ISO 20022, What Will the Implications of the Long-Awaited Standards?

According to the online data portal Statista, 91% of the global population is expected to own a smartphone by 2026. The on-going shift of consumer habits from traditional face-to face trading to e-commerce is gaining pace. While fragile supply chain process is already pushing international payments meet the industry’s needs for speed, the requirement to instant payment will also come from retail segment.

Countries, which implemented real-time payment systems have witnessed economic growth. According to the report published by ACI Worldwide and GlobalData, inefficient payment systems are barriers to inclusive growth. Take remittances: the average cost of an international transfer is 6.3 percent. This means some $45 billion per year are diverted into the hands of intermediaries—and away from millions of lower-income households. The USA recorded 1,8 billion real-time-transactions in 2021, which resulted in an estimated cost savings of $648 million for businesses and consumers. This in turn helped to generate $1,4 billion of economic output, representing 0,01% of the country’s GDP. With real-time-payments set to rise to 8,9 billion transactions in 2026, the additional economic output to be generated would be $5 billion (0,02% of forecasted GDP). According to the Centre for Economic and Business Research (CEBR), theoretically, in case all payments would be real time; the impact on the economy could add 1,7% to formal GDP by 2026.

The growing momentum in the digitalization of money and the conviction on the efficiency of real-time payments has mobilised the regulating and controlling entities of the system. According to the 2021 survey of Bank for International Settlements (BIS), nine out of 10 world’s central banks are actively exploring CBDCs (Central Bank Digital Currency) and more than half are now developing them or running concrete experiments. Accordingly, 90% of central banks are now dipping their toes into the water. Both Covit-19 and the emergence of crypto-currencies and stable coins backed by blockchain has accelerated the work on CBDCs; especially in advanced economies where financial stability and the need for regulated environment has increased in importance. In developing and creating a solid mechanism for CBDCs, SWIFT has also stepped in by developing a CBDC connector. SWIFT officials comment that they are testing on sandbox an experimental method for interlinking CBDCs with existing fiat infrastructures. Commentators include that a second phase of sandbox testing will also be held, in which the Swift member banks can collaborate further with a focus on new use cases, including in securities settlement, trade finance, and conditional payments. 

Consumer demand, the need for faster supply chain processes and economic gains for instant transactions is driving change in cross-border payments. Technical challenges against realization of instant real time payments are mostly overcome in many markets by real-time clearing and settlement facilities. Frictionless ways to make payments using various physical and digital tools from wallets to wearables, embedded or contextual payment options are adding speed to the payment process. While on the merchant side, embedded finance products like “buy now pay later” (BNPL) require on time payment infrastructures while offering unique payment terms.

These expectations in the society for faster and practical financial services started to be annoying for the banking industry. As consumer expectations for a seamless, frictionless experience increase, account abandonment are at an all-time high. Abandonment rates increase significantly as the time to open an account or complete an application increases. According to a recent survey, if it takes longer than five minutes to open a new account or complete a new loan application, the abandonment rate can be as high as 60 percent. Eliminating points of friction that threaten a seamless, end-to-end experience has the potential to double or triple the number of new accounts opened.

After several delays, ISO 20022 global messaging standards will finally and hopefully go live today, on 20 March 2023. On 19 June 2023, CHAPS (High-value payment system for sterling payments) Real Time Gross-Settlement System (RTGS) will migrate to ISO 20022 under the responsibility of Bank of England. Shortly, cross border payments globally together with high-value payments in Europe within SEPA (Single Euro Payment Area) will migrate to ISO 20022. Yet, the Fed decided to delay the implementation of the ISO 20022 standards by two years to 2025 in response to bank concerns that this process was hampering the launch of its real-time payments service, FedNow’s rollout.

ISO 20022 SWIFT standards, as new jurisdiction and operational framework for global cross border payments and reporting will replace the old standards which were in use in the last 30-40 years. With these new standards, for the first time, a shared language will be used for transactions made by anyone, anywhere. However, changing all the mechanisms which were in place for so long and the infrastructures where those mechanisms were running will not be easy at all.

Banks’ current systems - typically burdened by legacy technology stacks - are unlikely to be able to provide or accept the additional information required by the new messaging format. Potential data recapitulation issues remain a challenge for the financial services industry.

ISO 20022 cannot be viewed as a “plug-and-play” product. Given the sheer volume of archaic technology, infrastructure, and data within every institution, there needs to be a clear connection between the data cleansing and the transformation processes to ensure old flows are joined seamlessly with new flows.

