Many of the world’s most important payment market infrastructures are transforming to meet the needs of automation, integration and real-time services. All of this is underpinned by the migration to a new payments messaging standard – ISO 20022. For banks and corporates, this is more than just another IT project; it signals a major opportunity to improve payments processes and reassess business models. Paula Roels looks at the implications
“Even the best-designed standards only take off if they meet real and immediate needs in the market,” said Stephen Lindsay, Head of SWIFT Standards, back in 2015.1 For ISO 20022, a global standard for payments messaging first created in 2004, take-off has taken 15 years. Now the moment has arrived.
Globalisation and the increasing need for interoperability of payment flows put the need for a global standard on the runway some time ago. Yves Mersch, Member of the Executive Board of the European Central Bank, described the building of financial market infrastructure on individual or national solutions as “anachronistic” in a speech given in Brussels in February 2018.2
Yet it is digitalisation – and with it the need for automation and faster, or even real-time, payments – that has signalled take-off. Different messaging standards are a hindrance to data automation capabilities, with payments often having to be converted at payment gateways – not always leaving all information intact.
In other cases, information has to be truncated when processed by banks that are not capable of handling data-rich formats, and enriched once more after processing. Not only does this mean inefficiency and potentially lost transaction data, but it is also a big impediment to fulfilling anti-money laundering compliance and fraud regulatory reporting – at a time when it is more arduous and more closely scrutinised than ever.
Enter ISO 20022, which allows for the introduction of new data components, meaning that far richer information can be transmitted.
Make no mistake, the decision by major central banks and SWIFT to migrate to ISO 20022 is a game-changer in payments processing. It promises greater interoperability between various settlement networks, leading to simplified global business communication, richer information flows, higher levels of straight-through processing (STP) and more efficient compliance-driven processes.
This is not simply another IT project. Rather, it signifies an opportunity for banks and corporates to improve operational efficiency and reassess existing business models. It appears that most are onboard, with SWIFT’s Lindsay noting an overwhelming response to migrate to ISO20022.
Market infrastructures flock to new standard
ISO 20022 has already been introduced for High Value Payments Systems (HVPS) in Japan, Switzerland and China, and is the standard for instant payments in Australia, the US, Canada and Singapore.
But all eyes are now on the world’s major currency areas: over the next few years the US Federal Reserve and The Clearing House, the Eurosystem and EBA Clearing and the Bank of England’s real-time gross settlement service will all modernise their HVPS with ISO migration (see Figure 1).
Bigger than just a banking issue
This promises a future where banks and their clients can effect payments far more efficiently and economically.
It is understandable that messaging standards may not get many corporate treasurers’ hearts beating overly quickly. But looking at this as just another messaging standard would be a mistake. So allow me to try to at least raise the tempo slightly. Imagine receiving a payment message with rich information – including data on invoice number, account number, and customer number – that can be easily and automatically recognised by your enterprise resourcing processing system for more effective STP, auto-matching and auto-reconciliation. Excited?
This end-to-end transmission of ISO 20022 messages will, in turn, increase transparency and support financial institutions by providing secure payments processing and conforming to compliance regulations. It should also be used as a basis for reassessing existing business models or, at the very least, redesigning substandard business processes.
The introduction of ISO 20022 in certain currency areas to date highlights the potential financial benefits. PwC suggests, for instance, in a report authorised by the European Commission, that the Single Euro Payments Area (SEPA) has resulted in €21.9bn of cost savings per annum.3 Even accounting for the fact that SEPA migration encompassed more than just the migration to ISO 20022, the savings associated with standardised messaging have probably been considerable.
Think long term, not shortcuts
Now for the reality check: such benefits cannot be accessed without some hard work. For an idea of the scale of the migration, think back to the transition to SEPA or the introduction of the euro. A mid-sized bank could expect a four-digit outlay in terms of project working days; for larger banks, it will probably be even more.
The impact extends beyond just core payments systems, touching everything from booking systems to embargo and know your customer systems, through to electronic banking, liquidity management and archiving. And it is not just cash management – securities, trade finance, global markets and treasury departments will also need to be able to process the contained information and apply it elsewhere.
Inactivity is not an option, given the risk of losing access to key payment market infrastructures. So what are the options?
Given the effort required, it is understandable that some banks may look for shorter migration journeys. On the face of it, maintaining existing systems and converting existing formats into ISO 20022 or vice versa – either at the inlet or outlet of the payments processing system, or at the interface – makes sense. But not only do you risk losing information this way, you almost certainly miss a fantastic opportunity to improve efficiency and better service clients.
As such, a strategic restructuring of internal bank information flows must be the way forward. Acting as a ‘first mover’ may potentially result in a competitive advantage – bringing forward the benefits of harmonised standards, amortising the investments on the bank side and securing end-to-end efficiency of the payments ecosystem. Yet it will require a clear strategy, making it crucial that senior management spearhead change from the outset.
Now is the time to fasten your seat belts and get ready for take-off.
Paula Roels is Head of SWIFT & Market Infrastructures, Cash Management, Deutsche Bank
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