In the world of finance and business, effective communication between organisations is critical. Miscommunications in financial messaging can have severe consequences, leading to substantial losses, regulatory issues, reputational damage, and erosion of client trust.
Given the global nature of modern finance, the need for a universally adopted messaging standard is paramount. This need drove the development and adoption of the ISO 20022 standard, establishing a single, consistent global language for exchanging financial transaction data seamlessly across institutions and borders.
So let’s explore it.
What is ISO 20022?
ISO 20022 (pronounced ‘ISO twenty-oh-twenty-two’) is a global standard for exchanging electronic messages between financial institutions.
It was first introduced by the International Organization for Standardization in 2004 to give the financial industry a standard platform for developing messages in one eXtensible Markup Language (xml) rule.
We’ll discuss this in a little more detail soon, but the migration to ISO 20022 is increasingly on the radar of UK businesses.
Why is it Important?
Just like languages around the world, there are different messaging standards and formats within the current financial landscape, each specific to their own geographies or business areas.
Put simply, there are a million different ways to say the same thing.
As fintechs and challenger banks continue to innovate, introducing new ways to pay in an increasingly globalised world, it’s now more essential than ever to make use of a common standard.
To synchronise the language used between new systems and traditional infrastructure to help realise end-to-end processing across domains and geographies.
So, ISO 20022 sets out to answer how implementing a global standard of financial messaging will:
- Improve communication
- Make sense of different meanings
- Get everyone on the same page
In order to accomplish each of these goals, ISO 20022 overcomes two barriers:
- Syntax – the structure and form – or the language – of a message
- Semantics – the meaning of those messages
So How Does SWIFT’s Standard Work?
SWIFT likens ISO 20022 to a recipe that comes with all the ingredients you need to put it together.
The result is a standardised way of communicating across borders and industries.
If we’re to continue the metaphor, the recipe is based on three separate layers:
1. Business processes and concepts
A key characteristic of the ISO 20022 methodology is the distinct separation between the business and the way it is represented in a message (the syntax).
So, the ISO 20022 methodology starts with defining the activity or business process, the roles and actors involved, as well as the information needed for the activity to take place. This data is then organised in to components containing business elements
2. Logical messages independent of syntax
Another key feature of ISO20022 is the ability to reuse components across all messages – no matter if it’s a credit transfer, credit card payment or FX transaction.
So, the logical message is a description of the information that is needed to perform a specific business activity, independent of syntax and made up of message components organised in a hierarchical structure.
3. The syntax
This relates to the physical representation of the logical message. XML is specified as the primary syntax, but other common types can be used – i.e. SWIFT proprietary or FIX syntax.
This is all stored in a common repository, which also comprises an ISO 20022 dictionary. Just like the Oxford English Dictionary, it lists components, their structure, definition and context around how they should be used or interpreted.
And because ISO 20022 is a free and open standard, anyone, anywhere can add their 2 cents to the dictionary to help write and build solid business standards across the globe.
ISO 20022 as an International Standard
ISO 20022 messages are designed to break down cross-border barriers and support global business needs for the foreseeable future.
By 2025, it’s estimated that over 80% of high value transactions will be done using ISO 20022. So, SWIFT’s involvement is crucial to its global adoption and standardisation.
As a brief timeline, SWIFT:
- Drafted the original ISO 20022 specification as part of the ISO working group that developed the standard in 2000.
- Appointed Registration Authority (RA) for the standard in 2004.
- Continues to send delegates to the Registration Management Group (RMG) – the body responsible for overall management of the standard.
It’s common knowledge that SWIFT have their own MT messaging standard, which they update yearly. The two messaging standards currently coexist via a shared mapping service provided by SWIFT.
However, not all MT messages can be converted to ISO 20022, which is why the MT messaging standard will exist long in to the future.
In September 2018, the SWIFT board agreed to facilitate a migration to ISO 20022 for cross-border payments and cash.
This will include all users of payments and cash management messages (MT categories 1, 2, and 9).
What Is CBPR+?
When it comes to cross-border payments, the Cross-Border Payments and Reporting Plus (CBPR+) initiative is key to ensuring that ISO 20022 is adopted smoothly across the globe.
Managed by a group of payment experts, CBPR+ focuses on creating Market Practice and Implementation Guidelines to define how ISO 20022 messages should be used and validated for cross-border payments and cash reporting on the SWIFT network. The goal is to provide a common framework for banks to follow, ensuring a consistent rollout of ISO 20022 worldwide.
The CBPR+ guidelines are publicly available on MyStandards and come with various resources, including downloadable XML schemas, PDF, and Excel specifications. These resources make it easier for banks to understand and implement the new messaging standards. Additionally, the CBPR+ translation portal offers translation rules and logic between MT messages and ISO 20022, further easing the transition.
By standardising message formats and providing the necessary tools, CBPR+ promotes transparency, compliance, and efficiency in international payments, helping banks and their clients move towards a more unified global payment system.
What Is HVPS+?
