We are fast approaching the next phase of the ISO 20022 migration and the associated changes. By November 2025 at the latest, i.e. when the planned migration phase ends, the "old" formats in payment traffic must have been replaced by the new XML-based formats. We already gave our perspective on the potentials in our newsletter (Issue 123) in July 2022. Let us use this advanced stage of the ISO 20022 journey to discuss the tangible opportunities of such a transformation.

It comes as no surprise that banks and financial service providers have recently stepped up their efforts to raise awareness of the implications of this. Particularly for treasury departments, the necessary format changes can add a significant amount of time and effort. Still, the migration should also be seen as an opportunity: Besides generating automation potential in day-to-day business, the gain in structured information, for instance, can also unlock new opportunities in other areas. 

Account statements and the DTAZV format in the focus of transformation

The migration of payment traffic to the ISO 20022 standard is hardly new. In fact, it had already started with the SEPA migration of domestic payment traffic a few years ago, which some will still remember. Ever since, ISO 20022 has steadily gained importance in the financial industry, both nationally and internationally. The uniform and user-friendly XML communication language provides many advantages already. The ISO format aims to converge existing and new messaging standards in payments and other financial areas. Bulk payment systems in countries such as the US, UK and Europe have already been or are being converted to the standard, lending it additional support and investment security from companies and banks. As a result, this creates a solid standard that is sustainable in the long term and can be relied upon by all parties involved.

The migration to the ISO 20022 standard is also being made in the light of new regulatory requirements in payments. The standard will enable financial institutions to prepare for future developments and changes in international payments. This stage concerns the account statement information and the conversion of the DTAZV format, through which foreign payments, check payments and foreign currency payments can be processed.

Know the risks to exploit the opportunities

To avoid the risks and maximize the opportunities, it is up to treasurers to take the right steps at the right time.

Many countries and financial institutions around the world have begun adopting, or have already fully adopted, the ISO 20022 standard for financial data exchange. Backed by numerous payment systems and financial messaging platforms, the standard is expected to grow in importance in the coming years.

As far as account statements are concerned, the ISO 20022 standard specifies the message formats camt.052, camt.053 and camt.054, which are used for the exchange of information on account statements electronically between banks and their customers. Just like the DTAZV payments, in future mapped in the pain.001.001.009 format, this is a structured and uniform representation of payment and account information, making it possible for banks and companies to process and interpret their financial data more efficiently.

The use of the ISO 20022 standard for account statements provides bank customers with detailed information about their account activity, including incoming and outgoing transactions, interest credits, charges, and other relevant information. This standardized format of communication facilitates the reconciliation of account activity, the analysis of financial data, as well as the integration of account information into their ERP systems.

With the use of the ISO 20022 message format, such as pain.001.001.009, it is possible to prepare foreign payments in a structured form and transmit them to the banks. The EBICS procedure (or other procedures such as SWIFT), popular among German treasurers and in Europe, then permits the secure and efficient transmission of this payment information between the companies and the banks. With this integration, cross-border payment transactions become more transparent, secure and efficient.

The transition to the ISO 20022 standard for foreign payments entails several improvements and changes aimed at optimizing payment transactions between different countries and financial institutions. Treasury officers today often wonder why, in an interconnected world, making international payments, for example from Germany to the U.S., often takes a surprisingly long time, involves multiple conversions, and incurs high fees. The new ISO 20022 standard will address these challenges and greatly simplify the process. Apart from the structured design and standardized data, the new formats also feature an extended structure that allows more extensive payment information to be recorded in the payment orders. This in turn leads not only to greater transparency for all stakeholders involved in the payment process, but also to more advanced harmonization of international payment transactions.

As it has the support of numerous countries and financial institutions, the ISO 20022 standard greatly enhances the interoperability and efficiency of cross-border payments. Post-transition, same-day cross-border payments will also be possible.

