The entire payment world won’t move into ISO 20022 standards simultaneously. Different approaches will be taken.
The financial services industry is always evolving. This is particularly true as enterprises streamline their global communications and messaging infrastructure by adopting a common ‘language’ and standardized communications format.
ISO 20022 is an international messaging standard defined by the International Standards Organization. ISO 20022 is a modelling methodology based on the Unified Modelling Language (UML). It captures business transactions and message flows in a syntax independent approach. It is predominantly used for data exchange between financial institutions. The ISO 20022 messaging standard originated to provide a common messaging protocol which will have a defined central dictionary of business terminologies and rules across all financial messages. All financial institutions across the globe will migrate from current message standards (e.g., SWIFT MT Financial Messages) to the ISO 20022 standard in a phased manner. SWIFT, of course, is the current, global member-owned provider of secure financial messaging services.
The entire payment world won’t move into ISO 20022 standards simultaneously. Different approaches will be taken. The ‘Big Bang’ will see institutions supporting full ISO 20022 data from the beginning. ‘Like-for-like’ migration will see institutions taking intermediate steps with a subset of messages having equivalent data fields in the current data format, limiting its functionalities as additional data requirements are not accommodated.
Understanding the Transition
From November 2022 onwards, SWIFT will accept payment messages in the ISO 20022 format (through FINplus or APIs) in addition to the current MT format. Support for MT messages, however, will be discontinued from November 2025 — after the ‘Coexistence Period’ — wherein both old and new message formats will coexist (from November 2022 – October 2025). Target2 and Euro1 would follow a Big Bang approach to migrate the newer payment standards by November 2022. However, payment schemes such as CHAPS – the Clearing House Automated Payment System — have plans to take a Like-for-like approach first, before subsequently migrating to enhanced ISO 20022 messages.
Key components of ISO 20022 include: the Data Dictionary — a repository of all data that can be reused during business process modeling and message building, and sub-elements Business Concepts, Message Concepts, Data Types, and the Business Process Catalogue (which describes the financial business model, message definitions and schemes). Additionally, Business Transactions cover multiple functional areas, like Payments Initiation (PAIN), Cash Management (CAMT) and Securities Settlement (SEE.)
Key Migration Benefits
- Enhancing consistency and interoperability — ISO 20022 is designed to bring a defined structure, consistency and interoperability to global financial institutions having different messaging protocols.
- Enabling richer data & enhanced efficiency — ISO 20022 messages are much richer in data, accommodate more details and promote efficiencies for payment processing systems.
- Facilitating new age solutions through real time payments – Adoption of ISO 20022 standards can accelerate straight through processing (STP) and implement real-time payments networks.
- Allowing better data quality & analytics – ISO 20022 heightens data quality and data analytics and helps with compliance, while reducing manual intervention.
- Optimizing costs— ISO 20022-backed payments mechanisms have the potential to bring cross-border payment costs down drastically due to compatible message structures and near-instant payments. Payments are expected to be faster, cheaper, and more convenient for retail and corporate customers of banks.
- Enabling new innovations — This global migration paves the way for greater integration of payments and new innovations to benefit end customers, thus enabling real-time retail payments and better money transfer response time for corporate customers through STP.
ISO 20022 Migration Starts Now
ISO 20022 migration will significantly impact the payments industry. Financial institutions need to work closely with regulatory bodies governing the implementation in specific parts of the world, prepare their systems to accept the ISO 20022 MX messages through SWIFT and map out a complete migration plan. Early adopters of full ISO 20022 messages will have a clear advantage by being future ready toward fostering value for customers and harmonizing with the larger payment ecosystem. Financial institutions have to enhance their current payment processors and payment gateways to accept/send the newer messages sets. The transformation process requires careful planning and usage of tools for translation processes. Also, a large implementation process won’t be smooth unless each organization upskills those involved in the programs.
Financial Institutions’ Migration Teams Should:
- Assess and Define the current payment ecosystem and payments processing capabilities, and define a plan for data mapping, changes required, data storage, testing, etc.
- Ensure robust processes are in place to upgrade legacy infrastructure for processing larger volumes of data, and enabling higher throughput, STP, instant payments, systems for liquidity management, compliance check, fraud, and risk management.
- Engage IT teams in end-to-end testing to ensure reconciliation, clearing and backend updates in associated payment systems are happening properly.
- Document broadly— Documentation of SOPs for all aspects of payments is utmost important for resolving the issues in a timely manner.
- Educate & train employees and corporate customers on additional features, information, and data to be provided, while initiating the payment transaction in online mode or batch mode.
[author title=”” image=”http://”]Tuhinabhra Mahapatra, Head of Next Generation Payments, Attra, a Synechron company, Bangalore, India & Shantharam Shenoy, Vice President – Payments and Banking Platform, Transaction Switching, Attra, a Synechron company, Bangalore, India [/author]
