such as Visa and Mastercard.

Nevertheless, many banks globally have struggled to define a compelling business model around real-time payments. Typically, real-time payment pricing commands a slight premium over non-real-time payments, but even in cases where the difference is minimal, except for a few banking customers that absolutely need instant payments, up-selling to real-time has been challenging. However, with the adoption of ISO 200022, the amount of data and insight that can be provided through realtime increases dramatically. This offers new business opportunities and value-add services.

High-value Payments & Real-time Gross Settlement:

Operated by the U.S. Federal Reserve Banks, the Fedwire Funds Service is one of the four fundamental large-payment systems in the United States. Driven by increasing international adoption of ISO 20022 and the desire to provide better payment services to its customers, the Fedwire Funds Service announced that it would adopt ISO 20022 standards by the end of 2023.

Similarly, in Japan, the Bank of Japan Financial Network System (BOJ-NET) has been in operation since 1988 and is an extension to Zengin that handles transactions over JPY 100 million. The new version BOJ-NET was launched in October 2015, with support for ISO 20022.

The rationale for upgrading high-value payment systems is not unlike that of ACH and real-time payment systems insofar that payments on newer systems provide business benefits including better insight and STP in the settlement. Yet the real focus will come in the need for systems to streamline or become compatible with cross-border payments and align to accommodate cross-border instant payment schemes.

Cross-border Payments:

The challenge of standards is certainly more acute for cross-border payments as different jurisdictions may have completely different approaches to payment standards. Although ISO 20022 will significantly streamline communication, many of the ISO 20022 payment messages are very similar. This requires an element of offline coordination agree to what messages are used in which scenarios.

It is no surprise therefore that SWIFT is playing a significant role in coordinating the shift of cross-border payments to ISO 20022 and sees the standard as an eventual replacement for its own MT standard. In April 2018, SWIFT launched a "full-scale community consultation" to review its strategy for migrating existing cross border payment services to ISO 20022. It has a plan to make cross-border transactions via ISO 20022 available by 2021 and will completely migrate to the standard in 2025.

The timing of the change will be coordinated with the migration of the TARGET2 highvalue payment system, which will switch to ISO 20022 in November 2021, and in the U.S., where the Federal Reserve and The Clearing House plan to roll out ISO 20022 for high-value transactions starting in the first quarter of 2022. SWIFT estimates that by 2023, around 80% of the volume and 90% of the value of high-value payments worldwide will use the ISO 20022 standard.

ISO 20022 will also drive the convergence of multiple platforms especially around real-time cross-border payments, which has been a big focus of the industry in Asia Pacific. A 2018 trial conducted by SWIFT leveraging the GPI platform successfully sent payments from a domestic account in China to a domestic account in Australia in under a minute. While the trial was between specific banks and specific accounts, with ISO 20022, the platform could conceivably be expanded to all domestic accounts without much client change required. This would allow seamless real-time cross-border payments from domestic account to domestic account.

Deriving Value: ISO 20022 Benefits

No one single benefit defines the key business value of migration to ISO 20022, but rather a range of features are driving adoption and ROI.

Extensibility that future-proofs the ISO 20022 standard and enables new products and services:

One of the most essential ISO 20022 concepts is extensibility. ISO 20022 sets out a structure and framework for developing consistent standards across the financial industry but does not limit the business processes that can be created to leverage the framework.

If there is a need for a new type of messages, such as one related to mortgage payments, or a new esoteric derivative that has a complex settlement process, that business process can be defined within the ISO 20022 standard. Further, all of the elements within the ISO 20022 standard are reusable, so organizations only need to map each field to their internal systems once and that connection can be leveraged across all ISO 20022 business processes.

This extensibility ‘future-proofs’ the ISO 20022 standard as there is effectively no limit to the business processes that can be defined and incorporated in the framework. Banks are better able to service future customer needs with new unique and potentially fee-driven, products and services. It also ensures that the investment will not be wasted with a change to a new future standard.

Standardized message types and formats improve STP both internally and externally:

As the financial industry grows in complexity, there is a significant challenge in ensuring that financial messages, payments or otherwise, achieve STP. The industry has put a considerable effort over the past decade in achieving STP. However, as the industry changes, it’s often a never-ending battle for financial institutions and vendors to keep up, but even small improvements can deliver attractive cost reductions.

