Long reads

ISO 20022 holds key to fintech innovation and competition in years to come

Jamie Crawley

Jamie Crawley

Reporter , Finextra

As banks and other financial institutions migrate to ISO 20022 in the years ahead, many of the ongoing conversations of ‘old vs new’, ‘big’ vs ‘small’ and ‘incumbent’ vs ‘innovator’ in financial technology may be built around this new standardisation of language and messaging for payments data.

Preparation for and adaption to ISO 20022 has been a 15-year journey. The significance of its aims has possibly been highlighted in recent months as electronic payments spiked amidst the Covid-19 pandemic, while the difficult economic conditions have heightened the importance of liquidity and cash management for businesses fighting for their survival.

The push for common standards is therefore of joint significance for the private and public sectors, with governments, corporations and banks (both central and commercial) gripped by a common determination to address some of the challenges and shortcomings in domestic and cross-border payments.

ISO 20022 will then have resonance across all developments in banking, payments and the broader fintech space.

CBDCs v crypto

It is likely for example that ISO 200222 migration will be positive for central bank digital currencies (CBDCs) and by extension negative for many established cryptocurrencies like bitcoin.

Standardising the communicating instructions for electronic payments would facilitate transacting across borders and between financial institutions and provide a boost for centralised payment providers such as SWIFT. It may also short circuit the use of decentralised systems presented by bitcoin, ethereum et al.

A bank in South Africa will be able to send funds in rand to a bank in India who naturally transacts in rupees using SWIFT, empowered further by operating in tandem with real-time payment schemes in different markets.

Another scenario is that ISO 20022 provides a boom for the scaling of CBDCs. With numerous central banks examining the development of a digital currency, the standardised language of payment requests and orders is likely to be a boost to the interoperability of different CBDCs.

Rather than being concerned about whether the potential reach of China’s CBDC, the e-RMB, and the implications it could have for the country’s dominance of the world’s financial system, ISO 20022 should in theory ensure the playing field remains level. Companies and individuals could transact in whatever digital currency is convenient to them without concern for whether it’s practical from a technical point of view.

This may cut the knees off bitcoin and other cryptocurrencies, as it would undermine the argument that crypto is a solution to outdated, centralised payments systems that place undue costs and barriers to remittance and financial inclusion.

However, one crypto that could benefit is XRP, the currency used on the blockchain-based payment system Ripple. This is one cryptocurrency that will be compliant with the ISO 20022 standard allowing it to operate alongside CBDCs within centralised payment systems.

Driving competition

ISO 20022 will prove a decisive test for how different size institutions are able to adapt. Large incumbent banks have the perennial complication of legacy systems and infrastructure, for example. At the very least, it could prove difficult for them to enable all their systems to become ISO native. This could hamper these banks from realising the benefits of migration and raises the question of the competitive advantage newcomers in the market will enjoy, given that their infrastructure was built with ISO 20022 in mind.

“Today’s technology enables the execution of a payment to be fully embedded in a broader business workflow – this however doesn’t work well with legacy formats,” says Isabel Schmidt, global head of direct clearing and asset account services at BNY Mellon’s treasury services.

Banks that migrate quicker, on the other hand, have the opportunity of differentiating themselves from competitors with value-added services enabled by the superior messaging.

The more systems that are enabled to receive ISO 20022 data, the more opportunities there will be for innovation and, by extension, the more competition there is in the market.

“For institutions that wish to unlock challenges and enable opportunities for their clients, ISO 20022 will be able to carry additional data about a payment or non-payment service,” says James Whittle, director of standards and architecture at Pay.UK.

“Standards must enable participants to compete and innovate, which means that our standards must be able to support market differentiation or communities of users who want to drive toward data rich payments at a faster pace.”

ISO-native payment platforms also have a head start in rolling out products and services that harness the developments in RTGS or real-time payment initiatives like Request to Pay (R2P).

“Many vendor payment platforms have been upgraded to be fully ISO capable which makes adoption a bit simpler especially for smaller institutions,” Schmidt says.

