Right standard, right time
As we start to count the efficiency, interoperability and innovation benefits of ISO 20022 investments, is the time right to develop standards to support the new technologies?
It’s been a long journey, but with major market infrastructures (MIs) from the US to Japan now committed to ISO 20022 for renewal projects, a clear sense of meaningful progress permeated the standards community gathered at Sibos 2017 in Toronto.
“It’s no longer about ‘shall we do this’, but about the details of implementation,” said Stephen Lindsay, head of standards and innovation at SWIFT. Through the Standards Forum, MIs shared ambitions for systems renewal, integration and transformation across their markets, including a payments modernisation programme in Canada, revamps to FedWire and CHIPS in the US, and the European Central Bank’s consolidation of TARGET2 and TARGET2-Securities (T2S), and its recently-announced TIPS instant payment settlement service.
Along with regulatory requirements (e.g. PSD2, MiFID II), standards can trigger change when “the status quo gets too painful”, said Isabel Schmidt, head of institutional cash management, Americas at Deutsche Bank, citing the earlier example of the Single Euro Payments Area, which drove STP in the payments industry. Today, banks need to take advantage of the new infrastructure that MIs are creating. “In payments, we need to operate in an environment where the marginal cost is close to zero and focus on solving our customers’ pain points,” said Schmidt, suggesting that the areas on which banks will compete with each other and with FinTechs will change dramatically.
The message from Toronto to service providers across the finance sector was clear: it is time to realise the benefits of a lengthy and costly standardisation effort.
“We’re seeing the tip of the iceberg in terms of the opportunity this offers,” said Janet Lalonde, director of modernisation at Payments Canada. “The real opportunity of ISO 20022 is from the increased data coming with the payment.” Deutsche Bank’s Schmidt agreed: “This rich data will provide valuable analytics for our risk management, but our corporate customers also want analysis of their payment counterparties and flows.” The increased availability of structured data via ISO 20022-based platforms is enabling product innovations that offer both cost benefits to providers and service benefits to users. In the US, for example, strong resistance to direct debits is being overcome by an ISO 20022-based real-time payments system which supports a new request-for payment product to automate the request, settlement and reconciliation of retail payments.
As well as greater processing efficiency and product innovation, other internal benefits claimed for ISO 20022 environments include reduced code implementation and testing costs.
Interoperability of platforms and ecosystems cross-border and cross-business is the ultimate promise of this far-reaching standardisation effort. For Berthold Kracke, CEO of Clearstream Banking, the company’s T2S strategy follows “a radical vision, providing market participants with harmonised access to different liquidity pools via one single platform”.
Siegfried Vonderau, head of division for TARGET2/T2S services management at Deutsche Bundesbank, also argued that “broader, higher integration” is valuable to users, the industry and regulators, but warned of potential risks. “When, for example, the system can pick up disparate assets from different pools and tie them together 24/7, what tools will users need to help them manage that complexity?”
This sounds, perhaps, like a ‘first-world problem’ and assumes continued painstaking collaboration in pursuit of true interoperability. In Toronto, many representatives from high-value payment system operators were keen to learn from the almost two years of experience gained by HVPS+, a group of MIs and banks working to harmonise market practices for ISO 20022 HVPS implementations.
“Because many of us were in the process of determining our implementation timelines, we had the attention of our communities, and this helped us to move forward,” explained Gina Russo, assistant vice president in the Wholesale Product Office of the Federal Reserve Bank of New York. Working on the basis of “not wanting to just implement like for like”, HVPS+ participants reached consensus on required enhancements, then published six core messages and a set of implementation guidelines to help MIs implement in a consistent way. One typical area of discussion has been how to include additional parties in the enhanced ISO 20022 messages.
In 2018, SWIFT will begin a consultation process with the industry on possible migration of MT messages to ISO 20022, a move that would increase opportunities to transform business processes and enhance interoperability – for example, between SWIFT gpi-enabled correspondent banking payment services and high-value or domestic instant payments systems.
Although much progress is being made, many challenges remain, such as the barriers to achieving widespread standards adoption across the value chain. ISO 20022 implementation can raise issues for large corporates generating payments through ERP systems. In the securities sector, Bernie Kennedy, senior business advisor in the group CIO office at Hong Kong Exchanges and Clearing, noted the difficulties of migrating small market participants onto new ISO 20022-based platforms in Asian markets lacking in third-party service providers.
“If we want to be efficient and avoid risk, we can’t let the ‘long tail’ hold us back,” insisted Alain Pochet, head of banking services, BNP Paribas Securities Services, suggesting smaller firms should outsource if not willing to make the internal investment needed.
Should regulators or infrastructures enforce the adoption of industry standards by smaller firms? The debate recurred across the week-long Standards Forum programme, with Pochet noting the role of the ECB as an infrastructure provider, acting as a catalyst for the integration of more than 22 markets through the T2S project.
“Regulators will [tend to] define timings and requirements – let’s keep this at an industry level,” warned John Abel, executive director for settlement and asset servicing strategy at the DTCC.
With PSD2 coming into force, the UK payments industry’s experience of the Open Banking initiative mandated by the UK Competition and Markets Authority is pertinent to the broader debate about standards adoption and governance. At both the European and UK level, a principles-based regulatory framework has seen regulators stop short of mandating standards. “Only nine institutions were involved in the UK project, but it was difficult to get agreement because we were standardising competitive products,” said James Whittle, director of international standards and services at Payments UK and chair of the ISO 20022 Registration Management Group. “Some sort of rule book will be required for PSD2 and we need to be thinking about who will provide that governance.”
Innovate or standardise?
With many across the finance sector looking to leverage emerging digital technologies such as distributed ledger technology (DLT) and application programming interfaces (APIs), the questions of how, and particularly when, to develop standards was also a key question for discussion. “Now that we have real production pilots, real engagement and real assets at play in DLT solutions, when do we converge and how do we keep from limiting innovation?” asked Brian Behlendorf, executive director of Hyperledger, the project founded by the Linux Foundation to foster open source collaboration on DLT-based initiatives across industries.
Richard Gendal Brown, chief technology officer at R3, the bank-owned blockchain development consortium, made a strong plea to avoid premature standardisation. “For the time being, trying to force standardisation between platforms misses the point. Since every participant who takes a node on a blockchain implementation has to deploy the same technology, if you think about that from a network or freedom effect, then you have to use open source.”
SWIFT’s Lindsay agreed, with a caveat. “While underlying technologies are still evolving, the fundamental business models won’t change and data definitions such as provided by ISO 20022 are very helpful. Agreement on what is an equity, a bond or a payment is important.”
The UK’s Open Banking API was developed in just four months using ISO 20022 definitions and JSON (a data interchange format preferred by the World Wide Web Consortium for the development of web APIs). But ISO 20022 is a heavy standard, not immediately attractive to API developers. “We’re thinking about how to adapt our standards to make them more flexible and re-usable for the API environment, without losing the interoperability benefits they bring,” commented SWIFT’s Lindsay.
Carlos Figueredo, CEO of Open Vector, was responsible for developing the Open Banking data standards transported by the APIs, so knows intimately both the challenges and opportunities that APIs offer and the importance of standards in supporting collaboration and enabling transformation. “This is the most exciting opportunity to really make banking customer-centric. By changing the way banks work with FinTechs through open banking we can create brilliant new services,” he said.
Standards will play a critical role in supporting the next wave of innovation and transforming the banking industry. But generating consensus on timing and governance will be key to driving successful adoption.