As payment platforms update their systems to support ISO 20022 and new platforms launch with native ISO 20022 support, it will become easier to deal with system changes. As the standard is extensible, any changes to existing systems should involve the definition of a new business process but require little additional work for entities that connect into that system. For both existing and future financial message types and methods, ISO 20022 can reduce internal costs and increase efficiency.

The consistency of the ISO 20022 standards helps in a few aspects of STP:

? Internally, banks and corporates can use ISO 20022 to streamline their internal financial messaging amongst payment, capital markets, and other financial systems to decrease complexity and increase STP.

? Externally, banks can provide additional value-add to customers such as integration with ERP or corporate payment systems that are also on ISO 20022 to both enable STP and broaden the range of available products and services.

Finally, ISO 20022 opens up the possibility of more effective cross-border real-time STP, which is a clear vision in the South-East Asia region.

For example, leveraging SWIFT, a payment message that originates on Singapore’s domestic G3 payment system using the ISO 20022 standards, could be sent through SWIFT’s GPI to Thailand’s domestic PromptPay, achieving streamlined cross-border real-time STP. Even without SWIFT, South-East Asia, through the ASEAN Payment Network, is moving towards direct cross-border connectivity between real-time domestic payment systems.

Enabling Open Banking:

The ISO 20022 standard will also help with the shift to Open Banking and API adoption. Many banks have published very detailed lists of APIs that external parties can connect to in order to leverage the banks' products and services. Often these use proprietary semantics and syntax that make it challenging for external corporates or fintechs to connect easily.

ISO 20022 can streamline this by making messaging consistent across banks and users. As an example, the UK’s Open Banking initiative defines ISO 20022 derived API specifications to ensure that payments data, whether exchanged via message or API, is consistently defined along the entire value chain.

Within these efforts, ISO 20022's re-usability should help to standardize API syntax and make it easier and more cost-effective for external parties to use APIs. It also means that financial institutions only need to map each element to their internal data structures once with ISO 20022 providing common end-to-end language. 

More Data = Better Services = Additional Value Add:

The ISO 20022 standard provides significant value in terms of additional data capabilities. Considering remittances as an example – much of the present-day payment infrastructure around the world has been designed and optimized for throughput and compliance.

Although businesses may need to incorporate additional transaction data or information in remittance type payments, handling that data has not been a high priority for financial institutions. Many of today's existing payment message standards have the capability to include remittance data, but it is typically limited.

As an example, the current U.S. Fedwire system limits sending and receiving names to 35 characters, without a separate note field for a country code. Similarly, a standard domestic real-time payment in Japan can only handle 20 characters. This causes problems when matching payments and often results in significant manual reconciliation.

ISO 20022 provides extended remittance information (ERI), as well as longer data fields to allow the use of a full name. Supporting a larger message format should increase STP, and as the message is structured from end to end, it can enable realtime payment tracking for each party.

The ability to incorporate more data into a payment message is critical for banks to be able to provide additional value for their customers.

As an example, in many non-ISO 20022 payment systems, if a business needed to include information on specific invoices that a payment was referring to, the business would need to either manually convey that information to the beneficiary or use a 3rd party solution. The ISO 20022 payment standard allows additional remittance information so the customer can seamlessly reconcile incoming payments.

Continuing the example, if the transaction is part of a trade, ISO 20022 allows for the definition of more meaningful business concepts. In a trade transaction, this could include components such as ‘Account,’ ‘Trade,’ and ‘Party.’ These could then be further defined through business elements such as trade date/time, trade price and trade place. For both the buyer and the supplier, the basic payment data is suddenly much more valuable as the payment has significantly more information about the underlying transaction.

ISO 20022 standards encourage higher quality and accuracy of data. As business models are specified in the repository, financial messages are sent through with a complete set of data that is required for any process. This is especially useful for Know Your Customer (KYC) or anti-money-laundering efforts where data can be critical – especially as banks move to real-time payments and the time to perform a KYC check becomes even more compressed.