Call to action: implications of the transition

While banks in particular will be affected by the transition to ISO 20022, as this will impact their core business, treasurers will also need to take action. The legacy formats such as MT940, MT942, DTE and the DTAZV for foreign payments, foreign currency payments and check payments will become obsolete and can no longer be used by companies after 2024. Even though the ISO formats for account statement information have been known and available for years, the German banking industry recommends its customers not to switch to the new ISO 20022 (pain.001 format) for foreign payments and foreign currency payments until they receive the corresponding information from their payment service providers. However, the switch must still be completed by November 2025.

As a result, the significance of this radical change to payments should not be underestimated. It is absolutely essential to migrate to the ISO 20022 standard in good time both to ensure smooth business operations and to plan for the corresponding resources and investments at an early stage.

The risks of a dispersed banking landscape and the challenges of co-existing standards

Not all banks will be switching formats at the same time. Especially abroad, a lot of banks will not switch at all, but continue to use the previous formats. Where an organization maintains an international and heterogeneous banking landscape, some banks may not be able or choose not to adopt the new formats in a timely manner.

This fragmentation in the standard's implementation may pose challenges for cross-border payments, processing of bank statement information, and communication between different banks. As a result, companies may need to continue to be able to work with different formats and provide detailed information reporting in case of queries. Similar to the SEPA migration, both banks and software vendors are offering assistance in the form of conversion tools. Conversion tools, or file format converters, are tools used to convert payment data from one file format to another using a predefined mapping. In the financial and banking industry, payment data often needs to be exchanged between different systems, platforms or banks. This may involve the use of different file formats that may be incompatible with each other.

Still, even if conversion tools initially offer security, especially the payment medium formats should be changed as soon as possible. This is because the conversion to the ISO 20022 standard with its structured form and the new additional information fields will put financial institutions in a position to detect money laundering in good time and to combat the financing of terrorism. 

This means that, in the medium term, the adoption of the new pain format may lead to new compliance and regulatory requirements, given that financial institutions will pass on transaction pre-processing requirements to companies for automated foreign payment transactions. Companies will then have to integrate the necessary information in the data medium and provide it as well. As a result, in addition to the already known mandatory information such as the full name or the payee, a unique reference number, information on the purpose of use, etc., further details may be added and require adaptation. 

Given that the new message formats offer richer customer data, but not every bank in the world is converting to the new pain. format. This means that information can be lost when translating between the different formats. Introducing external conversion tools in the process further increases complexity, which, depending on the degree, can be a potential source of errors. So as to keep the time required for research as low as possible, it is advisable to consider appropriate tools or software solutions in the implementation project.

Still, processes should not be set up in a complex way; keep it simple is the motto here, and not only for the best possible use of the additional information gained.

Need for adjustments in the treasury system: characteristics for processing new formats must be available in the system

The conversion to the ISO 20022 standard requires a high degree of adaptation of master data and functions in treasury systems, which essentially influence automated accounting and IT processes. The implementation of new formats is interdisciplinary, thus requiring careful planning and preparation. The following are some important points that should be considered:

  • Analysis of existing processes: before initiating the conversion, it is important to conduct an analysis of the current bank statement and foreign payment processes in the system. This involves identifying the existing message formats and interfaces currently used for the account statement, as well as the information content provided for DTAZV payments.
  • Selecting the right message format: determine which message format you would like to use for the account statements: is end-of-day information sufficient, or should intraday positions and bank balances also be processed? Should account balances be taken into account? Ensure that the selected format meets the requirements of your bank and its TMS. For instance, intraday information might be important for internal accounting but also for management to monitor daily cash flows.
  • Adjusting the configuration: Change the system configuration according to the new message format. This may include updating master data, adjusting payment formats, defining new fields, and configuring interfaces. 
  • Data conversion: In case you need to convert bank statement data to the new format, make sure that the data conversion is carried out efficiently. Check that all required data is available in the new format and can be properly converted back to the old format.
  • Testing and validation: carry out extensive tests to make sure that the switch runs smoothly. Verify that the new statements and foreign payments are generated correctly, that the data is transmitted correctly, and that all relevant information is included. Also validate the statements and payment files with your banks to ensure they can support and properly process the new formats.
    Collaboration and communication between stakeholders is critical to ensure that all relevant information is properly captured and transmitted in the payment orders to ensure the smooth processing of foreign payments.
  • Staff training: ensure that your employees are aware of the new message format and the processes involved. Provide them with the necessary training so that they understand the change and can work effectively with it.
  • Communication with partners and banks: inform your banks and other internal stakeholders in good time about the upcoming transition of account statements and the impact on foreign payment transactions in your system. Clarify all questions regarding cooperation and make sure that all sides are well prepared.
  • Contingency plan: have a contingency plan ready to deal with any problems that may arise during the transition. This may include the temporary use of manual processes or the possibility of reverting back to the old format if necessary.

