Question Answered: Payments/ISO 20022/SWIFT

Published: May 2022

“What does ISO 20022 mean for the payments industry and how should treasury prepare?”

Person using smart phone to make a payment

Portrait of Nasir Ahmed, ISO 20022 Programme Lead, SWIFT

Nasir Ahmed

ISO 20022 Programme Lead

Cross-border payments can be constrained by unstructured, incomplete and inconsistent data. This low-quality data is subject to different interpretations and can require manual intervention and repairs before processing. To overcome this challenge, a modern data standard, ISO 20022, was created. As an open international data standard, it brings significant benefits in the form of increased automation, faster processing, and improved mitigation of financial crime risk – all critical components in the cross-border payments process.

Already used by payment systems in over 70 countries, ISO 20022 will be the de facto standard for high-value payment systems of all reserve currencies by 2025, supporting 80% of global volumes and 87% of the value of transactions worldwide. In addition, starting from November 2022, the SWIFT community will start adopting ISO 20022 for interbank cross-border payments and cash reporting, with a coexistence period with MT messages until November 2025.

While many corporates have been using ISO 20022 for a considerable period now, the upcoming transition will bring further benefits for not only corporates but everyone within the payments industry. This wider market adoption means that corporates will be able to embrace the benefits of true end-to-end integrity of a financial transaction by ensuring that data flows seamlessly without truncation or alteration as the transaction progresses through its lifecycle. Corporates will be able to make real-time, data-driven treasury decisions and focus on their core business and opportunities for innovation. Richer quality data also means that corporates will have access to deeper analytics for more accurate forecasting, which will support more sustainable business growth. Ultimately, it will drive the next generation of business innovation.

As many in the banking community (banks, financial institutions and their vendors) will move to full ISO 20022 capacity in the next three years, there’s a clear need for corporates to adhere to these new standards as well. Such a major transition within the payments industry will create a strong demand from banks to their corporates to be fully ISO 20022-compliant to ensure interoperability and data integrity all along the payments and reporting chains.

Global interoperability means harmonising ISO 20022 market practices worldwide. In preparation for this new phase of cross-border payments, corporates need to take the necessary steps along with their ERP, TMS and related system providers to upgrade to ISO 20022. To do so, these systems need to be configured to support rich and structured data. This will ensure that all data meets compliance and due diligence standards.

Corporates should also consider early adoption of ISO 20022 cash reporting and statements to receive higher quality data, ultimately facilitating auto-reconciliation. Supporting new data elements can also assist in achieving seamless data flow. This can include upgrading to the newer pain.001 V9 and consolidating payments and cash reporting using a forwarding agent.

With the expectation for corporates to deliver payments fast, efficiently and securely, ISO 20022 adoption is imperative for a fast and frictionless future for the payments industry.

Portrait of James Kelly, Group Treasurer, Pearson

James Kelly

Group Treasurer

Why ISO 20022 could be a game changer

Much of the complexity of treasury transformation derives from bank statement reporting, specifically:

  1. Creating rules to successfully import bank balance and transaction reporting (banks typically have different file formats).
  2. Ensuring that reconciliations and cash allocation can be automated despite information potentially being truncated.
  3. Different file formats per region or per frequency.

This often results in expensive consultants being required to build rules, extensive testing and issues if and when banks make changes to formats.

The best cash allocation software requires time-consuming implementation, but can use AI and attachments to compensate for truncated payment references to achieve well over 90% automated cash allocation. This works best with remittance advices as well as the payment.

This lack of standardisation equally makes interoperability between systems and companies very difficult. As an example, where remittance advices are used – who chooses the format? The beneficiary? If so, the remitter has to use lots of different templates. Or if it’s the remitter, then the beneficiary has to be prepared for multiple formats. We are equally seeing this with APIs: with each bank taking their own approach to APIs, it makes working with multiple banks challenging. For corporates, the ISO 20022 standard has been around for some time, allowing corporates to move to XML file formats and richer data – and this is next on our roadmap, so that we move to richer, more real-time data.

