SWIFT’s decision to delay migration of cross-border payments to ISO 20022 by 12 months has important strategic implications for the industry. With multiple market infrastructures moving to ISO 20022 on different schedules, and varying approaches to co-existence, financial institutions will need to redouble their focus on modernising their infrastructure. In the UK, the retail payments authority Pay.UK has just finished consulting with industry in regards to proposals for the adoption of ISO 20022 and other key standards for the clearing and settlement capability to be enabled by the New Payments Architecture (NPA) infrastructure. The regulator views this upgrade as a “once in a generation opportunity to modernise the data and service capabilities that the standards will enable”. The key here is for industry to not only focus on the challenges of the technical migration but, of equal importance, to recognise the opportunities that an improvement of services capabilities brought about by the messaging upgrade can provide.

ISO 20022 and the NPA Programme

The upgrade of ISO 20022, the ISO standard for financial services messaging, is intended to create an emerging global standard for payments messaging and a common language for payments data across the globe. Because an ISO 20022 message allows a significant amount of data to travel with a payment, there are several benefits to using the standard within the payments industry. Full information on payment parties and/or remittance data can provide a reduction in payment processing errors, sanctions screening and reconciliation, which can pave the way towards a much higher level of automation. Operational efficiency, transparency and customer service should improve once interoperability under the same standard is achieved, laying the groundwork for firms to be able to offer differentiated products and services to end clients.

Pay.UK established the NPA Programme to help design the standards and business rules necessary for UK payments, as well as the Standards Authority which has the responsibility to deliver the next generation standard for UK payments. The focus of the recent consultation paper, “Next Generation Standard for UK Retail Payments”, was on the adoption of ISO 20022 for the clearing and settlement capability of the NPA, specifically the transference of different CHAPS, BACS and RTGS services into the new NPA standard. Overall, Pay.UK wants to encourage financial institutions to think about the application of overlay services in order to compensate for the costs involved with technology upgrades related to the migration.

Opportunities & challenges

Firms need to think about the possibility of creating new business models such as straight-through processing of payments and the facilitation of on-boarding of new corporates. Currently these processes require manual intervention to either interpret received data or to input additional data potentially missing from the payment message. With the additional messaging capability provided via ISO 20022, firms have the potential to enrich their businesses by offering new value-added services, thereby benefiting from the application of artificial intelligence and aggregation of data to be able to better understand and predict the needs of end-clients.

One example of a use case related to differentiated services is the ability for corporate treasuries to transfer liquidity in real time, thus negating the need for buying additional liquidity in the marketplace.  Not only will corporates be able to view how their liquidity is spread across different correspondent accounts via open banking, interoperable standards will mean that liquidity can be easily pooled in real time. Another use case is the ability for life insurers and other financial institutions to include a “proof of life” message within payment messages to prevent fraudulent claims that currently cost the industry billions of pounds per year.

Preparation check-list

Once the migration to ISO 20022 occurs, international banks will have to face the challenge of integrating systems in order to provide real-time liquidity on 24*7 basis. Organisations will also need to integrate the data flows amongst their payment processing systems and in a real-time processing environment to fully benefit from the benefits that standardisation offers. Syntax variations amongst schemes, business rules and logic all need to be set - a complex task given the number of systems and processes that are included in a typical payments processing ecosystem.

One concern that has been verbalised by participants of the UK payments markets is the need for small and medium-sized banks to get more involved in the process of upgrading their systems and to learn about the potential stream of additional revenue from providing value-added services. Possible areas that firms should concentrate on during this preparation phase include: 

• Migration: In order to take advantage of potentially enriching value-added services, such as onboarding of corporates, businesses will need to migrate to ISO 20022 in a manner that simplifies complexity and manages the pace of change. Deployed solutions for this migration need to ensure data quality, improved operational efficiencies and preparation for future developments.

• Hybrid system: Some firms might be interested in moving their standards to ISO 20022, yet still want to keep their present payment systems in place. There is an opportunity for hybrid systems to be developed, based on either MIT or bespoke standards with messages transcoded in order to be compliant with ISO 20022.

• Organisational challenges: To keep the payments systems running on a 24*7 basis, new methodologies will have to be adapted and applications such as liquidity management tools and payment monitoring tools will need to be integrated.

• Exceptions and investigations: In order to compensate for missing or mismatched fields within the messaging data (often the case, for example, when incoming payments have originated from outside countries or jurisdictions), rules need to be implemented which can overlay the standard processing capabilities and condition to make these payments compliant and reduce manual intervention.

• Cloud services: When modernising payment journeys, migration to the cloud can provide institutions with greater agility and flexibility, as well as the chance to lower costs and the duration of implementations.

The rationale for moving quickly

ISO 20022 migration provides a tremendous opportunity for financial institutions to upgrade and enhance their legacy systems to maintain competitiveness over the coming years. Value-added services that can be enabled by this superior form of messaging are something that all participants in the payments industry should be engaging with. Indeed, it is during this extended timeframe that institutions can ensure they are adequately prepared by implementing the right rules, processes and systems.

Volante Technologies has served as a trusted partner to banks of all sizes since 2001, helping them simplify complex challenges in payments and financial messaging. Unsurprisingly, ISO 20022 migration is a major focus for us. In my work at Volante, I see banks and third party providers taking a spectrum of approaches, from translation-based point solutions to strategic payments modernisation programs.  Whatever the size of the program, budgets are constrained and timelines are tight, so working with the right technology partners is essential. Institutions that combine the right preparation with speed of execution will find themselves ideally positioned to convert a messaging mandate into a competitive advantage, and to deliver what really matters - new products and an enhanced user experience for their customers.