Published: February 07, 2024
The new financial messaging standard is potentially revolutionary for the global payments industry, with far-reaching implications for FIs and corporates. Here, two experts discuss ISO 20022 and highlight the many benefits it could deliver, not least unprecedented cash visibility and control for treasurers.
The global payments industry has undergone a sea change in recent decades – it seems hard to believe that as recently as 2010 the quickest way to get money from London to New York was to actually fly it out there. Payments processing is now on the cusp of another major transformation as FIs and corporates eye the switchover to ISO 20022, the new financial messaging standard.
The new standard, whose history of development goes back to 2004, is arguably the most important transformation in payments messaging since the introduction of the Single Euro Payments Area (SEPA) in 2008.
It aims to create a single common language for payments globally to support every kind of financial transaction. This is being made possible, says Jeremy McDougall, Director, UK Payments Consulting, EY, by the consistent structuring of data within ISO 20022 payments messages.
As a result, at the top level of the payments infrastructure, the new standard promises to facilitate greater interoperability between different payment schemes, ranging from domestic structures such as Clearing House Automated Payment (CHAPS), to cross-border payments via SWIFT. In addition, ISO 20022 aims to standardise securities settlement, trade finance, and FX transactions.
McDougall believes the broad impact of ISO 20022 will be far reaching: “This new messaging standard is helping to accelerate an already rapid push toward greater digitalisation across the global economy. It will support greater interoperability, data and analytics sharing, and ultimately drive a better understanding of customers and how to service them.
“ISO 20022 is designed to improve the payments experience for banking customers including corporate customers. Banks will be able to complete pre-validation and compliance checks – and ultimately process payments – more quickly and securely.”
According to the Bank of England, more than 70 countries have already adopted ISO 20022 in their payment systems, including Switzerland, China, India and Japan. SWIFT, which began its own migration journey to ISO 20022 in March 2023, estimates 80% of global, high-value payments by volume will be processed through the standard by 2025. In the UK, CHAPS and the BoE’s real time gross settlement system (RTGS) migrated to the ISO 20022 standard in June 2023.
Two overarching benefits of ISO 20022 stand out for McDougall: operational efficiency and cost reduction. The inclusion of richer, better structured data that ISO 20022 allows to be carried in payments messages will enable counterparties, intermediaries, and beneficiaries to increase automation in transaction processing. This, in turn, will reduce manual interventions and improve visibility of cash flows and cash positions.
McDougall explains that ‘structured data’ means that message information will appear in the same place in a specific format in every ISO 20022 payment. ‘Richer data’, meanwhile, will provide the opportunity to include more information within that structured format. ISO 20022 adopters need to understand the implications of these key features, he says.
The potential benefits of ISO 20022 for treasurers appear great, notably the enhancement it promises for their cash flow forecasting and reconciliation processes, but there are also some major challenges for them on the road to adoption.
McDougall explains further: “The new ISO standard will alter and improve the structuring of reporting messages, such as the structuring of name and address information. It will also capture additional information such as Purpose Codes for payments and Legal Entity Identifiers (LEIs). Corporate treasures will have to ensure their systems, processes, and people are prepared for these changes, offering training for personnel where required.”
While the way in which ISO payments are instructed through a bank’s preferred channel will most likely remain the same, McDougall advises corporate treasurers to liaise with their banks to ensure they are abreast of any change in requirements.
He adds: “Currently, the MT 940 end-of-day account statement remains dominant for cash management. However, if a payment is initiated in ISO 20022 format, but the end-of-day statement is in the old MT 940 format, this may lead to data truncation. Therefore, to avoid data truncation or loss of data, corporate treasurers should look to move towards an entirely ISO 20022 format for both payments and cash management messages.”
More specifically, McDougall says the structured format of ISO 20022 provides increased automation potential, enabling faster decision-making so that payment cut-off deadlines can be met for sweeping and investing activities. In addition, the real-time tracking of a payment status means treasurers will have better visibility of cash movements and landings.
