A major change to standards is coming and we all need to be aware of it. The regulators have decreed that the payment industry will standardise on ISO20022 as the accepted common standard, replacing other standards used today.
So, what is ISO 20022?
ISO 20022 is a global standard for exchanging electronic messages (often termed “Electronic Data Interchange” or EDI) between financial institutions. It was initially introduced by the International Organisation for Standardisation (ISO) in 2004 to give the financial industry a standard platform for developing messages in one eXtensible Markup Language; known as “xml”.
The standard covers financial information transferred between financial institutions that includes payment transactions, securities trading and settlement information, credit and debit card transactions, and other financial information.
Why is it important?
As with any language in today’s world, there are multiple ways to say the same thing. Similarly, there are different messaging types and formats within the current financial landscape to convey the same message and information between two parties; and each is specific to its own geography and commercial environment.
With the advent of Open Banking and PSD 2, new entrants to the banking and payments industry such as the FinTech’s and Challenger Banks, are introducing innovative and newer ways to initiate payments within an increasingly globalised world. Consequently, it is now more than ever essential to make use of a common standard, that enables all financial and commercial institutions to communicate with one another irrespective of; country, culture, and a financial entity’s current internal methods used for connectivity, interoperability and payment technology. The aim now is to standardise the “communication and messaging language” used between systems and traditional infrastructures, and realise end-to-end processing across different domains and geographies. As data and systems become increasingly diverse as the global economy becomes more interconnected, the payments industry itself becomes more complex; as a result it then relies upon a “common language” to keep the required dialogue open. ISO 20022 is set to become this “common” or universal language.
What does ISO 20022 mean for the Payments Industry?
ISO 20022 is emerging as the common language and model for financial messages across the world. As major currencies adopt ISO 20022 formatting, SWIFT (the global inter-bank messaging network) estimates that 80% of all global low and high-value payments and infrastructures will be processed using ISO 20022.
The FCA is right behind this initiative.
On 8th November 2018, the Bank of England, and Pay UK (UK’s leading retail payments authority) announced the creation of a “Standards Advisory Panel”. This is a senior group of industry professionals, whom provide strategic advice on the adoption of new payments standards in the UK, with an immediate focus on ISO 20022.
This goes hand-in-hand with the introduction of a common credit message across the domestic UK Payments Networks, which include: CHAPS, Faster Payments and Bacs. This approach will be made possible by plans to introduce a renewed Real Time Gross Settlement System (RTGS) as part of the proposed UK “New Payments Architecture”.
What are the advantages of ISO 20022?
Standardising financial messaging through ISO 20022 not only offers a common global language for corporates and financial institutions, but also brings about three distinct advantages; and these are:
- Linking messages to business processes; this means that messages are easily and universally recognisable
- Re-using existing components; this means that institutions only need to map the new formats into internal data structures once
- The use of “xml” syntax as an international open standard; this assists interoperability, and enables automated transfers and straight through processing across entire processing chains
Eventually, this specific standardisation will lead to enriched data carried in payments messages that will enhance analytics, improve compatibility across technology platforms, improve fraud prevention measures, and create opportunities for greater internal industry collaboration, and collaboration with external corporate customers.
- ISO 20022 is an “International Standard” prepared by the “ISO Technical Committee for Financial Services.” It has gained global acceptance as the “open standard” for payments and messaging, and is now used as the common data model for payment systems and applications around the world
- Adoption of this common standard means the end of customised bank and application specific data mapping routines. It also means the end of the utilisation of multiple messages, which all provide the same transaction remittance data, but in different formats and syntaxes
- ISO 20022 provides richer and higher quality data. This means much more detailed information about an individual payment is available. Messages will be harmonised with payment systems around the world. By 2025, the industry’s aim is that the high value payment systems of all major reserve currencies will have moved to this standard
- Currently ISO 20022 migration is not mandatory from a regulatory perspective. However, those that do not act now risk being excluded from the international payment systems and global interoperability. However, it is likely that eventually in the UK, this standard will become the mandatory rule
- ISO 20022 enables improved payments trend analytics, and predictive data for corporate customers. By analysing fields like: payment methods used, the number of transactions undertaken over an agreed period, payment amounts, and requested execution dates; such data provides a detailed insight as to how the average value and volume of payments and accompanying payment processes made by each corporate, can be improved. Such detail is “food” for the recently emerging industry of “Data Analytics” whose suppliers are now working ever more closely with FinTech’s and Banks
- ISO 20022 uses XML syntax and offers structured rich data
- This format is already used by many real-time, low-value and high-value clearing systems around the world
- The standard provides richer references and improved remittance information
With the need for more complex structure and dedicated fields within the payment message and encompassing message details, this formatting standard creates greater and more detailed communication efficiency. Consequently, as alluded to earlier; rather than managing multiple market systems that speak different languages, ISO 20022 offers a “universal” messaging language.
In today’s global banking industry, sending and receiving robust payment details is critical; not only for seamless interoperability, but also for improving the client experience and screening measures. With ISO 20022, financial institutions can screen more readable content, and recognise where data starts and ends, so enabling them to assess the overall messaging efficacy, messaging accuracy, and the benefits attributed to the compactness of the payment detail within the message itself. As a result, the impact for financial institutions expands beyond payables and receivables to transaction monitoring, client reporting and many other elements. Therefore; to take advantage of this scenario, planning for migration to ISO 20022 sooner rather than later, is key.
ISO migration is more than just a technical project for tactical execution. It releases the potential to shift from “passive to active” payment processing. It is not simply a standard with which banks must comply; but also an industry opportunity to capture rich and high quality data, and embrace data-driven innovation in this new digital world.
In today’s global environment, economic interaction together with financial and commercial operations, products, and services, are all about who owns the data. This new and highly structured messaging format means that systems can read messages better, thereby enabling faster automation and resolution. As such; data is key to everything, and ISO 20022 helps the organisation reach this “nirvana!”
From the corporate client perspective; additional benefits further include efficient reconciliation, enhanced invoice information, and fewer manual processes when it comes to – for example – implementing a reduction in “days’ sales outstanding;” or implementing an improved “working capital” cycle. Also apart from paving the way for more flexible payment structures, ISO 20022 helps accommodate corporate treasury needs, along with evolving market dependencies. It further enhances the Corporate Customer/Bank relationship through simpler, faster, and easier to understand transaction payment processing, and payment reconciliation.
Mansion House, one of our partners, offer sound advice on implementing ISO20022 and the benefits it can bring your organisation. Contact us for an introduction to the right person.
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