Closely linked to the competition between different sized institutions in the banking and payments space is of course Open Banking and its European counterpart PSD2.

As new interbank rails move to ISO 20022, the open banking APIs will need to align to new payment initiation standards. Payments richer in data will become the norm and the flow of these will create a virtuous cycle, in which richer data is fed into the account information space.

“The way ISO 20022 works has changed to include APIs, to maximise data modelling and become more agile to change,” Whittle says.

“The big development area is on data and not XML or messaging. It’s data that powers the business processes of financial services - industry needs to focus on the power and potential of the data.”

What’s new today?

While the market has been adopting ISO 20022 for 15 years now, it is the massive adoption by real-time gross settlements (RTGS) systems around the world which brings increased impetus now.

“Many market infrastructures adopt ISO 20022 and ensure adoption of and adaptation to the new features released by the richer standard,” says Charles Bunnik, market infrastructures project manager at ABN AMRO.

“It has no effect for a single bank to move to ISO20022, only if a community adopts a standard and creates new standards for services will it unleash its potential.”

Of increased significance now as well are the challenges of making cross-border payments easier, faster, cheaper and more transparent. a long-term priority of the G20.

The vast data possibilities in ISO 20022 can also extend the GPI initiative to support new services and address the existing barriers in cross-border payments.

“The cross-border element is very interesting about an initiative like P27 and the fact that an infrastructure is created across currencies,” Bunnik adds.

“We envisage a move to (near) real time FX transactions in Europe supported by regional infrastructure.”

 

Comments: (3)

Nick Ogden
Nick Ogden - RTGS.global - London 29 October, 2020, 09:321 like 1 like

ISO 20022 is the start. When you then overlay Atomic settlement it transforms the way every payment transaction is undertaken, from cross-border, domestic payments, and the card schemes. We have tested POS and e-commerce on the RTGS.global network and payments from the customer account to the merchant bank account take less than a minute. This removes financial friction costs, dramatically improves business cashflow ,and uses the FIAT currencies that consumers and businesses already use and understand.

 

Steve Miller
Steve Miller - Velo Payments - Tunbridge Wells 29 October, 2020, 10:50Be the first to give this comment the thumbs up 0 likes

Thank you - a clear and very well-articulated read, and I couldn't agree more. ISO 20022 has been around for 15 years. Banks have not been slow to adopt simply because of the friction imposed by "legacy" systems. They have been slow to adopt because a) it was not mandated until recently, and b) there was no clear competitive advantage in adoption. No-one credibly debates the conceptual benefits of harmonised language and process. Financial institutions *do* debate the priority of non-mandatory internal re-architecture that is not always obviously business-enhancing to the C-level audience. The tipping point has been adoption and enforcement by national payments schemes and other market infrastructures.

Jeremy Light
Jeremy Light - Independent - London 30 October, 2020, 09:001 like 1 like

Thanks Jamie - good article. I concur with the quotes in it from James Whittle - it's really the data that holds the key to innovation, and it is the data and interoperability that ISO20022 brings that are the essential ingredients to next generation payments.

Data richness and its use will power new business models, vastly expanding the nascent digital economy sometimes referred to as Industry 4.0.  Next generation payments are critical to enabling these business models, and by implication they need rich data at their core – for example in a) super-efficient innovative cross-border payments use cases - b) QR code acceptance, c) request-to-pay, d) just-in-time SME ordering/collections, e) streaming commerce & subscriptions, f) atomic liquidity bridges and so on.

However, standardisation ‘end to end’ is critical for next-generation payments to fuel these business models at scale. Standardisation is where ISO20022 has a role, enforced by rules adhered to by all network actors. Whilst ISO20022 is in widespread use for domestic payments, RTGS and securities systems, it has been limited to messaging, often bespoke - for example SEPA has multiple “flavours” of messages using ISO20022 which are proprietary to the SEPA schemes.

Standard network rules with data models are the enablers for providing payments required for Industry 4.0, and for allowing FIs (new and old) to build out the case for change and for participation in new networks.

ISO20022 is a great start and a great discussion.