ISO 20022 migration: the hard work will pay off

This article is sponsored by Deutsche Bank

Far more than just another large and complex IT project, the move to ISO 20022 signals a major opportunity to improve payments processes and re-assess business models.

ISO 20022, the global standard for payments messaging, is not new – it was first published in 2004. But, as Stephen Lindsay, Head of SWIFT Standards, remarked back in 2015, “Even the best designed standards only take off if they meet real and immediate needs in the market. For ISO 20022, that moment has clearly arrived.

Globalisation and the increasing need for interoperability of payment flows have been moving us towards this moment for some time. But the final push has been delivered by widespread digitalisation and client demands for near instant payments.

To meet such demands, we need a next-generation market infrastructure that can offer seamless and quicker payments processing in support of digital business models. The decision by major central banks and SWIFT to migrate to ISO 20022 therefore represents the payments industry’s watershed moment.

ISO 20022 promises greater interoperability between various settlement networks, richer information flows, higher levels of straight-through processing and more efficient compliance processes. It signals a significant opportunity for banks to improve operational efficiency and reassess existing business models.

Do not make the mistake of thinking this is just another IT project”.

Global market infrastructures make the move

ISO 20022 has already been introduced for high-value payments systems (HVPS) in Japan, Switzerland and China, and is established as the standard in instant payments markets following implementations in Australia, US, Canada and Singapore.

Much focus, however, is now on on the world’s major currency areas as well as, of course, SWIFT.  Over the next few years the US Federal Reserve and The Clearing House, the Eurosystem and EBA Clearing and the Bank of England’s real-time gross settlement service will all modernise their HVPS with ISO 20022 migration (see Figure 1).

SWIFT has already made ISO 20022-based XML messages (MX) available, exchanged within a closed user group over its network. From November 2021, however, shortly before the migration of the Eurozone, SWIFT will begin a four-year process of moving completely from existing MT messages to ISO 20022.

Figure 1: Migration of market infrastructures to ISO 20022

Efficiency gains, cost savings and enhanced services – what’s not to like?

The objective of ISO 20022 migration should resonate with us all: enabling more efficient and economical payments.

Looking at this more closely, ISO 20022 allows for the introduction of new data components, meaning far richer information can be transmitted alongside a transaction; increasing transparency and aiding banks with their task of guaranteeing secure payments processing and conforming to compliance regulations.

The enabling of seamless information flows from payer to beneficiary, with full data content, provides a significant opportunity for banks to enhance client service. Notably, standardised payment, reporting and exception handling messages can benefit corporates by facilitating end-to-end automation from invoicing to liquidity management, exception handling and reconciliation.

It is a clear opportunity for banks to re-evaluate their business models and market positioning.

The introduction of ISO 20022 in certain currency areas to date elucidates the potential financial benefits: the European Commission suggests, for instance, that SEPA has resulted in €21.9bn cost-savings per annum. Even accounting for the fact that SEPA migration encompassed more than just the migration to ISO 20022, the savings associated with standardised messaging have likely been considerable.

Avoid the short-cuts

Naturally, such game-changing benefits will not be achieved without some heavy labour. This must start with us all adopting a community approach to the migration, working together to overcome pain-points, ensure interoperability and establish global usage guidelines.

In this respect, SWIFT’s collaboration with the newly created Cross-Border Payments and Reporting Plus group is a leap forward, bringing a common set of standards and global alignment firmly into view.

Standards should lower the implementation cost for the industry as a whole. That said, individual banks should not underestimate the size of the task that remains: a mid-sized bank will need to plan for a high four-digit number of “project working days”; larger banks will naturally need even more.

It would be wrong to see this as just a cash management or payments project. ISO 20022 migration will touch everything from booking systems to embargo and know-your-customer systems, through to electronic banking, liquidity management or archiving. In addition to impacting IT and payments, numerous other areas – such as securities, trade finance, global markets and treasury – will also have to process the larger data volumes and apply it elsewhere.

Each bank’s success will hinge on a clear strategy that involves senior management from day one in order to ensure commitment to the project, timely resources and budget.

Given the effort required, it is understandable that some banks may look for shorter migration journeys. On the face of it, maintaining existing systems and converting existing formats into ISO 20022 or vice-versa, either at the inlet or outlet of the payments processing system, or at the interface, could make sense. But, not only do you risk losing information this way, you almost certainly miss a fantastic opportunity to improve efficiency and client service.

The hard work will pay off.

Paula Roels is Head of Market Infrastructure & Industry Initiatives, Deutsche Bank