Jerald Seti, VP Product Management, ION Treasury, reflects on ISO 20022, the global standard for payments set to gather pace through 2022 and become the de facto standard worldwide for high-value payments.
Why is the migration from traditional legacy platforms to ISO 20022 such a major undertaking for financial institutions?
The migration presents challenges to both sending and receiving messages. For outbound messages, difficulties originate from the large number of payment channels in existence today which will migrate to ISO, each with a slightly different interpretation of how the payment standards will be implemented. For example, while there is a common format, one locale may require certain fields to be populated one way, whilst another locale will have different requirements.
Additionally, banks handling cross-border payments and local payment regimes will have multiple global standards to adhere to simultaneously, such as cross border payments (CBPR+), high value payments (HVPS+), and local payment standards including RENTAS. For these banks, transitioning to a new platform will be more complicated.
Institutions making this transition will have to formulate new transformation libraries to support outgoing messages which differ from the variety of formats used regularly around the world today. The common message structure is XML-based and contains enriched data which may not be captured today. As a result, the interfaces to underlying systems must change to ensure a granular level of detail can be reported successfully. To accommodate these changes, users must adapt their operational data flows which capture and validate the data early on. To accomplish this, institutions must ensure that planning is in place to design, test and implement the migration. This includes setting aside a budget and allocation of resources for the project.
Although inbound messages face fewer hurdles, these remain significant. For instance, whilst one common format will reduce the maintenance and complexity of parsing inbound messages, databases and reconciliation matching rules still need to be updated to accommodate the data in the ISO 20022’s updated formats.
How will migration specifically impact corporate treasurers?
Whilst in most cases corporate treasurers hold a slight advantage as they are in the driver’s seat, with their needs mostly met by their banks or their treasury management system (TMS) solution providers, they too face challenges associated with embracing the migration. As the new enriched data elements need to be sourced and populated, corporate treasurers should anticipate changes to their data entry screens and their source-system interfaces to ensure these new fields are included. Information including party data and settlement instructions will be affected, meaning operational procedures for data gathering and validation must be modified to support these changes. If corporates don’t adapt and map the data provided in the new ISO formats to placeholders in their older platforms, they risk losing some of the benefits from new data elements contained in the ISO formats. There will be no place to store them.
Timing of migration is another obstacle. As most payment mechanisms are making the migration either through a big bang on a specific date, or gradually over the next several years, co-existence of the new and old paradigms may create headaches for corporates conducting business on a global scale. For example, Target 2 is migrating in 2022, whereas SWIFT is migrating gradually through 2025. Confusion may occur as some of the traditional nomenclature will change. For instance, what was once referred to as “beneficiary” or “payee”, will be called “creditor”. The “payer” or “remitter” will be the “debtor”. During the transition, the two systems will need to be interchangeable.
Although corporate treasurers may be covered by their TMS provider, they will still need to confirm what specifically is covered within their transformation libraries to produce an ISO20022. Treasurers must ensure that they are not just converting old to new, but that they are set up to benefit from more enriched data. Finally, it will be important to understand what change management will be required.
How important is embracing migration?
Although the real fallout of late adoption is yet to be determined, looking forward, banks seeking to remain competitive must comply with the ISO changes. If they fail to do so, they will find themselves unable to deliver or receive statements and payments on behalf of their customers and therefore place their business at a risk of decline.
An embrace of ISO 20022 is especially important for those operating in local markets, where non-compliance is higher, as smaller institutions lack the ability to keep up with the changes due to resource constraints. Here, there may be the opportunity for early migrants to poach business from competitors.
Initial obstacles may make migration seem like a complex and time-consuming task for corporates. However, once they adapt to the new standards, the task of normalising data from one payment mechanism to another will largely go away, making the reconciliation of payments much simpler and likely more automated. These improvements, coupled with the additional benefits of enhanced transparency and consistency of remittance information, seemingly unlocks new opportunities, and makes the process worthwhile.