In their approach to composing a seamless technology portfolio, banks must consider how their ISO 20022 strategy will fit into this overall vision.

On the process of implementing ISO 20022, banks not only need technology strategy, but also business strategy and customer strategy.

The benefits of transitioning to the data-rich standard are well documented, but executing the migration itself is relatively new territory for financial institutions and the counterparties that transact with them.

Risks associated with ineffective migration to ISO 20022 are not small, and improper implementation has the potential to cause long-lasting impacts which can damage client relationships and reputational image for the institution.

the IT migration itself will have an impact that goes far beyond core payments processing, affecting peripheral systems such as anti-financial-crime applications, liquidity management, billing, accounting report, nostro reconciliation and archive systems.

Without sufficient (and early) attention given to the ISO 20022 project, banks run the risk of failing to finalise their transition and finding themselves in breach of compliance regulation. Further, an inability to operate using the landscape’s new standard for payment rails would render banks unable to fulfil basic duties – let alone leverage the bountiful opportunities for innovation in the sector.

Throughout this process, firms also must keep a keen eye on the impact the transition may bear on their operations, ensuring that they are able to process or translate ISO 20022 messages in their existing back-office systems.

Due to local implementation guidelines and jurisdictions, different message versions and business or payment models are emerging even in ISO 20022 standards. This will surely undercut the standard’s potential. In such an environment, complexity of diversity on payment systems will increase further. A joint task force managed by the international community is working on to develop harmonised user requirements for ISO 20022. This currently consists of 15 general requirements related to messaging fundamentals, transparency and the use of structured encoded data.

A possible solution could be countries working together to develop a global public digital platform—a new piece of payment infrastructure with clear rules—so that everyone can send money at minimal cost and maximum speed and safety. It could also connect various forms of money, including central bank digital currencies. Harmonizing messaging standards will substantially increase efficiency and enable a new environment suitable to develop new services.

Some infrastructures and frameworks already ready to meet industries needs to harmonize global operations are as follows:

SWIFT gpi: It ensures that international payments meet the industry’s needs for speed, traceability and transparency. It allows banks to provide their customers with a transformed payments experience, enabled through easy to use and simple to set up digital tools.

CBPR+: Cross-border Payments and Reporting Plus specification define how ISO 20022 should be used for cross-border payments and cash reporting on the SWIFT network. 

HVPS+: High Value Payments Plus market practice task force. Aiming to harmonize messaging standards across High Value Payment Systems. This provides a unique opportunity to have an open and active dialogue among the main payment system operators and agree on a common framework to implement ISO 20022. One of the principal aims of HVPS+ is to promote harmonisation around ISO 20022 and to reduce the risk of fragmentation due to inconsistencies and multiple standards across different markets. HVPS+ is a living group that includes FMIs banks and other industry participants. 

The speed and success of HVPS+ development reflects the commitment of the global financial community to maintain its successful track record in contributing to transformational industry payment solutions across borders, such as SEPA, ISO real-time and SWIFT gpi. 

The payments ecosystem is already on its way to becoming friction-less and real-time. Cross-border, domestic real-time gross settlement (RTGS), and instant payments rails are all experiencing dramatic evolution with a digital future at their heart. ISO 20022 is the key to this new payments ecosystem, however, by nature, it demands a level of digital interoperability that all financial institutions do not yet hold.

After having stated all above, I would briefly underline main benefits of ISO 20022:

•         Reduction of costs through the elimination of outdated systems and applications;

• Increased automation and improved straight-through processing, resulting in reduced friction;

•    Growth of available opportunities through the building out of new APIs based on ISO20022;

• Development of new customer-centric products and services with greater speed, transparency and finely detailed tracking; and,

• Increased fraud detection and efficiency of security processes.

While a significant project, ISO 20022 is just one of multiple digital transformation projects being driven by financial organisations. Regulatory deadlines also mean that firms are under pressure to allocate financial resource to these upgrades within tight timeframes, and it can be difficult to secure the budget for the best and most robust technology solutions.

Given the extensive need and demand for more efficiency and cost effectiveness in retail, wholesale and cross-border payments, central banks and financial regulators must step in to regulate this new environment with legislative frameworks and covering infrastructures. If this could be achieved, the unpreventable diversion towards a technology-oriented system and the need to mitigate the risks on financial stability could be balanced.

ISO 20022 may meet the need for a common, trusted mainframe in this environment, where regulatory bodies, banks, fin-techs and all other parties operate.

With my best regards,

Kaan Gürsal