However, what is changing is that cross-border payments are migrating for banks to ISO 20022, meaning that it becomes mainstream and so ERP providers and treasury providers will start to provide capability by default.

This should make a transition from MT940/942 or BAI files to XML much more straightforward. For our part, in order to shift to XML we will need to ensure that our ERP and TMS are both set up for the new file format. As CAMT files can still vary in structure, we may need work to ensure that the systems can read files for each bank, which may vary. This allows access to the world of APIs and real-time treasury, allowing pay by bank solutions to rival card solutions for pace and data.

ISO 20022 files will also make sharing data via blockchain easier, with standard naming conventions meaning that the same fields can be mapped to each other in different systems. Again, the power of this is being seen in some of the early blockchain solutions, particularly in the supply chain finance space, where API calls can be used to trigger payment for goods and services.

The potential of richer data is enormous. Solutions such as virtual accounts exist to address challenges around reconciliation. With XML files with stronger references, they may not be necessary. However, success depends on whether common implementation approaches are adopted – standard bank file formats, other users making use of the richer reference fields, etc. My suspicion is that a shift to XML will yield benefits – but until adoption is widespread, and tools like blockchain make a common approach more or less mandatory, it may be some time before we see the full potential.

Portrait of Rijuta Jain, VP, Product Management, Payments, FIS

Rijuta Jain

VP, Product Management, Payments

Treasury departments of large global corporates are often dealing with complex payments processes and environments, including multiple banks. Cash management and funding are often managed locally in the various countries, where multiple banking partners are involved. By using a combination of different bank communications channels like SWIFT, host-to-host communications in shared service centres or web-based banking systems in subsidiaries, it is difficult for corporates to integrate these channels effectively within their TMS and ERP systems.

With disparate systems and processes, treasurers lack the visibility and control across their payments. Their decision-making is impaired if they can’t see what payments are leaving the organisation. Without the proper automation and workflow in place, companies are at risk of errors and the increasing risk of fraud.

New technology, which connects corporates with their financial partners, particularly with banks, is evolving fast. Cloud-based solutions integrate services so that corporate treasurers can gain access to a wide range of additional services through one single access point. Increased standardisation for exchanging financial messages between counterparties will allow easier integration of systems and processes, thanks to ISO 20022.

Using the more structured and richer data that ISO 20022 provides allows not only better straight through payment processing, but also helps corporate treasurers further automate their reconciliation processes, and therefore increase payments speed and reduce costs. By implementing these ISO 20022 messages, more information can be provided to compliance departments when performing sanction screening or transaction monitoring, and may also enhance fraud prevention and detection. This will lead to a more seamless client experience as those payments are embedded in the processes that they support.

There are other possible implications of ISO 20022, however. One is cost. If you continue to send payments using MT formats, the bank will need to convert the messages to ISO 20022 – which is likely to result in higher fees. Another consideration is that banks are continuing to work on upgrading to newer versions of ISO 20022. As a result, organisations that don’t have a payment hub will have to upgrade their back-end systems and carry out development in their ERP systems, which is likely to be an expensive undertaking.

ISO 20022 is a game changer and signifies an opportunity for banks and corporates to improve operational efficiency and reassess existing business models. By taking out all the effort that today is spent on message translations, conversions, manual reconciliation etc, allows every actor in this payment chain to focus on value added activities, on data driven services, on better liquidity forecasts and better risk models.

The good news is that the migration is not mandated for corporates. Older messaging formats will still be supported. But companies that don’t migrate will not be able to harness the opportunities brought by richer data. Companies that already have a payment hub between their ERP/TMS systems and bank communication channels, that is fully compliant with ISO 20022, will be able to benefit from the changes. However, companies that don’t have a payment hub will need to start a dialogue with their banking partners and ERP/TMS providers. Preparation for ISO 20022 should start now, whether a large corporate is looking to adopt to ISO 20022 end-to-end, or a smaller company simply wants to provide the necessary party and remittance information to its banks.

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