ISO 20022 ushers in a new era in banking payments. Are banks ready for it?
For years together, global payment processing of high-value transactions has been a challenge. This has been due to the lack of common formats and standards across borders. The world is now moving towards a common international standard for financial messaging called ISO 20022, which is highly structured, data-rich, and offers a standardised set of rules and practices, thereby increasing interoperability among local and international financial institutions.
ISO 20022 is based on a flexible framework that covers trade, cards, payments, securities, and foreign exchange. It applies to domestic, cross-border, Automated Clearing House (ACH) payments, real-time payment systems (RPS), and high-value payment systems (HVPS). Banks and financial institutions (FI) need to move from the legacy SWIFT MT messaging standard towards ISO 20022.
The need for banks to adopt ISO 20022
The lack of standard messaging for high-value business transactions makes it imperative for banks to adopt ISO 20022. Payment networks and business processes need to be integrated as customers need a seamless payment experience. Global payment networks need to use a standard and structured payment methodology that will enable banks to offer better digital solutions. It will improve compliance as well as cater to high-value and cross-border payments, leading to better efficiency and reduced costs.
ISO 20022 offers an adaptable, extendable and common global business messaging syntax that enables interoperability across countries. It uses an XML format which allows context-specific payment information to be specified, resulting in high quality of data.
Along with interoperability, operational flexibility and increased efficiency, the adoption of ISO 20022 will result in better straight-through-processing (STP) rates and automatic reconciliation processes, increased payment speeds and reduced costs. A seamless global payments system results in reduced manual efforts and translations, allowing banks and financial institutions to pursue value-added data-driven services, thereby offering better customer experience.
The path to ISO 20022
While there are significant benefits to adopting ISO 20022, the transition requires significant investment in terms of time and money. Migrating to ISO 20022 is complex as it will impact most banking processes. In the mid- to long-term, to support payments, banks will need to transform their infrastructure and processes related to client systems, reporting, risk management, accounts reporting, exceptions management, and payments processing. Banks and FIs with legacy infrastructure may have to undergo a technology transformation to adopt ISO 20022 to be able to handle large-scale transaction volumes and payments data at a faster rate. The industry will need to ensure that clients and employees are completely trained and comfortable with the new standard. Given the far-reaching impact of the new standard, this is an enormous challenge and cannot be underestimated.
Globally, 70+ countries are already using ISO 20022 in their domestic payment systems, including Switzerland, Japan, China and India. According to the timelines given by SWIFT, banks across the globe need to update their messaging infrastructure ahead of November 2022. Since migration to ISO 20022 is a complex process, and organisations may be at different stages of readiness, SWIFT has specified a global rollout timeline from November 2022 - November 2025, where the legacy SWIFT MT messaging and ISO 20022 will continue to co-exist.
ISO 20022 is not just about compliance. Banks and fintechs will need to strategize and partner with software vendors to scale up their IT infrastructure and undergo a digital transformation to take full advantage of the new standard.
ISO 20022 - Adoption by banks
Going beyond being just a messaging standard, ISO 20022 offers a comprehensive business model that is independent of the network and business domain, which means that it can be used by any business in the financial sector.
While ISO 20022 is mandated by the financial industry, the extent of adoption can be decided by the organisation. The banks and fintech companies which decide to go the whole hog will gain long-term efficiency and will be the preference for customers who demand faster and seamless payments. Every organisation is different, and banks need to decide their strategy based on their internal processes and business goals.
To achieve strategic transformation, banks should assess their current state, and do an impact study of the changes that affect the payments value chain. Ongoing initiatives that overlap with ISO 20022 should be considered. The organisation should then identify the impact of ISO 20022 and list gaps with respect to operations, applications, infrastructure, integration and so on, develop a strategic transformation plan, and identify vendors and partners to close the gaps. Lastly, the organisation should develop a roadmap and a migration plan.
Banks and FIs will require to dedicate significant time, resources and money to be able to re-strategize and develop a new business model that takes advantage of the ISO 20022 standard. Using the standard for long-term gains will need banks to become more agile and hyper-productive through a business transformation and offer value-added services resulting in revenue growth, better operating efficiency and modernization.*
*For organizations on the digital transformation journey, agility is key in responding to a rapidly changing technology and business landscape. Now more than ever, it is crucial to deliver and exceed on organizational expectations with a robust digital mindset backed by innovation. Enabling businesses to sense, learn, respond, and evolve like a living organism, will be imperative for business excellence going forward. A comprehensive, yet modular suite of services is doing exactly that. Equipping organizations with intuitive decision-making automatically at scale, actionable insights based on real-time solutions, anytime/anywhere experience, and in-depth data visibility across functions leading to hyper-productivity, Live Enterprise is building connected organizations that are innovating collaboratively for the future.