As financial institutions recognise the scale of the impending ISO 20022 migration deadline, implementation strategies are being re-calibrated to incorporate risks, challenges and opportunities of the industry-wide transformation.

Key dates:

• November 2021 ISO 20022 messages to go live on Swift.
• Between 2021 and 2025 a four year ‘coexistence period’ for ISO 20022 and the legacy Swift MT standards.
• The UK and US are expected to adopt the ISO 20022 standard in 2022 and 2023 respectively.

ISO 20022 (otherwise known as ISO) is the new data-rich language and structure for payments information with an EU migration date currently set for November 2021.

ISO is predicted to revolutionise the banking sector through increased detail, flexibility, efficiency, reduced costs and straight through processing (STP) rates. Increased ‘rich’ data transfer is immensely attractive for financial institutions because of its ability to strengthen security and reduce transaction errors.

The language is on track to become the new global standard and financial institutions across the market are readying themselves for the herculean migration project. The transition is expected to occur in 2022 for the UK and 2023 for the US, however institutions are being strongly advised to adopt early.

Erwin Kulk, head of service development and management, EBA CLEARING tells Finextra Research that he is positive about the progress: “Preparations for this major industry changeover are completely on track at the level of our large-value payment platform EURO1, our work is fully aligned with the project and testing milestones set forth for TARGET2.”

The EURO1 migration to ISO 20022 deadline for end of 2021 is in line with the Eurosystem’s TARGET2 platform to the ISO standard.

Kulk continues: “The only differences we see are at the level of strategic approaches taken by our users: some banks are concentrating all their efforts on tackling the ISO 20022 migration and all related compliance aspects, while others are already looking at how to benefit from this migration in the medium term.”

Currently managing two of Europe’s Systemically Important Payment Systems, EURO1 and STEP2, EBA CLEARING has worked alongside Swift since 2018 to help market participants craft a seamless transition to the ISO standard.

Saqib Sheikh, global head of the ISO 20022 Programme at Swift advocates early adoption of the standard to Finextra Research, and argues: “We encourage institutions to look at ISO 20022 strategically – as a new data model that will yield efficiencies and improvements in compliance and customer experience…the rich, structured information it enables will improve the quality of data between sending and receiving customers – significantly improving their over all experience.”

In addition, Sheikh elaborates that ISO will improve efficiencies thanks to updated automated processing, provide detailed party information to facilitate compliance and will provide a platform where new services can be offered to clients because of the added data.

But with discrepancies across the industry about ISO 20022 preparedness, optimism must give way to realism as banks are coming to terms with the scale of the ISO migration.

Are financial institutions on track?

Paula Roels, head of market infrastructure & industry initiatives at Deutsche Bank highlights to Finextra Research: “As things stand, we see the majority of banks focusing their attention on putting processes and infrastructure in place to meet the 2021 deadline and be able to receive extended ISO 20022 messages in the correspondent banking space.”

From conversations with clients and peers, Roels adds that while most banks have commenced their projects for migration, “we see European markets leading with the implementations driven by the clear timelines set by the market infrastructures. Most banks in these markets are using the opportunity to prepare for the migration in the correspondent banking space in parallel.”

Roels emphasises that cooperation across the landscape is critical to the project’s success and that the migration cannot be considered in isolation: “We need to work closely together within industry bodies – such as PMPG, the Wolfsberg Group and others – and pay close attention to recent developments. Banks cannot overcome the challenges alone, we expect service providers to support their clients in this migration too.”

Swift has been engaged by a number of the large payment banks and key intermediaries to provide workshops and webinars to provide detailed coaching for the ISO adoption process.

“We also continue to engage with our whole community and are tracking this closely to ensure they are preparing properly,” Sheikh explicates.

CHALLENGES

Risks

Change begets instability, and the need to avoid risk is vital not only as digital payment platforms face unrelenting pressure to maintain airtight data security (or suffer the reputational consequences), but to ensure that their commercial interest is protected through interoperability.

Kulk explains that EBA CLEARING has been heavily focused on providing structured testing with the community to ensure system components, interfaces and processes have been fully tested before the go-live date.

Kulk states that aligning the EURO1 and TARGET2 migrations was especially important as “it excludes the potential risks that a staggered migration would have entailed.”

Underlining the risk of an ecosystem proving to be fundamentally immature, Roels warns that a lack of readiness could cause increased payment-related enquiries (Exceptions & Investigations for example) which would exacerbate the “synchronisation of market infrastructures.”

