What is ISO 20022? Regulation in financial messaging

In today's fast-paced financial landscape, staying ahead of regulatory changes is crucial. The ISO 20022 standard represents a significant shift in how financial messages are structured and processed, offering enhanced data richness and improved interoperability. Francisco Jimenez and Simone Aranha of our Valuation team explain below.

As new standards are introduced, there's often a rush to implement changes just before the mandatory requirement date. However, with ISO 20022, the stakes are higher due to the potential for payment and bank statement failures. This makes it essential to prioritise this change well in advance. This new standard requires extensive planning, system configuration, and thorough testing to prevent integration failures. For Treasurers, CFOs, and CIOs, early adoption should be a top priority in 2024 to ensure seamless transitions and avoid disruptions.

By addressing this early, organisations can mitigate risks, ensure compliance, and maintain the integrity of their financial operations.

Francisco Jimenez

Principal, KPMG Financial Instruments Lead

KPMG in Ireland

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Background

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.

Why transition to ISO 20022?

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.

What changes can corporate expect?

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:

Requirement	Description
Purpose of Payment Codes (PoPs)	With over 1,600 PoPs, a PoP will be required for payments, as an example, in the UK there will be 6 specific PoPs related to a prerty transaction.
Legal Entity Identifiers (LEIs)	For organisations regulated by the PRA in the UK, it will be a mandatory requirement for a payment to include the LEI.
Structured Remittance Data	It will be required to provided structured data within payments. The use of fully unstructured addresses will result in a rejection.

Requirement

Description

Purpose of Payment Codes (PoPs)

With over 1,600 PoPs, a PoP will be required for payments, as an example, in the UK there will be 6 specific PoPs related to a prerty transaction.

Legal Entity Identifiers (LEIs)

For organisations regulated by the PRA in the UK, it will be a mandatory requirement for a payment to include the LEI.

Structured Remittance Data

It will be required to provided structured data within payments. The use of fully unstructured addresses will result in a rejection.

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

SWIFT MT	Message name	ISO equivalent
MT101	Request to Transfer	pain.001
MT103	Customer credit transfer (single)	pacs.008
MT940	Customer Statement Message	camt.053
MT942	Intra-day statement	camt.052

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

When is this being introduced (key milestones)?

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.

May 2025	Nov 2025	Nov 2026	Nov 2027
Mandate the use of Purpose of Payment Codes for Property transactions, and LEIs.	Hybrid or fully structured address data mandated i.e. Town Name and Country code.	Unstructured Addresses will be rejected. End of transition of MT to MX messages.	Mandatory use of purpose of payment codes for all payments.

May 2025

Nov 2025

Nov 2026

Nov 2027

Mandate the use of Purpose of Payment Codes for Property transactions, and LEIs.

Hybrid or fully structured address data mandated i.e. Town Name and Country code.

Unstructured Addresses will be rejected.

End of transition of MT to MX messages.

Mandatory use of purpose of payment codes for all payments.

What challenges might corporations encounter if they are not adequately prepared to address this regulatory change?

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:

Task	Action
Discovery and identification	Engaging with your banks to identify their timelines/deadlines and expected impact across the organisation.
Data Quality	Assessing data quality to identify accuracy and completeness of this data. This can pose a challenge, with potential data quality issues resulting in processing errors and reconciliation complications.
Messaging formats	Identify the number of different formats which are required to be adopted to meet the new global payment messaging standard.
Vendor engagement	Engage with system vendors on readiness/effort to reflect the new standards within all relevant systems.

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.

How can KPMG help?

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.