By reducing friction in the bank-to-bank space, the adoption of ISO 20022 will, continues McDougall, lead to transactions being processed faster, and therefore improve corporate working capital due to reduced investigations. In addition, structured remittance information will see improved invoice reconciliation. Key to this capability is the ISO 20022 pain.001, a payments initiation message that depicts a credit transfer message in XML format. It will enable improved cash flow through the processing of large volumes of invoices at once.
An essential step for adoption of ISO 20022 is migration from the legacy MT standard, which has been in place since the 1970s, to the newer, ISO 20022-compliant XML-based MX message standard. As it stands, non-compliant messages will be rejected after November 2025.
To fully leverage the benefits of ISO 20022 for their organisations, McDougall urges treasurers to proactively identify data fields that would be most useful and relevant to their business. He says: “The value of ISO 20022 will depend on business usage and adoption, and corporate treasurers have a vital role to play in accelerating this process. Actions they should be taking right now include liaising with their banks to ensure they are aware of upcoming changes and impacts on day-to-day processes.
“Where possible, treasurers should begin to assess systems, processes, and operational teams for readiness to receive ISO 20022 messages and data. To benefit from improved reconciliations and reduce issues with compliance in the future, treasurers are also encouraged to explore the ISO 20022 standard for cash management reporting as a priority. This is because it will provide more accurate cash flow forecasting and mean fewer problems with payment reconciliations.“
McDougall also advises corporate treasurers to note that the planning and delivery for ISO 20022 implementations can, depending on the organisation, take several years due to the number of technical and operational changes required. These include testing of all applications and business processes to ensure systems can consume the new data and carry out the necessary processes and controls, as well as staff training and upskilling to ensure familiarity with the new standard.
Migration to ISO 20022 for cross-border payments and reporting plus (CBPR+), SWIFT’s programme for adopting ISO 20022 for cross-border payment and reporting messages in the correspondent banking space, began in March 2023, marking an important milestone. Both MT and ISO 20022 messages, however, will be supported until November 2025.
While ISO 20022 is a global standard that is being adopted as the new benchmark standard in payments messaging, McDougall stresses it is the financial market infrastructure in each country that will dictate how and when it is adopted in each region. While there will be variation in how data is collected across markets, importantly, all of that data will still be exchanged in the same language, enabling harmonisation of cross-border payments.
“For example, central banks of countries including Bahrain and India have made payment Purpose Codes mandatory, while other regions have not. In March 2023, the European Central Bank launched its T2 wholesale payment system – which comprises an RTGS system and a central liquidity management tool – mandating that all transactions meet the ISO 20022 standard.”
McDougall is clear that ISO 20022 impacts all FIs active in cross-border payments as well as financial market infrastructures (FMIs), the network of systems that enable the clearing, settlement, and recording of financial transactions.
He continues: “The complexity and scale of the change, coupled with the long implementation period, makes the adoption of ISO 20022 a challenging task for banks. Updating complex existing architectures and legacy payments systems is a time-consuming and costly exercise. Payment providers also need to consider upskilling staff to become familiar with the new ISO 20022 format.
“Banks will need to implement solutions that are able to process the structured and rich data, as it will impact core payment applications, middleware, and reconciliations and compliance-related systems for anti-money laundering and sanctions screening. Having an end-to-end view across the payment value chain is critical, and should be in place before the end of the SWIFT co-existing period in November 2025.”
McDougall is certain, however, that despite the scale and challenge of this change for banks and corporates, ISO 20022 presents unprecedented opportunities for the future of payments: “Banks can offer better services and maintain client-centricity, while corporations and clients can benefit from the data-rich messages thanks to efficient processing and time savings from reduced manual intervention.”
Banks have been proactive in addressing the challenges presented by the transition to ISO 20022 and arguably none more so than BNP Paribas, which regards itself as one of the industry front-runners with migration to the new standard.
Wim Grosemans, Global Head of Product Management, Payments and Receivables - Cash Management, BNP Paribas, says the bank’s “progressive, determined” approach to migration has already delivered notable successes. They include its successful migration of TARGET2, EURO1, and CHAPS to ISO 20022 during the spring of this year.
