There are big changes on the horizon for the payments industry as, at the end of this year, global payments messaging will begin a transition to the new ISO 20022 standard. And over the next five years, the new standard will replace the existing patchwork of message formats to create a universal language and common platform.
So What is it Exactly?
Simply put, ISO 20022 is a set of XML messaging standards across payments, securities, trade services, cards and foreign exchange; as well as a common language for financial institutions to communicate complex business data.
For financial organizations, some aspects of adoption can sound daunting, but the benefits are well worth it, including:
- Greater cross-border interoperability;
- Better screening of payment data to mitigate terrorism and money laundering;
- More efficient handling of exceptions;
- More effective reconciliation for corporate customers; and
- Improved data-driven decision making through purpose and context of payments.
The Transition Timeline
- November 2021: FI–to–FI payments and cash messages go live, triggering the start of a four–year period of co-existence.
- November 2021 – November 2025: Transition period during which institutions should begin implementing required changes, enabling payments under ISO 20022, and decommissioning Swift MT–based payments.
- November 2025: The co-existence period ends and Swift MT–based FI–to–FI payments and reporting messages are disabled.
Conveniently, ISO 20022 will allow for backwards compatibility, which will protect against payment disruptions during the four-year transition period. During this time, the new standard will maintain compatibility with Swift MT; adapt to user capabilities and provide data in the user’s chosen format and protocol; and allow for coexistence until 2025 to allow financial institutions to adapt to the new standards at their own pace.
Key Issues for FIs to Consider During the Transition
- Data structure changes that will impact branch, back office and customer–facing channels. In order to stay ahead of the game, financial institutions should make a plan for implementing fluency of ISO 20022 codes, practices, and data fields/formats.
- Testing and certification because rarely do large structural changes go perfectly right from the outset. Those who develop a readiness plan will be in much better shape than those who don’t.
- Engagement and collaboration with vendors will be critical for a smooth transition. An understanding by all parties of the rollout plans, steps, and requirements will help avoid confusion and disruptions while things are in flux.
Aside from the specifics involved in a systematic change, financial institutions, fintechs, ERP providers and businesses should also think about how their unique structures will need to change to meet the demands of the new standard. Because there is no “one size fits all” approach, this requires holistic as well as technical considerations.
The benefits of this new standard go beyond financial institutions. Anyone sending, receiving or processing payments should be exploring how they can take advantage of it. In order to maximize use of the transition period, interested parties should be seeking out strategic pathways for innovation, such as:
- With enhanced Straight Through Processing (STP), much of the complexity is removed for the originator of the payment because it removes the need for manual interventions. Not only does this save time and money, but it creates a much better end-experience for clients. With STP, payment details can be saved in the system, avoiding manual entry of settlement and routing information – decreasing the potential for errors.
- With ISO 20022 Extended Remittance Information (ERI), complete and detailed payment information can be included with transactions. This includes company information, customer information, date of transaction, summary of goods and services, linked documents etc. The ease and efficiency of sending concise and critical payment information allows parties the tools needed to effectively screen and process payments.
- With the now structured data flows, companies can more easily synthesize large swaths of payment information to extract business insights and create new and improved products and services that are functional and relevant for their clients.
A New Era for Payments
While ISO migration can be viewed as merely a technical project to achieve ISO compliance standards, it actually offers a unique opportunity to embrace the future and devise strategies to capture benefits from better interoperability and richer structured data. Any organization involved in the payment lifecycle from the corporate customer initiating a payment for an invoice to the controller reconciling receivables, and everything in between, will benefit. Through unified standards and a common language, participants of all sizes will be better positioned to improve efficiencies, grow their organizations, offer new value-added services and gain a competitive edge in the marketplace.