Whether paying for a taxi ride from the airport, optimizing your company’s working capital position or making that impulse purchase at the retail checkout, payments innovation has accelerated in every industry imaginable and has reshaped how businesses and individuals make payments. With the increased adoption of real-time payments in recent years, other innovations have come to the fore to accommodate the demands for faster payments. Enter ISO 20022.
What is ISO 20022?
ISO 20022 facilitates the exchange of financial transaction data by using standard messaging formats that present a richer, more powerful data structure.
A changing regulatory environment, complexity of new payment flows, and the need for improved data quality to support automation have created a growing need for corporations and financial institutions to adopt a new standard of financial messaging. The benefits derived from additional and more structured information in financial messages include a reduction in investigations, automation of reconciliation processes and a faster cash application cycle.
The aim of ISO 20022 is to replace proprietary messaging formats with a standardized industry format that is based on well-defined data elements. Using a common payments language between banks and corporates will reduce translation requirements, eliminate costs associated with exceptions and reduce errors. In addition, preventing data loss, which causes payment delays and increases inquiries, will improve the speed of payments along the payment chain and facilitate payment reconciliation within end-user ERP systems.
Moving from MT (FIN message types) to MX (FIN+ message types) will further lay the foundation for innovations like the automation of inquiry and service processes and flexible payment routing across different payment rails like instant payments, ACH (Automated Clearing House) or CBDC (Central Bank Digital Currency).
MT and MX messaging
FIN message types (MT)
The industry has been using MT messages for over 40 years and they have evolved from replacing telex communications between banks to supporting more complex payment use cases in the inter-bank space as well as between banks and corporate customers. Created at a time when storage cost was a major consideration, MT messages use a limited set of fields and support about 10 kilobytes of data. To accommodate local practices, these messages have been customized, leading to variability and straight-though processing challenges. In many cases, data needs to map into free format fields and be parsed by the receiver. A change in sequence of data or a misplaced ‘/’ can lead to manual processing.
FIN+ message types (MX)
In comparison, MX messages have a richer and more granular data structure that supports more parties in the payment chain and accommodates structured remittance data. Supporting up to 100 kilobytes, the message has the capacity to support more complex payment use cases and sufficient structured data to support the automation needs of banks and corporates.
For example, instead of a single reference number field, the Customer Credit Transfer message supports six, including an end-to-end reference number that originators can populate and that is transported unaltered through the payment chain. Structured remittance data supports the inclusion of multiple invoices, down to the line-item level, including applicable invoice numbers, as well as line-item codes such as the Universal Product Number or the International Standard Book Number (ISBN).
Adoption of these new data elements will be an opportunity for faster, straight-through payment processing. For example, the greater specificity in data elements describing a payment party supports the segregation of name, structured address data and, if needed, account name data. This granularity supports the opportunity for greater automation in compliance screening processes and a reduction in false positives.
On the road to ISO 20022
Leading the way to a wider adoption of ISO 20022 are interbank payments and messaging platforms such as the U.S. Federal Reserve’s Fedwire Funds systems, CHIPS[1], SWIFT[2], and TARGET2[3]. Their adoption of the standard will follow a specific timeline to grant other organizations enough time to adopt ISO 20022.
Larger corporations and financial institutions are preparing more targeted adoptions that will be in sync with industry guidelines. Other companies are taking a more cautious approach and are awaiting guidance from their banks and technology vendors. Smaller financial institutions will depend fully on the bank platform vendors and the testing schedule set by the Federal Reserve.
Although the transition to ISO 20022 may be a challenge, there are plenty of tools, FI support, and third-party solutions that can ease the transition. An organization’s approach to adoption should be well-defined and in line with its needs and goals.
The particular challenges of ISO 20022 adoption
Although ISO 20022 promises to provide many benefits, highlighted above, the reality is that its implementation may prove to be a challenge for most organizations. Here’s what they are up against:
- Boosting skill levels will be a concern with banks and businesses, as there doesn’t seem to be enough skilled personnel in the ISO 20022 field to educate and train, impeding wider adoption.
- Significant investment is required for modernizing legacy platforms and updating current systems, providing ISO 20022 education, and meeting the cost of translation of MT and MX message types.
- Scaling technology and testing to meet ISO 20022 will be complex.
Although these challenges may pose a real threat to ISO 20022 transition, individually to any one organization and collectively to the industry, they are not insurmountable. Much can be done to facilitate the transition.
Effective strategies for adoption
Here’s a look at what organizations can begin implementing today to start to prepare for full adoption of ISO 20022:
- Position education as a key to a smooth transition. This includes educating employees to gain a comprehensive understanding of ISO 20022. Banks can engage with their customers through educational campaigns.
- Reach out to bank partners and vendors to understand their timelines and experiences. Benefit from the experience of others and optimize your organization’s transition schedule.
- Fully exploit the rich data available. With ISO 20022, the increased data granularity should be conducive to data mining; the resulting insights may assist in enabling further automation and addressing transaction processing pain points, such as compliance screening false positives and manual reconciliations.
- Make ISO 20022 part of your payments’ modernization strategy. Gradually phasing out legacy systems and embracing new technology will position your organization to better mitigate risk and facilitate the migration and support of a digitalized payment ecosystem.
Migration to ISO 20022 affords opportunities
Adopting ISO 20022 is replete with benefits such as the potential for improved reconciliation, enhanced straight-through processing, and reduction of manual exception payment processes. These improvements are not automatic but will require an ongoing dialogue between banks, customers and vendors supporting the payment ecosystem. Banks can specifically look forward to the opportunity to provide an enhanced customer experience, lower costs due to reduced exceptions and better risk management.
With modernization of the messaging standards and data structures, along with collaboration among participants in the payments ecosystem, the adoption of ISO20022 offers the opportunity for a faster, more frictionless payment experience for all.
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Joanne Strobel, Head of Corporate & Investment Banking (CIB) Segments Solutions and Advisory for Wells Fargo Global Treasury Management (GTM), and Michael Knorr, CIB Industry & Advisory Lead for Wells Fargo GTM, co-authored the article.
[1] Clearing House Interbank Payments Systems
[2] Society for Worldwide Interbank Financial Telecommunications
[3] Trans-European Automated Real-time Gross Settlement Express Transfer System