Grosemans says: “These are three important milestones achieved by the bank in support of the ultimate goal of instant and frictionless payments that ISO 20022 will enable. At BNP Paribas, we strongly believe in the huge benefits that the ISO 20022 standard will provide. That is why we are executing our ISO 20022 strategy at full speed. Our capabilities to produce XML messages instead of MT are growing rapidly.
“With ISO 20022, high value and real-time payment systems are converging on a common financial language, which is both richer and more structured. It will enable us to get closer to a world of borderless payments with increased interoperability between various payments infrastructures.”
Grosemans is clear that while the initial ISO 20022 migratory targets are focused on interbank transactions, the impact of these deadlines on corporates cannot be understated. At the same time, he acknowledges the challenges ahead for clients. One of the biggest concerns for corporate treasurers, he says, is ISO 20022’s requirement for fully structured party addresses. Under the current messaging regime, address fields for beneficiaries are merged. A major concern for treasurers is that it would require a significant amount of time and manual effort to separate out these fields to meet the proposed new ISO 20022 structure, which requires the building number and street name of the beneficiary party to be shown in different fields.
Grosemans says that, as it stands currently, there will be an obligation for corporates to send fully structured addresses of the counterparty with their payment instructions by November 2025. He adds: “That may be postponed by a little – we don’t know yet. It is certainly possible we will end up with a kind of hybrid solution for the fully structured address lines, which helps address corporate treasurer concerns. Otherwise I fear it’s just going to be too complex and costly an exercise for them.
“There is no obligation yet for corporates to move away from what they have today and start using ISO 20022 as a payment initiation format, though they can do so if they want to. From a banking perspective it would, of course, be great to have fully structured remittance data. If we can do that using XML texts we would have much more granular information, invoice by invoice, and that could really help, for instance in identifying fraudulent payments and improving automation of investigations.”
BNP Paribas is certainly seeing increasing numbers of clients being proactive themselves in preparing for migration and adoption of the new standard. “They are rethinking, rationalising their connectivity for the move to ISO 20022,” says Grosemans.
“We believe migration to ISO 20022 presents a major opportunity for corporates to enhance their financial operations. It’s an ideal opportunity for them to evaluate current processes and identify areas that can be streamlined and automated to increase efficiency and even minimise risk. This may include data aggregation, format conversions, workflow management, sanction screening, transaction validations, flags, reporting and more.”
With ISO 20022 becoming increasingly high profile and the November 2025 deadline for the switchover coming into view, corporate treasurers understandably may be feeling anxious about the challenges posed by the migration.
Grosemans, however, is reassuring: “For those who are worried about being left behind, my first message is do not panic. Many, many corporates are in the same position. From some of the posts I’ve seen on LinkedIn, for instance, it’s easy to gain the impression that there’s an acute need to do something, that they are lagging behind. That is not true. They have time.”
The second crucial point for corporates to note, says Grosemans, is that the ISO 20022 rules for them – for example, regarding fully structured addresses – have not yet been finalised. That, he says, makes it all the more important for banks to ensure they keep clients fully informed of developments and decisions over ISO rules that will impact them. Equally though, it is vital that corporates are proactive in seeking help from their banks, he stresses.
“Once some of those final decisions have been made, for example on structured addresses, there is going to be a lot of work ahead for corporates. So my advice to them, especially their treasurers, is hunt down the people in the organisation that are managing the data, work with them to come up to speed with developments, make sure you are all on the same page. That will really help when the serious work begins.”
While watching and waiting for the ISO 20022 regime to be finalised, corporates should also be thinking about how their connectivity to banks from a payment initiation reporting perspective will evolve, and how treasury centralisation strategies may help.
Grosemans concludes: “There is no denying there are potentially significant challenges for corporates posed by the new standard. The ISO 20022 train is now picking up a head of steam, however, and the one fact corporates can be sure of right now is that the train is heading their way. Keeping abreast of developments is vital. It can be worrying, so speak to your banks. Don’t lose sight of the many benefits that will flow though from ISO 20022, and think carefully about how you can best exploit the frictionless cross border payments of tomorrow.”
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