Leveraging standardization and unification for improved treasury management

The ISO 20022 standard, with its harmonization and standardization of payments, will enable companies to participate in faster payment processes, a wider choice of service providers as well as potential cost savings. Incoming and outgoing payments will be processed faster with the ISO 20022 standard, accelerating the processing of customer and foreign payments. In addition, the financial world is becoming more open: in addition to the traditional principal banks, new players in the field of online money transfer services will increasingly be active in foreign payment transactions, offering companies more choice. As a result, companies will benefit from more efficient and competitive foreign payment transactions.

For the treasury, the transition offers an opportunity to play a central role in the company on an interdisciplinary basis, as payment transactions and liquidity planning affect two vital functions of any company.

Higher automation rates owing to structured information in the note to payee

Through automated STP (Straight-through Processing), which is based on the structured information in the note to payee and the detailed business transaction codes (GVC for short), you will achieve a higher level of automation and improve your liquidity management. The automated processing of structured liquidity information ultimately contributes to a highly effective treasury data management and provides the basis for meaningful treasury reporting.

By necessity, settings for foreign payments will have to be adjusted in the ERP or TMS systems. This also presents opportunities for Treasury to drive or optimize other issues. There is a great need for adjusting formats, bank chains, instruction keys, fee information and other payee information; these have a direct impact on or form the basis for other treasury processes. 

The underlying regulatory restructuring of foreign payment transactions allows the Treasury to advance further topics in the existing payment process context, such as sanction screening, KYC or fraud management, and to automate or readjust them. After all, with improved dovetailing and the insertion of necessary but automated pre-checks, time-consuming downstream clarification traps are counteracted or reduced. Collaborating with their IT department, treasurers can also implement small standardized reports for data preparation and information gathering.

The added information will make it easier to ensure that transactions are not carried out involving individuals or entities that are subject to international sanctions. Companies can conduct more accurate checks by including additional information in the verification process. 

A further topic that should be mentioned in this context is the automation of foreign trade reporting. Already today, treasury software solutions can generate the various reports as standard and submit them electronically to the Bundesbank in an automated manner.

However, harnessing this potential in the best possible way requires companies to analyze their existing systems and processes in great detail. It is important to establish that the updated systems support the necessary data fields for providing information or checking against sanctions lists, for instance. 

Adjustment of bank contracts

The switch to the ISO 20022 standard also requires the bank contracts to be modified, since new order types for the formats are provided by the banks, especially in the case of EBICS. Treasurers may also want to use the adjustment of the contracts as an opportunity to review them in more detail. For example, can the number of EBICS bank users be reduced?

Conclusion: planning for and leveraging this change pays off

The ISO 20022 standard essentially aims at defining a uniform language for different business processes. For payment processes, this means that the individual message components in data traffic in the financial industry are brought into a standardized and replicable structure. Both senders and recipients of cross-border payments benefit from an improved database and transparency through the use of the ISO 20022 standard.

Last but not least, by adopting the ISO 20022 standard, companies will benefit from faster payment processes, a wider choice of service providers, potential cost savings and a better basis for treasury reporting. The transition also marks another step into the global era of real-time payments and the realization of the digital payments vision. 

As described above, Treasury is well advised to agree on a course of action and narrow the focus to its own optimization potential. Irrespective of the ultimate assessment of the implications, it is time for treasury departments to prepare for the upcoming changes - be it as a challenge or as an opportunity.

Source: KPMG Corporate Treasury News, Edition 134, July 2023
Börries Többens, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Nils Bentzien, Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG