ISO20022 – Interoperable or not-so-standard?
Over the course of the next three years, the payments industry will undergo a substantial transformation as we see different regions and financial market infrastructures across the globe go-live with the ISO20022 messaging standard. As with any implementation (generally, but especially one of this size), discussions will take place around what is a must-have versus what is a should-have for organisations. It is in this sliding scale between strategic and tactical change that we have the question of just how many of the proposed benefits of ISO will be realised.
Minimum compliance with the standards may not bring about the desired benefits within an organisation or in the wider payments ecosystem. For these benefits to be realised, strategic change and investment is needed. For global banks, this may well amount to a significant financial undertaking, and therefore C-suite support is imperative. At the heart of the business case for ISO20022 is the desired global harmonisation this brings for efficiency in payment message processing. But in reality, just how interoperable will the industry become?
By definition, interoperability is the ability for systems to integrate seamlessly and use data collaboratively, within and across organisational and national boundaries. In the context of ISO, it can be interpreted as interoperability within the industry (viewing organisations as nodes in an ecosystem able to communicate to each other), or within an organisation, i.e. straight through processing (STP).
There can be no doubt that the migration to ISO20022 is a big step in the right direction for the industry. Just one of the key improvements and steps towards interoperability is the implementation of defined and consistent address fields to prevent a false positive sanctions hit for examples such as ’28 Syria Road’. SWIFT estimates that approximately 10% of international payments are delayed for compliance checks as false positives and wasted investigations . That is a significant volume, and one where marginal decreases can save organisations considerable operational costs and enable faster international payments for customers. We may see a short-term spike in the number of false positives whilst the new message structure is embedded, but the result would be the same as this should be followed by a gradual reduction to <10% for international payments (baselining against the SWIFT estimation). This should be a quick win and one that will enable early benefit realisation.
There are, however, intricacies that will have an impact on how harmonised the industry becomes and the level of STP experienced within an organisation. To understand these, we need to look at the entire flow of the payment message, highlighting the customer and the individual organisation.
The entire end-to-end chain needs to move to the ISO20022 format, otherwise there is a risk of truncation. This truncation risk can broadly be split into:
- Industry risk – likely a medium-term risk between the first migration to ISO20022 to the industry scheduled completion date (currently 2025 for the major schemes). As organisations, countries and schemes transition to ISO at different times, truncation risk is at its most probable; and
- Organisational risk – lack of the consistent use of structured data sets within an organisation. This results in firms sacrificing STP or burdening themselves with a significant number of ‘translations’ internally.
Getting customers onboard with the change is a big challenge and an important consideration. Organisations need to work with customers to ensure that customers understand the impact to them; whether this concerns the transfer of inbound messages (e.g. how customers can read payment messages in the new format) or outbound messages (e.g. how customers provide beneficiary information via the new format in their payment instructions). There must be a consistent customer communication strategy in place to ensure that there is improved quality of data at source (the customer) which interfaces with the banks, for example, more granular originator and beneficiary details. If customers are aligned with how they can benefit from these changes, they will likely be engaged and supportive and thus increases the likelihood of improved interoperability. On the other hand, banks who don’t communicate this well risk losing business as customers who are not yet ready or onboard with the change are forced to send information in ISO20022 formats. Another angle to consider is that a large number of customers will be multi-bank – are they going to be sending in a mixture of ISO and legacy formats? How are they going to manage the transition? Communication here, as ever, is key.
Following 2025, at the very least all the gateways of organisations will be able to send/receive in the new formats, shifting truncation risk to within each organisation as opposed to the global industry.
It is very important to note that, within organisations, if channels or master customer data stores do not capture information in the updated structured formats, then either no benefits are realised or there will be multiple translation modules (each module introducing a risk of truncation). Even by selecting translation modules as a tactical solution, organisations then force more questions onto themselves as there are decisions to make on whether to use industry translators, APIs or local translators (refer to the diagram below).
Updating legacy technology is not easy; in fact, it is regularly cited as one of the most complex challenges of this transition. It is highly unlikely that organisations (particularly the largest global banks) will have the resources or the time to uplift their entire technology estate to ISO20022 in the stipulated timeframes. Rather, it is more likely that the transition will be phased, taking place at a component level (working backwards from the gateway). However, looking further ahead, it is a big assumption that the required funding will be approved at a later date in order to carry out the presumably significant uplift of legacy technology systems after initial ISO compliance has been achieved. Is this likely tactical approach endangering the standardisation that ISO set out to achieve? Will tactical approaches leave organisations trailing behind competitors who are using the enriched data for customer analytics and innovation?
Interoperability is a crucial objective of ISO20022, but clearly there are challenges in achieving this. Minimum compliance by organisations will put this at risk for a period of time at the industry level, and after, it will turn into a hindrance to themselves. The additional year for Eurozone and SWIFT go-live dates needs to be utilised as much as possible to prepare for this transition, sliding the scale towards strategic instead of tactical change. Only then can the payment industry stand a chance of making the most of this transformation opportunity for a globally interoperable payments ecosystem.