Imagine a world where you can send and receive payments across the globe in a matter of seconds, with more information, transparency, and security than ever before. A world where you can offer new and differentiated services to your customers and streamline your operations and compliance. Where you can speak the same language as your counterparts and reduce the complexity and diversity of the payment landscape.
Sounds too good to be true, right? Well, this world isn’t a fantasy, but a reality that’s being shaped by ISO 20022. It’s a major transformation in the world of payments and the new global standard for financial messages.
So, what is ISO 20022, and why is it important for financial services firms?
At its core ISO 20022 is ‘A single standardisation approach (methodology, process, repository) to be used by all financial standards initiatives’. It’s a set of standards that define the syntax and semantics of electronic messages exchanged between financial institutions. Developed by the International Organisation for Standardisation (ISO) in 2004, ISO 20022 is the successor of ISO 15022 and ISO 7775. It aims to harmonise global payment standards and enable more efficient, accurate, and transparent communication of financial information.
But ISO 20022 isn’t just a technical change. It’s a strategic opportunity for financial services firms to transform their business models, processes, and customer relationships.
Key benefits to adoption for firms:
- More structured and validated data for faster and more accurate processing of payments
- Richer and more granular data for better analytics and decision making
- New and differentiated services to customers, such as enhanced remittance information, cross-border payments, and instant payments
- Improved fraud detection and prevention, as it provides more transparency and traceability of payments
- Support for longer references, non-Latin alphabets, and extensions and customisations
- Reduced rejections, exceptions, and disputes, and enhanced reconciliation and risk management
- Simplified complexity and diversity of the payment landscape, and lower maintenance and operational costs
ISO 20022 also benefits customers by:
- Showing more details and attachments about their payments, such as the purpose, the originator, the beneficiary, and the intermediaries
- Providing faster, smoother, and more reliable payments, with more options and flexibility, such as cross-border payments, instant payments, and enhanced remittance information
- Reducing fees and charges, and increasing straight-through processing rate, as it simplifies the complexity and diversity of the payment landscape, and lowers the maintenance and operational costs
- Improving compliance and security, as it provides more transparency and traceability of payments, and supports extensions and customisations, and helps detect and prevent fraud.
The role of ISO 20022 in preventing financial crime
As we’ve seen, the standardisation of payment messages through ISO 20022 enables financial institutions to have a more comprehensive view of their customers’ transactions, which can help identify suspicious activity and prevent financial crime.
The standard also allows for more data to be sent with payments, and in a more structured format, which can help improve the efficiency and efficacy of financial crime compliance checks.
However, while firms focus on technical readiness, not enough consideration has been given to the downstream impact on financial crime (FC) controls. Firms need to ensure full organisational readiness. All impacted staff across first and second lines need to understand the impact of ISO 20022 for their role. By providing targeted training to colleagues, you can educate them on how ISO 20022 impacts their responsibilities as risk owners and stewards. Operating procedures will also need to be updated to reflect the new standard.
So how is ISO 20022 being implemented in the UK and globally?
ISO 20022 is being adopted by various payment systems and market infrastructures around the world, such as SEPA, TARGET2, Fedwire, and CHAPS. In the UK, the Bank of England (BoE) and SWIFT are leading the implementation of ISO 20022 for domestic and cross-border payments, respectively.
In June 2023, the BoE successfully migrated its CHAPS payments system and its Real Time Gross Settlement (RTGS) system to ISO 20022, as part of its RTGS Renewal Programme. This will affect domestic payments in pounds sterling and require payment users to make changes to the way they send and receive payments.
In November 2023, SWIFT launched its new ISO 20022-based cross-border payments and reporting service, which will coexist with the existing MT message standard until November 2025. This will affect global payments in various currencies and require payment service providers to upgrade their systems and processes to support the new service.
The BoE will also move to the SWIFT InterACT service and introduce enhanced data requirements that will become mandatory from November 2024. This will affect the settlement of payments and other transactions in RTGS and require RTGS account holders to test and migrate to the new platform.
The next big leap
In Summer 2024, the BoE will launch its new core settlement engine for RTGS. It’s set to be modular, flexible, and based on open standards. This will enable the BoE to connect with other payment systems and market infrastructures, and to support new payment innovations and initiatives, such as the UK’s New Payments Architecture (NPA) and the global Financial Stability Board’s (FSB) roadmap for enhancing cross-border payments. A real game changer.
How can you prepare for ISO 20022?
ISO 20022 isn’t just a technical change, but a strategic opportunity for financial services firms to transform their business models, processes, and customer relationships.
Here are five key steps to follow when preparing to implement the standard in your organisation:
- Conduct a gap analysis to identify the areas that need improvement, such as data quality, system compatibility, and business processes
- Appraise, upgrade, or replace legacy systems that can’t support the new message formats, standards, and timelines
- Ensure interoperability between MT and ISO 20022 message formats, by using the SWIFT InterACT service and following the market practice guidelines
- Onboard the standard as soon as possible, to take advantage of the benefits of richer and more structured data, and to have sufficient time to plan, test, and launch your ISO 20022 processes
- Engage with the relevant internal and external stakeholders, such as regulators, colleagues, customers, vendors, and industry bodies, to understand the requirements, expectations, and best practices for ISO 20022 migration. Involve the financial crime and operations teams as soon as possible to help plan for a seamless transition.
As we’ve seen, ISO 20022 isn’t a one and done project, but a continuous journey of innovation and improvement. Firms shouldn’t view ISO 20022 as a mere compliance exercise, but as an opportunity to modernise their payments infrastructure and gain a competitive edge in the global market. By embracing ISO 20022, financial services firms can unlock new opportunities and value for themselves and their customers.
If your technology stack needs modernising or you need a partner to support you, we’d love to chat. Reach out here.