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(ISO) 20022: A Payments Odyssey

ISO 20022 (developed by the International Organization for Standardization (ISO) Technical Committee 68) has been around since 2004 but there has been little incentive to… Read more

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ISO 20022 (developed by the International Organization for Standardization (ISO) Technical Committee 68) has been around since 2004 but there has been little incentive to force financial institutions to migrate to the standard, until it became clear that the Single European Payments Area (SEPA) would only really work if everyone spoke the same (payments) language.

The standard covers payment transactions, securities trading and settlement information, credit and debit card transactions and any other financial information transferred between financial institutions. At present, over 70 countries have already adopted ISO 20022.[1] While it is not mandatory to switch to ISO 20022, anyone who does not do so risks being excluded from the global payments system and could be missing a valuable opportunity to improve operational efficiency and update models. The Payment Systems Regulator’s Specific Directions for Pay.UK’s introduction of the New Payments Architecture for retail payments includes the adoption of ISO 20022 as a key principle.[2]

ISO 20022 is a global standard for payments messaging that creates a common language for payments data relating to high value and time critical payments being exchanged across the globe. It standardises the data and groups it into transactions. In the UK this is intended to be implemented by the Bank of England and Pay.UK via a Common Credit Message. The change impacts anyone who makes or provides digital payments and is a direct or indirect participant in any of the payment schemes or provides associated technologies.

In May 2017 the Bank of England announced its intention to replace the Real-Time Gross Settlement (RTGS) system for CHAPS payments. One of the key parts of the Bank of England’s new vision was the move to ISO 20022. The Bank of England, the Payment Systems Regulator and Pay.UK consulted on the move to ISO 20022 in summer 2018 and the payments industry was largely supportive.[3] The Bank of England’s timeline is split into a preparation phase (to be completed by the beginning of 2022), an introductory phase (running until mid-2023), an enhancement phase (due to be completed by Q1 2024) and a mature phase.[4]

Over the next four years, the Bank of England, the Federal Reserve and The Clearing House in the US, Eurosystem and EBA Clearing in Europe will all modernise their High Value Payments Systems and migrate to ISO 20022.[5] Accenture states that “the move to ISO 20022 by all major RTGS and high-value payments systems globally is one of the most far-reaching and widely underestimated initiatives currently underway in the financial services industry”.[6]

In the UK, payment systems such as CHAPS and retail payments systems operated by Pay.UK, such as BACS and Faster Payments will migrate to ISO 20022. However, Pay.UK has recently issued a consultation to seek advice from the industry on how best to do this.[7]

The Open Banking initiative also requires ISO 20022 API specifications to enable consistency across the payments chain.[8]

Are there any benefits?

As ISO 20022 creates a common language no matter where a firm is located, it allows participants in different markets to communicate using agreed terminology. As such, it has particular benefits for international financial communication between financial institutions, their clients and domestic or international market infrastructures, such as payment schemes which are involved in processing financial transactions.[9]

SWIFT estimates that by 2023, up to 80 per cent of high-value payments by volume and 90 per cent by value will have migrated to ISO 20022. [10] The move to ISO 20022 has been described as the “first step towards payment automation” because of its ability to remove the need for human intervention.[11]

The benefits of the migration to the standard are stated by the Bank of England to be[12]:

more efficient data collection improving decision making and analytics;
more efficient processing, meaning less need for banks to make manual interventions (meaning reduced costs);
better quality data leading to product innovation and more competition and innovation within the financial sector;
greater resilience as messages can be re-routed to reduce the impact of any outages;
richer data making detection of fraud and financial crime easier for businesses; and
increased responsiveness to changes in innovation and in the economy.

While there are many financial institutions currently operating the ISO 20022 standard, not all are, and this means that the rich, structured data sent by a financial institution using ISO 20022 will become truncated further down the payments chain as there is difficulty in translating the rich data into another standard. The result of this is a significantly degraded service quality for the bank’s customers despite the originating bank being ISO 20022 compliant and possible compliance issues for downstream banks if the originator and beneficiary details are incorrect.[13]

What are the potential challenges?

This week SWIFT has announced its intention to delay its implementation of ISO 20022 for cross-border payments and cash reporting until the end of 2022, pushing it back by one year. SWIFT states that this is in order to enable financial institutions to migrate at their own pace in line with their innovation priorities.[14] This is likely to mean that there will be a period of co-existence where SWIFT will have to use a conversion service to covert its MT messages into ISO 20022 format.[15] The delay will not affect SWIFT’s migration initiatives for other market infrastructures such as TARGET2, EURO1 and the new RTGS.

SWIFT has made clear that “work already undertaken by the community for ISO 20022, including data remediation, channel improvements and back-office processing is not wasted and will play a critical role in enabling future innovation by banks”.[16]

For many large, financial institutions this will form just another small part of their overarching transformation projects, but for some smaller payment service providers the migration will mean significant investment and changes to processes, data storage and user channels. This could entail struggles against transition demand, legacy systems and the changing architecture of banks.[17] ISO 20022 means the processing of 3 times more data than usual and that will inevitably prove a strain on existing banking infrastructures.[18]

The Bank of England has highlighted some of the specific challenges that stakeholders will need to be mindful of:[19]

if you are a direct member of a payment scheme then you will need to ensure that your payment instructions to the central infrastructure are ISO 20022 compliant;
if you are an indirect member of a payment scheme then you may be required to send message to correspondent banks in a new format;
if you are a corporate treasurer or make payments then banks may require new information which may be in a different format; and
if you are a technology vendor to any of the above, customer demand and functionality of systems may evolve.

Final thoughts

While ISO 20022 might not feel like something that should be top of the agenda right now with topics such as coronavirus, Brexit and Strong Customer Authentication getting far more press attention, banks not currently using the standard should dedicate time and resource to making the most of this opportunity to realise the benefits of the migration, and ensure that changes to infrastructure and business strategy are prioritised so that banks are prepared for future changes to digital payments. The shift to ISO 20022 will make payments processing and regulatory compliance easier, and help meet the global demand for round the clock payments and digital banking. Those with the least cumbersome and most adaptive systems in place are likely to become pioneers in the future development of the payments ecosystem.

[1] https://cib.db.com/docs_new/UltimateGuide-EN-Top.pdf

[2] https://www.wearepay.uk/what-we-do/standards/iso-20022/

[3] https://www.bankofengland.co.uk/-/media/boe/files/payments/rtgs-renewal-programme/iso-20022/iso-20022-consultation-response.pdf?la=en&hash=A6A1D4189565E5B2B3CFE766B51043D041A7B215

[4] https://cib.db.com/docs_new/UltimateGuide-EN-Top.pdf

[5] ISO-20022-migration-the-biggest-change-in-payments-since-SEPA

[6] https://bankingblog.accenture.com/iso-20022-watershed-moment-payments-industry

[7] https://www.finextra.com/newsarticle/35234/payuk-seeks-industry-feedback-on-iso-20022-recommendations

[8] iso-20022-watershed-moment-payments-industry

[9] https://www.wearepay.uk/what-we-do/standards/iso-20022/

[10] https://bankingblog.accenture.com/iso-20022-watershed-moment-payments-industry

[11] https://internationalbanker.com/banking/the-payment-processing-revolution-why-banks-need-to-plan-for-iso-20022/

[12] https://www.bankofengland.co.uk/-/media/boe/files/payments/rtgs-renewal-programme/iso-20022/iso-20022-factsheet