ISO 20022 Is Coming

How to get ready for a big but challenging upgrade to a crucial standard for cross-border payments.

Cross-border payments are set to be transformed by the upcoming introduction of ISO 20022. This new messaging standard will replace existing, ingrained messaging infrastructures—including SWIFT MT messages and their equivalents used by legacy clearing systems, such as CHIPS.

These services are no longer able to adequately support today’s granular business models and payment needs, including the speed and transparency that end customers expect from their service providers.

ISO 20022 is a messaging ecosystem with enriched, structured data at its core. The degree and depth of information that ISO 20022 will facilitate, as well as the increased automation that will come from working with a central standard, will enable banks to optimize payments. That will make for a seamless service, with a better, faster, cheaper, and more efficient experience for clients.

Beneficiaries, for example, will be able to access more detailed, structured remittance information, helping them to automatically reconcile against open invoices and accounts receivable. This, in turn, could enable improved cash flow and counterparty risk management, thereby helping to create opportunities for clients to grow their businesses.

The interoperability of the networks that will be created will allow payments to travel more easily across the globe, across different payment rails. Meanwhile, having robust, quality data at the initiation stage of a payment will help to enable payment pre-validation and result in fewer false positives.

Such capabilities will not only reduce manual intervention and costs, it will also allow for more focused, effective risk management and play a key role in driving 100% straight-through processing rates. And, by increasing efficiencies and removing friction from payments processes, that will allow banks to focus more on value-added activities, such as data analytics.

So ISO 20022 (ISO) will unlock a host of benefits and bring about a new era for cross-border payments. Yet, the path to implementing ISO is far from straightforward, and many banks may not be fully prepared for the scale of what is involved in the ISO migration.

Updating Systems

An important point is the significant discrepancy in the size and amount of data between Message Type (MT) and ISO (also referred to as MX) messages. MX messages will use the XML text-based format, which has many more fields, making it very comprehensive from a data perspective.

Banks will therefore need to ensure their systems are able to source, store, and process the larger set of data. That will, of course, mean preparing payments and financial-messaging platforms. But it must be understood that any system that touches a payment within a bank’s internal ecosystem could be affected as it needs to be able to receive and transmit the additional, structured information. Banks will need to carefully consider this in their ISO preparation.

Besides technology, the importance of communication and guidance cannot be underestimated. Work will need to be undertaken by underlying clients, and banks should evaluate how they can best support them to help ensure they are ISO ready.

For example, unlike MT messages, which have a broad, non-specific field for address information, the address field for ISO messages is much more structured. Corporate clients will therefore need to have the correct information for MX messages in the correct structure and format.

Communication with internal stakeholders is also vital. One of the most important developments for staff to understand is the differences between MX and MT messages. The format description for the MT103, for example, is half a page; the equivalent ISO message spans multiple pages.

The business language traditionally used in the cross-border payments space will also be different. Those currently called “originators” or “ordering parties” will be called “debtors.” These now designated “beneficiaries” will be called “creditors.”

Ultimately, banks need to ensure everybody who supports the business-as-usual payments environment is prepared for the new ISO landscape. A great deal of education and training will be required.

The Coexistence Phase

A key challenge that banks will need to navigate will be the coexistence phase, when some banks will be using ISO and some will be using legacy formats. This is due to the fact that the major market infrastructures are migrating at different times over a period of four years.

The proposed migration dates of different jurisdictions have altered in recent months and the landscape remains fluid, so banks must continue to closely observe developments.

As of August 2020, the migration is due to begin in the United Kingdom with the transition of the GBP (British pound sterling) high-value payments system CHAPS moving to ISO in April 2022. This will occur in a “like-for-like” migration with respect to the data that is to be transmitted, followed, approximately one year later, by the mandatory use of the enhanced version of ISO, when the enriched data is to be used.

November 2022 will see the euro clearing systems TARGET2 and EBA Clearing, as well as SWIFT, move to ISO in its full, enhanced capacity.

With respect to the United States, the situation remains subject to change. Initially, the U.S. market infrastructures had planned a gradual migration starting in 2021 and lasting until 2023. Those plans have been put on hold and we are awaiting publication of the final plans for The Clearing House, CHIPS, and Fedwire. The industry anticipates, however, that the transition will likely occur in the second half of 2023.

Finally, the migration ends in 2025 with the retirement of the legacy messages, with, for example, the discontinuation of category one, two, and nine MT messages on the SWIFT network.

Plentiful Rewards

While the U.K. is migrating in spring 2022, as this is initially on a like-for-like basis only, this development will not have the same impact as when banks begin to use the enhanced version of ISO in November 2022.

Complications will arise for banks then because, though payments could be originated in ISO by a fully ISO-ready bank using and transmitting richer, more structured data, they would have to be cleared through a market infrastructure or correspondent bank in a jurisdiction that has not yet migrated. There will therefore be a significant discrepancy in the level of information that can be received and sent on.

The key question therefore becomes, “How does the industry deal with that funneling process?” There is no easy mechanism for intermediary banks to translate ISO information into legacy formats without potential loss of information. For each extra piece of information received, every bank will have to assess how to deal with it and where to pass it on.

A great deal of effort is under way in the industry to try to address this issue, including initiatives by SWIFT, such as the Cross-Border Payments and Reporting Plus (CBPR+) group, which aims to help formulate a standardized approach to ISO implementation.

SWIFT has also provided training and tools to assist with the migration in general. The Readiness Portal and MyStandards tool have been launched to make it easier for banks to carry out testing and validate their messages.

As the industry embarks on a multiyear journey, it is important that banks are aware of the time and investment involved in the transition and are prepared for the challenges ahead. Equally, however, while the road to ISO implementation may be complex, the rewards will be plentiful.

The ecosystem that ISO 20022 will enable will revolutionize cross-border payment capabilities, allowing banks to deliver a truly optimized end-to-end client experience.

—Isabel Schmidt is global head of direct clearing and asset account services, BNY Mellon Treasury Services, New York City.

[The views expressed in this article are those of the author only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.]