Complexity & compromise

The sheer size and complexity of the migration is emphasised by Roels, who argues that despite most banks having already begun the implementation process, “many of them are only now realising the complexity of the necessary changes.”

As the transition goes beyond a simple mapping exercise, Roels flags three key challenges which have emerged given the project’s complex nature:

1. The business rules and workflows external to IT processes will see a significant shift of gear as certain processes are automated and compliance rules are applied to these processes.
2. Existing infrastructure or legacy systems will complicate the integration for institutions.
3. The granular model which ISO 20022 follows requires changes to the format and the source of the information for transmission. This is currently something outside of banks’ control.

Roels also points to Swift’s Exceptions and Investigations (E&I) protocol as a long-established process which will have to be re-defined with the ISO 20022 implementation process.

“Considering the complexity and the short migration deadlines, there will need to be compromises in terms of migration.” For instance, we are seeing banks ‘de-scope’ their range of services to successfully take their first steps toward ISO adoption with the intention of reaping the full benefits of the new system at a later stage.

Institutional size

Banks aren’t equally equipped to prepare for the migration in a consistent manner. Petia Niederländer, head of retail and corporate operations at Erste Group Bank, highlights the challenge the migration presents for smaller firms operating in the space. Niederländer says: “European banks are working very hard to meet the 2021 deadline [however] I think the deadline is quite challenging, especially for the smaller banks.”

“There are technical challenges such as migration mapping, changing legacy systems, and the changing architecture of banks and corporates. Particularly for regional banks the business challenges means a decision has to be made about approaching the change as a compliance demand or a business opportunity.”

Niederländer adds that governance challenges for these mid-size banks will require a re-evaluation of their correspondent banking processes as it will prove costly and complex to continue serving regions independently within decentralised infrastructures.

She contends that these banks will be forced to reconsider how many entry points their network provides, how to optimise their technology base, how they store data and the compliance processes related to ISO data collection – a tall order for smaller firms.

Prioritisation

Kulk argues that the largest challenge for financial institutions facing the ISO transition is the necessity to juggle this project with every other scheme being introduced, integrated, or refined concurrently.

Kulk explains: “From a market infrastructure perspective alone, there are several developments that will continue to bind a large number of resources in financial institutions over the next few years, [such as] the move from a cycle-based settlement model to continuous gross settlement for SEPA payments in STEP2, the ongoing roll-out of instant payments, or the introduction of a Europe-wide request to pay scheme.”

“There is a keen awareness in the market of the risks involved in these parallel deployments, and system operators, their users and other key stakeholders are putting much focus on the planning and coordination needed to mitigate these risks.”

The requirement to achieve compliance versus the desire to adapt to achieve a competitive advantage is apparent. As a heavily regulated industry, rigorous attention to compliance remains a fundamental requirement for financial institutions, but Roels argues that the business case for early adoption is clear.

Early adoption means that banks and their clients can benefit from the data rich format before their competitors, and, as Roels contends: “implementing ISO 20022 in 2021 in one holistic project will provide a better return on investment in ISO 20022 infrastructure, save costs and avoid additional complexity.”

She adds: “Given the number one concern of the community is data truncation, being an ‘early adopter’ of ISO 20022 will benefit intermediary service providers, in particular, as they have to ensure the full transmission of the data front-to-back.”

No glory without pain

Roels notes that despite the complexity and breadth of the challenges associated with migration, establishing the harmonised ‘rich’ messaging standard brings huge potential to the entire payments ecosystem and ultimately the client experience.

The rich data will “facilitate improved transparency and message filtering to help with compliance requirements, such as those relating to sanctions and AML. Overall, increased straight-through processing is the greatest benefit of the migration, not just in the inter-bank space, but also end-to-end for the automated reconciliation of payments by corporates.”

A whirlwind of ISO adoption is likely to take hold over the next 12 months as institutions buckle down to meet the European deadline, capitalising on the first-mover advantage that is expected to set the tone for 2025 global adoption.

While the obligation to implement compliant infrastructure and protocols remains with financial institutions, it remains to be seen whether involvement from government bodies and regulators will provide smaller players with sufficient guidance and support through the migration process.

Payments technology is a key topic to be discussed at EBAday, the Euro Banking Association's annual conference in partnership with Finextra. European banks, fintechs, and payment providers will gather to explore changes in the industry to develop an open dialogue across key industry players.

Register here for EBAday at The Hague, Netherlands on the 19th-20th May, 2020.