Alongside CBPR+, the High-Value Payment Systems Plus (HVPS+) initiative is focused on optimising the use of ISO 20022 in high-value payment systems. Also managed by a workgroup of payment experts, HVPS+ creates detailed guidelines for how ISO 20022 should be used in these systems. The mission of HVPS+ is to provide a set of guidelines that domestic markets can use as a foundation to develop their own specific market practices, ensuring that local requirements are met while still aligning with international standards.
These guidelines cover both payment clearing and settlement messages (pacs) and cash management messages (camt), ensuring a comprehensive approach to high-value payments. The usage guidelines are publicly available on MyStandards, making it easy for financial institutions to access and implement them. Additionally, the guidelines for HVPS+ are fully aligned with those for CBPR+, ensuring consistent usage across different regions while allowing for minor business differences, such as settlement methods. This alignment helps financial institutions handle large transactions more smoothly and accurately, enhancing overall efficiency and reducing the risk of errors in critical payment processes.
ISO 20022 Adoption in the UK and US
Most countries are still working towards introducing a payments architecture that’s ISO 20022 ready, despite the impact of Covid-19 on the finance sector and business payment trends. The UK and the US are predicted to adopt the standard in 2022 and 2023 respectively, with ongoing enhancement and maturity phases.
However, some countries are ahead of the curve, with many seeing Australia’s New Payments Platform (NPP) as the shape of things to come.
ISO 20022’s Place in the UK Payments Landscape
In June 2018, the Bank of England, Pay.UK and the Payment Systems Regulator issued a statement which accompanied proposals for introducing ISO 20022 compliant messaging to payments in the UK:
“By working together as an industry, we can safely deliver a complex but critically important and highly beneficial change, which will help create the conditions for the next generation of innovation in UK payments.” – Bank of England
On 8th November 2018, the Bank and Pay.UK announced the creation of the Standards Advisory Panel, a senior group providing strategic advice on the adoption of new payments standards in the UK, with an immediate focus on ISO 20022.
This goes hand-in-hand with the introduction of a common credit message (CCM) across CHAPS, Faster Payments and Bacs, made possible by plans for the introduction of a renewed Real Time Gross Settlement (RTGS) for CHAPS and the NPA for Bacs and Faster Payments.
Don’t worry, either – ISO 20022 has nothing to do with Brexit.
What impact will ISO20022 have on corporates?
Despite changes starting to come in to effect from November 2022, we expect a transitionary period until 2025.
Currently the emphasis is on the banks preparations for accepting ISO20022 standardized messaging. Many ERP and other back-office providers also need to enable the creation of payment files within the new standardized format. For example, enabling the creation of files containing ISO enriched data will require changes to the properties used by an ERP to create payment files in the first place. The files themselves will also need to compatible with the new xml format.
Even with a 3 year transitionary period on the cards, this will eventually impact corporates making cross-border Treasury payments, CHAPs payments and other common payment types mentioned above. So its beneficial for corporates to have ISO20022 adoption on their radar and be aware of the roadmaps of their partner banks and ERP vendors.
Benefits of migrating to ISO 20022
Switching to ISO 20022 brings plenty of perks for financial institutions and their clients, like better-structured data and easier compliance. The improved data setup makes reporting more accurate and detailed, which helps meet regulatory requirements and boosts fraud detection.
Plus, because ISO 20022 is a global standard, it makes cross-border transactions simpler by using a common language, cutting down on errors and delays. Its flexible and unified integration also means financial systems can adapt more easily to changing market needs and new technologies. Overall, moving to ISO 20022 brings more transparency and efficiency, helping to create a stronger and more reliable global financial system. To break it down, the benefits of migrating to ISO 20022 are:
- Global reach
- Flexibility
- Harmonized integration
- Enriched structured data
- Compliance and regulation
- Transparency and efficiency
How can AccessPay Help?
The move to the new standard ISO20022 format brings about lots of benefits as discussed above. AccessPay can support you through this period of change in a number of ways:
Legacy system compliance – If you have an ERP system, payroll or Treasury Management System that is not able to generate the new format, AccessPay can take your file format and transform it to the new XML format without impacting your existing system.
Cost benefit- If your back office system can be upgraded to support the new XML format, but the cost of the upgrade is significant, AccessPay can transform the existing file at a lower cost option.
Automatic Payment Status Reports – One of the benefits of the new format is that the banks will respond with a status update message (Payment Status Report or PSR) in near real-time. The PSR can be generated by the bank at file and transaction level. This has significant value for the corporate user to obtain real-time information of the payments submitted, including whether the transactions have been accepted or rejected by the bank. If the legacy back office system is not able to consume this data and/or not able to receive it, AccessPay can provide both the mechanism for delivering the PSR and also provide a status update via the user interface and/or email alerts.
To Summarise…
Standardising financial messaging through ISO 20022 not only offers a common, global language for corporates and financial institutions, but also brings about 3 main advantages:
- Linking messages to business processes means they’re easily and universally recognisable
- Reusing components means that institutions only need to map them to internal data structures once
- The use of xml syntax as an international open standard helps interoperability, enabling automated transfers and straight through processing across entire processing chains
Eventually, standardisation will lead to enriched data carried in payments messages to enhance analytics, improve compatibility and compliance across technology platforms, improve fraud prevention measures and create opportunities for collaboration.
