The upcoming conversion to ISO 20022 presents both challenges and opportunities for banks. It allows them to drive potential efficiencies by redesigning operational processes around Swift messaging. However, there is also the challenge of data ingestion; banks will need to ensure every tech platform in their stack, particularly reconciliation and reporting tools, can effectively handle ISO 20022 messaging.

In a recent PaymentsJournal podcast, Nick Botha, Payments Sector Lead at AutoRek, and Brian Riley, Co-Head of Payments at Javelin Strategy & Research, explored where things stand with ISO 20022 conversion, and how workarounds may cause banks more problems than they solve.

What ISO 20022 Promises

ISO 20022 introduces a single standard approach to facilitate communication interoperability between financial institutions, their market infrastructures, and their end users. The deadline for both corporate bodies and financial institutions to prepare their systems is November 2025. 

As the adoption date approaches, banks are relying on Swift’s expertise and resources to ensure the transparency and validity of their transactions. Swift is preparing to introduce a messaging system with comprehensive data insights for many of the 11,000 participating firms. The goal is to create standardization across the market as the transition to a more centralized payments economy unfolds globally. 

ISO 20022 messaging is designed to provide  detailed information on recipients and participants in any payment. It aims to manage data processes and analysis more effectively, potentially reducing some of the cost associated with payments, allowing firms to achieve economies of scale. However, these economies of scale can sometimes be illusory. 

Where Do Things Stand Now?

Organizations are currently in a transitional period where many have adopted the ISO 20022 standards, but others are lagging behind. Migrating systems can be costly, and not all organizations have the resources and funds available to make the switch immediately. During this period, conflicts may arise in messaging when advanced firms transact with those that are still catching up, leading to some friction. 

Significant resources will need to be allocated to this project to ensure interoperability not only with counterparts in the wider economy but also in within the organizations’ tech stack and IT communication systems. The move to ISO 20022 is already somewhat overdue, but for companies that have yet to make the switch, it’s not too late. 

 “A lot of workshopping has been happening across different geographies globally within the Swift network,” said Botha. “If you haven’t done it yet, understand how it will apply to the strategic direction of cross-border payments for your business, especially if you are in the Swift network. If you’re not in that network, it’s still worth adopting the principles behind how this can work, because those 11,000 institutions are working with another 50,000 or 100,000 institutions that aren’t a part of that network too.”

Diseconomies of Scale

As banks and other financial institutions strive to keep operational costs down, they encounter a paradox. In the payments space, increasing transactional volume is typically seen as a path to profitability. But, producing additional volume comes with its own costs, such as expanding infrastructure, providing internal support, and implementing fraud reconciliation software.

The cost of adding transactional volume increases alongside the revenues generated by those transactions. Typically, the margins per transaction don’t increase over time. 

“We’ve had some clients speak to us about how there’s actually a diseconomy of scale at some point,” said Botha. “We’ve seen some firms stop acquiring new clients because they’ve hit that point.” 

The best way to counteract this effect is by creating operational efficiencies and reducing the operational cost per transaction on a daily basis. As margins per transaction  increase, the company can gain more revenue from processing additional volume. This leads to benefiting from economies of scale.

 “Do you really want to be the one who tells your boss you have to slow down volumes because you lose more each transaction?” said Riley. “That doesn’t seem to be something that would work well towards your bonus. This is real-time stuff that needs to get done in very short order.”

Working with a Trusted Partner

If a company is handling a CSV file with a single line of data containing 10 to 15 fields, this task could probably be managed manually by one person. However, large companies deal with millions of transactional records and significant amounts of data that require automation. In such cases, a partner can be exceedingly valuable. They can manage not just payments data but automate the entire process. 

“We save our clients a lot of time in their daily process of just handling the data,” said Botha. “When it comes to ISO 20O22, the major benefit is the reconciliation piece. The reporting aspect has been validated and reconciled.

 “That’s where AutoRek fits—not just in the banking space but in the payment space, insurance space, and even the asset management space,” said Botha. “We are joining them on the journey of transitioning into ISO 20022 messaging. This is the global one-world economy of payments that we’re looking to move toward.” 

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A significant number of large banks say they won’t be ready to adopt ISO 20022 protocols in time for its arrival in 2025, and many of their customers aren’t prepared either. But Swift is attempting to address this issue. The global cooperative has announced a solution for payment initiation, developed in collaboration with dozens of banks and corporate entities, using the ISO 20022 format as part of a major effort to iron out inconsistencies in the use of the messaging standard.

ISO 20022 presents a single standard approach to facilitate communication interoperability between financial institutions, their market infrastructures, and their end users. The deadline for both corporate bodies and financial institutions to get their systems ready is November 2025, or 18 months from now. 

“ISO 20022 is a meaningful initiative in the pursuit of a more robust and standardized messaging format for payments,” said Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research. “The challenge is that it, by design, was made to be flexible so there are many variations of implementations globally. That’s not necessarily a bad thing and the benefits far outweigh the downsides. It does highlight however how important it is to partner with companies that are experts in ISO 20022.”

Swift Takes the Lead

Swift is working with 25 cash management banks and 20 corporates to develop a white-labeled transaction tracking service for ISO 20022 messages across the entire payment chain.  The goal is tostandardize corporate payments complicated by competing standards and proprietary formats. Swift will also help member banks offer their customers ready-made ISO 20022 payment tracking services via API or messaging channel, providing complete transparency on a payment’s status as well as confirmation of its receipt.

Swift says that by standardizing the payment tracking data, financial institutions will be able to offer the same experience across their corporate customer base. Thierry Chilosi, Chief Strategy Officer at Swift, says that the new capabilities will be extended across its wider community later this year.

“Capturing rich data at source will enhance the entire ecosystem, driving us closer to our goals of instant and frictionless transactions,” Chilosi said in a prepared statement. “We’re delighted to be making it easy for our community to extend the benefits to their customers while simplifying and standardizing access to services, such as tracking, which are so important to efficient corporate treasury.”

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