ISO 20022 Adoption: Understanding its Role and Importance in Financial Services

What is ISO 20022?

ISO 20022 is a global standard for sending electronic payment instructions between local, regional, and international financial institutions. It was first introduced in 2004 and has gone through multiple iterations of development across different financial domains.

Why Was There a Need for a New Global Standard?

As the global economy became interconnected, the data used to send information across systems and countries became increasingly diverse. There was no single language (so to speak) in which payment instructions could be exchanged between local and foreign financial institutions. The probability of misinterpretation of the instructions was high, creating friction and increased costs for all members.

Global standards are important to help ensure communication between everyone. For example, without standards in the field of telecommunication, one would not be able to talk to people whose handsets are different from ours or who are on different networks. Standards in IT help in operating different gadgets on different platforms and protects consumers by uniform repair and production.

How Does ISO 20022 Work?

ISO 20022 lays out the protocols for a common platform for sending messages using:

•  A standard modelling methodology to capture financial business areas, business transactions, and associated message flows in a syntax-independent way.
• A dictionary of business items used in communications pertaining to financial transactions.
• A set of XML and ASN.1 design rules/protocols to convert the message models into XML or ASN.1 schemas, which are machine-readable.

Which Financial Services are Covered by ISO 20022?

This standard covers a wide range of financial services including:

• Electronic payments like credit and debit card transactions and direct debits
• Securities for trading, settlements, and other activities
• Cash management, including reporting, forecasting, and liquidity management
• Trade finance
• Foreign exchange
• Treasury management

How Does ISO 20022 Adoption Help?

The benefits of ISO 20022 have been publicized to be many. Some of them are listed below:

• Lots of Informative, Granular Data: Having informative data will help institutions to deliver better and faster services to their customers.
• Driving Innovation and Delivering Better Products: Access to this data will help in developing new products tailored to customer behaviors. With better data and flexibility, there will be more competition, potentially leading to product innovation.
• Enhanced Regulation and Security: Improved and faster analytics, will result in accurate compliance processes, improved security, and fraud prevention. This will especially benefit the e-commerce industry, which is inundated with false declines to prevent frauds.
• Transparency: Transparency with additional remittance information and real-time visibility will lead to a better customer experience.
• Better Treasury Management: Enhanced and real-time view of liquidity flows will provide more robust forecasting capabilities.
• Improvement of STP rates: The new standard is expected to improve the rate of Straight-through Processing (STP). This will reduce the need for manual data entry, minimize the risk of human error, eliminate the need for rework, result in cost savings, and improve productivity.
• Improvement in Cross-border Payments: It is expected that the global implementation of ISO 20022 will reduce transaction timelines, as the additional data sets will make compliance quicker and reduce financial crimes, with fewer payments being processed manually.
• Reduction in Operational Costs: With more extensive and structured data sets available, fewer payments will be required to be sent back to customers, thereby reducing operational costs.

Reasons for the Delay in ISO 20022 Adoption

With such a wide range of benefits and the number of financial services that are covered by this standard, one would have expected it to have been widely adopted across the world. Many countries have already adopted ISO 20022 in their domestic payment systems, including India, China, and Japan. SWIFT (a messaging network used by many financial institutions worldwide) has also begun the migration of its system for cross-border payments and reporting messages, in March 2023. There will be a period of overlap until November 2025, between the current SWIFT messaging system and the ISO 20022 messaging system, so that banks and other financial institutions can continue to transfer payments while their systems are being migrated.

However, many banks and financial institutions have decided not to move forward with or have had to delay the implementation of ISO 20022. Some of the reasons are outlined below:

• Complexity of Iimplementation: The systems that the banks and financial institutions work on, have a data model on which they are based. Considering that ISO 20022 means a change in the data set, the systems now need to evolve to support the new data structure. The larger the financial institution, more such systems need to be changed, as most of these systems interact with each other. This means that thorough planning, designing, testing, and coordination, is required between different areas.
• Resource Constraints: Resources and costs are challenges that each institution faces when it comes to makinge changes to their existing systems. Many experts need to be aligned to make changes to the systems, taking them away from their daily activities, putting undue pressure on the institutions. At the same time, the institutions will need to make investments in training and making changes to existing processes. This may adversely impact smaller organizations with limited resources.
• Technical Constraints: Managing data mapping, introduction of the new message formats, transformation, and interface changes, are some of the key challenges that most institutions are facing. Similarly, post-implementation issues like data migration and system upgrades need to be planned and accounted for, to ensure that there are no delays or disruptions to the current business.
• Data Complexity: With an increase in the amount of data that is captured, data integrity issues can crop up while migrating existing data. The potential increase in the complexity of systems, processes, and operations, is preventing many organizations from timely implementation of ISO 20022.
• Regulatory Considerations: Reporting requirements and adherence to specific regulatory guidelines have posed a challenge to institutions, especially in countries with complex frameworks.

What Can Financial Institutions Do?

Considering that a data goldmine will be awaiting all the financial institutions that move to the ISO 20022 standard, businesses need to start evaluating ways in which they could move to the new standard if they have not already done so. While many banks worldwide have already adopted the new standard, the same is not true of the customers and financial institutions associated with them. Most are not looking beyond the perceived immediate costs associated with revamping their current systems. However, there is a high probability that these institutions will end up incurring costs in other ways, including falsely declined transactions that impact customer experience and potential data breaches that impact security.

Support is available in the form of expert-led webinars and guidelines for successful implementation of system changes, to migrate to ISO 20022. An increasing number of existing standards are also being mapped to ISO 20022, which will make its adoption easier by allowing ISO 20022 to act as a bridging standard. It is imperative that a business case is made, in terms of adopting the new standard and migrating to a better data platform.

Final Remarks

ISO 20022 offers richer data at its core. However, all banks and financial institutions need to make changes to the data that they receive, store, and provide, so that it contains more information on the parties involved and to ensure that the data is not truncated. Unless these changes are completed, organizations will be unable to reap the full benefits of the rich, granular data.

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