Prioritise ISO 20022

In the 1970s, when system storage and bandwidth were expensive, payment messages were designed to be small, containing only the minimal data necessary for processing. However, the world has evolved with much faster internet connectivity and an increased need for more data. The electronic message standards introduced in the 1970s no longer provide businesses with sufficient data to support automation, eliminate manual intervention to interpret data, and provide greater insights.

To address these challenges, the G20 is promoting the harmonised use of ISO 20022 for enhancing cross-border payments. This standard utilises an XML file format for financial messaging, allowing for a more comprehensive exchange of information in payment transactions, securities trading, and other financial activities. ISO 20022 is poised to become the cornerstone of modern finance, offering enhanced data richness and improved interoperability.

Transitioning to ISO 20022 is a crucial step in standardising financial messaging. Historically, the MT message standard has been used globally to facilitate various financial activities such as funds transfers, cross-border payments, clearing and settlement, and securities transactions.

However, the MT standard is not highly rules-based or prescriptive, leading to significant ambiguity in the data being exchanged. This ambiguity results in inefficiencies, obstacles to automation, and challenges in achieving global interconnectivity.

Moreover, MT messages limit the quality of data exchanged due to constraints on data field size, unstructured formats, and optional usage. This limitation hampers businesses' ability to automate processes and gain deeper insights from their data.

Regulators worldwide now demand greater transparency regarding payment participants and purposes. To meet these demands consistently, a clear, unambiguous, and rules-based standard is essential. For instance, using the current MT format could force institutions to squeeze anti-money laundering (AML) information into limited or inappropriate fields. An unstructured element like "CA" in the party field could ambiguously represent either Canada's country code or California.

ISO 20022 addresses these issues by utilizing an XML file format for financial messaging, allowing for a more comprehensive and structured exchange of information. This standard enhances data richness, improves interoperability, and supports automation, reducing the need for manual intervention.

Additionally, ISO 20022 facilitates better compliance with regulatory requirements, reduces operational risks, and supports the development of innovative financial products and services.

The transition to ISO 20022 is not just a technical upgrade but a strategic move towards a more efficient, transparent, and competitive financial ecosystem. Embracing this standard will be essential for financial institutions to meet the growing demands for data-driven decision-making and to stay ahead in the evolving financial landscape.

The global standard will introduce several new data requirements and will impact payments submitted to the bank.

Any source system creating payments, (i.e., payroll/employee expenses, supplier invoices, tax related payments, etc.) will need to capture additional data requirements. Any system used to release the payment file and/or receive bank statements will require system configuration changes to accept the new format. Corporates can expect two key changes due to ISO 20022:

New data requirements: The global standard will introduce several new data requirements that will impact payments. Examples include:

Message format: The well-known financial messaging formats will migrate away from MT. Below is an extract of some of the changes:

These are significant changes and the SWIFT network plans to end coexistence of MT and MX by decommissioning MT messages by November 2025.

Below summarises the key milestones for UK CHAPS payments. However, each country, payment type and bank will have their own timelines, with many converting well in advance of these deadlines.

Despite the benefits that ISO 20022 has to offer, this standard has significant ramifications to processes pre and post payment (i.e., accounts payable/receivable, payroll, bank reconciliations, treasury, etc.). These changes are likely to require significant effort to obtain/update data in the relevant systems, i.e., ERP, payroll, expenses, treasury systems.

Significant end to end testing will be needed to minimise disruption to ‘business as usual’ and prevent any implications on tasks further downstream. Challenges that a corporate may face include:

If not adequately prepared, a corporate could be dependent on banks to convert messages from/into the existing MT format. This doesn’t come without risks, as banks may not offer this service and if they do then bank transaction details are likely to be truncated, potentially causing errors and delays in payment process and downstream processes such as bank reconciliations.

As a multi-disciplinary firm, we understand the challenges that businesses face in adapting to ISO 20022 and navigating the transition period. We can support you to:

• Develop strategies and assess options to transition from existing to the new standard whilst minimising payment and operational disruption.
• Diagnostic assessment to identify the different data gaps in the various source systems to become compliant with the new messaging standard.
• Support with assessment of in-house build vs SaaS based payment hub technology to meet new payment/bank statement formats.
• Support with selection of payment hub technology to manage the change in payment/bank statement formats.
• Design and implementation of payment hub technology to help you through the ISO standard changes.