ISO20022: One standard size doesn’t fit all
Despite many years of work by standards-setting organisations and committees, ISO 20022, the global industry standard for financial messaging and data interchange, has still made only small inroads into the world of payment transactions in the US and elsewhere, says Carl Slabicki, Line Manager for Immediate Payments, BNY Mellon. (second picture: Co-author Lisa Hays, payments and standards expert in BNY Mellon’s Treasury Services team)
There are still many other standards from Fedwire, CHIPS, SWIFT and banks’ own formats and slight variations that are impeding the shared goal of a single global messaging standard being introduced for payments, based around the ISO20022 format.
This standard is issued by the International Organization for Standardization (ISO) Technical Committee 68 (TC68), which is responsible for Financial Services in the body. It has longed been hoped that ISO20022 will become the de facto single payment messaging standard in the world.
ISO20022 is also the most common specified standard for use on card transactions, securities trade confirmations and in instant real-time payment schemes, such as The Clearing House’s (TCH) new US RTP platform, with many other schemes such as Australia’s new payment platform (NPP) mandating it too. However, there is still a long way to go in achieving the aim of universal global adoption and usage for real-time payments. I’ll look at the impediments in this article.
ISO20022: Vision & Reality
The final picture of ISO20022 implementation in the payments field that emerges will likely be more a form of peaceful coexistence with other standards and proprietary formats than a full replacement. Complete ubiquity is difficult to envisage unless a global initiative begins to mandate the change in a common manner everywhere.
With ISO20022, businesses and financial institutions (FIs) have a global standard that provides the flexibility for multiple payment types within a single format. A company can send domestic currency wire transfers, multi-currency payments including foreign exchange (FX), currency-to-currency payments, drafts, and more in a single file format to the FI that would disburse the payments as applicable. The standard offers a single format that spans payment types and scenarios, that will scale to future interoperability, and that will deliver on comprehensive approaches to payables and cash management. This is why it’s such an attractive standard, not to mention the large number of characters it can carry, enabling data-rich messaging.
Future potential aside, the current chicken-or-egg dilemma of ISO20022 still holds many back. All of the industry stakeholders we see tell their own side of the story. Corporate users have hesitated to invest; banks remain eager to support existing clients; and payment networks such as ACH, Fedwire, CHIPS, SWIFT, Bacs, and CHAPS (each of which have their own formats) are all still heavily utilized.
The Path to Adoption
Recent and emerging payment modernization efforts may eventually accelerate adoption, provided that business and their banks find compelling value to come on board and integrate ISO20022 into their operations on a cross-border, interoperable manner. The situation at the moment is as follows:
- Most domestic fast or real-time payment (RTP) systems make use of ISO20022.
- It already exists within dozens of countries.
- Corporates are realising that it allows for quicker implementations at lower cost by creating one file format across all FIs and payment types
- The industry is starting to have serious discussions about facilitating real-time instant movement of funds around the around the globe.
These factors will continue to inspire a wave of implementations of the standard.
Yet, to deliver on ISO20022’s promise of reduced friction in cross-border payments and greater flexibility for businesses trying to access different services with their banking partners, each entity will need to take an incremental approach, and avoid the trap of ‘one-size-fits-all’ implementation.
Budgets and Resource Planning
For the typical corporate treasury team we speak with at BNY Mellon, technical and general resources across the board are extremely tight. Resource constraints limit the ability to build new files and go through data mapping exercises, especially given that most organisations have competing priorities for their technology spend. If payment capabilities were to freeze at their current stage of evolution, few companies would want to invest in a new procedure or system since the process works well enough for them to get by.
For these reasons, the need to adopt ISO20022 varies because of factors such as the volume of payments processed, the number and diversity of counterparties and the strategic priority of payments processing and cash management to the business – and the underlying payment use cases have to be available to release budget. Even then, it will always have to be ‘right-sized’ to the corporate technology budget.
Taking on One Use Case at a Time
Both businesses and FIs tell us they are still searching for a truly compelling case for change that warrants allocating additional resources. To inform their decisions, the best approach is to look at how payment data moves between them and their business partners currently, and to then make specific calls about when they need to reduce exceptions and streamline exception handling. Other issues to consider include when to apply payments faster, or to provide greater transparency to a business process or to parties to the transaction. This thinking shows when and where it makes sense to find ways to adopt ISO20022.
However, with ISO20022 not all ways towards adoption are created equally and everything won’t necessarily happen at the same time. For instance, BNY Mellon’s own journey towards ISO20022 began with looking at the payments schema first and reviewing it across all of the payment types we support. Then we decided to look at acknowledgments and messaging. Finally, we focused on reporting from a cash management perspective for our corporate clients. This phased approach allowed us to realise the value of ISO20022 over a three-year period, and a comparable method of adoption makes sense for any organisation.
Driving Toward Peaceful Coexistence
Realistically, ISO20022 is unlikely to dislodge the many standards and formats, shared or proprietary, that currently underpin payments. Faster change would likely require a mandate to do so, which furthermore would result in a new host of issues with versioning.
Major existing networks will not migrate to the standard in the near or even medium term, although new networks and initiatives are making strides in this direction. For instance, The Clearing House’s (TCH RTP) Real-Time Payments network and the US Federal Reserve ISO initiative are noteworthy.
Banks will continue to support existing channels for payments and reporting because they do not want to force their clients to make significant investments to continue to do business with them.
What we expect instead are ISO20022 implementations that focus on supporting new options and capabilities, such as real-time payments, tokenized payments, or cross-border payments in parallel. In other words, FIs and corporates will use the ISO format to initiate these new payment types alongside the familiar ACH, wire, and check payments. During a long interim period of coexistence, ISO20022 will still play a key role, as an enabler of data translation.
In this world of data translation, we see perhaps the biggest opportunity in ISO20022 as a means to change the very underlying thinking about payments. A translation approach moves away from treating payment types as siloed offerings. This means payers can think in terms of a set of comprehensive payable instructions and information that travels back and forth between counterparties regardless of what channel is used or how it settles.
In other words, ISO20022 unlocks more strategic thinking about payments, by alleviating the preoccupation with channels and technology – as long as it is not viewed as an end in itself.
While this world of long migration and multiple formats may be more complicated than what a standards purist might hope to see, it also offers a more realistic and achievable end state. It will ultimately derive more business value from ISO20022 at lower cost and more quickly than a more monolithic ‘one-size-fits-all’ mentality.