16th June 2022 – November 2022 marks the point of migration for some of the top global payment infrastructures to ISO 20022, an international standard for exchanging electronic messages between financial institutions, covering cards, payments, securities, FX and trade.

Most banks, corporates and payments companies use SWIFT MT financial messaging for transactions, which will migrate over to the new system and eventually come to an end in 2025. ISO 20022 will consist of over 11,000 interconnected financial institutions, support all currencies, and connect market infrastructures in more than 200 countries and territories. This substantial shift provides the perfect opportunity to deliver payments automation and unlock data innovation across the payments industry. You can read the ProjectiveGroup guide to ISO 20022 which captures the key benefits here.

While Europe is set to lead the way, global adoption will lag behind – the UK’s clearing system CHAPS, Hong Kong’s CHATS and the US’ CHIPS and Fedwire aren’t expected to fully transition until 2023 at the earliest – and with SWIFT MT ending in four years’ time, different clearing houses and currencies may transition at different times. Firms navigating multiple markets will have to factor in compliance with existing standards and, at the same time, manage the conversion to ISO 20022.

With five months to go until the adoption of ISO 20022 in Europe, Jacob Rider, Head of Payments for financial services consultancy Projective Group shares what firms need to know and action now to make sure their processes are ready for this transition.

1. The IT challenge

With the adoption of ISO 20022 occurring in Europe before the Bank of England adopts it in 2023, banks and financial services firms will have to tailor their payments by region. Organisations in the UK processing payments from Europe or Asia will have the added burden of navigating between ISO 20022 and the legacy structures.

This requires these institutions to properly configure the complex IT architecture of their portfolios and projects accordingly, adjusting either their own in-house systems or using the services of third-party vendors.

Firms are faced with the options of redesigning IT systems for a brief window at great expense or relying on the services of third-party vendors, which adds uncertainty and potential dependency to payment processes. Accurately assessing your firm’s capabilities to temporarily adapt your systems will be essential for making this decision, as it may require serious investment.

2. Mitigation for the short-term

While many banks in Europe using TARGET2 changed their messaging formats in a single day, firms in the UK who are undergoing the longer transition need to adapt their payment and IT processes to counteract the potential delays and data influxes due to the lack of standardisation until CHAPS follows suit.

The use of in-flow translation services will be vital in ensuring that the full datasets are received, and payments are completed smoothly. However, close management of these systems is also necessary. Senior leaders will have to consider the challenges to coordination that these translation services pose and the potential impact that may need to be made to the firm’s indirect network of partners.

Navigating this interim and how much resource is allocated in translation between languages before standardisation can be a potential drain. Ideally, firms would be focusing all their attention on the transition, but a middle ground will have to be struck so that legacy frameworks are catered for, and an optimal transition is handled by senior leaders.

3. Embracing ISO 20022 in the long run

November 2022 and April 2023 may mark the switch to a new language for Europe and the UK respectively, but it is the beginning of an evolution. The new framework will alter the way in which payments are received forever, unlocking the speed and transparency associated with low-value domestic payments, and connecting the financial world with far less friction.

Measures to optimise your firm’s internal processes for resilience during the interim period and then running with ISO 20022 over the long term are therefore crucial. Reengineering of IT structures and a short-term contingency plan may be required not just in the short-term, but in the medium-term to 2025 until SWIFT MT comes to an end.

Making sure that your firm is prepared for all scenarios and has the resilience to deal with issues should be the priority for senior leaders in the short-term, while keeping an eye on the potential for further evolution in payment structures in the future.

Jacob Rider, Co-Head of Projective’s Payment Practice comments: “The transition to ISO 20022 needs to happen – and fast – if the industry wants to reap the many benefits it provides. Payments have already become faster, more transparent and more trackable thanks to the widespread adoption of SWIFT gpi, but the current MT standard does not offer the quality of data needed in today’s digital world.

With better customer experience, better compliance and better efficiency, ISO 20022 is good news for financial institutions, provided they manage this transition quickly and carefully.”