There’s nothing like the phrase “go live” to gain some perspective in the payments industry. With a few “go live” dates now in the books for the ISO 20022 format, it’s an excellent time to take stock of the next phase of what I believe is the most substantial change to financial messaging of the last 40 years.
In the UK, using the messaging format’s richer data set and structure will see significant uplift from the Bank of England “go live” in June, as well as beginning of the SWIFT CPRR+ co-existence period since March. The feedback we’ve heard so far from UK banks has been positive. In other countries, ISO has already been well-established, and let’s not overlook the fact that two of these are among the world’s top three consumer economies – China and India. In the UK, most of what we’ve seen so far this year is a technical migration. Now the actual use cases begin, and as ISO 20022 continues to gain traction, we see several factors that merit attention going forward. Among them: cost structures, compliance and the customer experience. ISO 20022 may be maturing, but the job of integrating it into day-to-day payment operations will be ongoing.
Costs and compliance
And one of the most important factors to watch is the costs associated with implementing and then using the ISO 20022 format. To comply with ISO connectivity, there are various cost factors that range from the size of the bank to the sophistication of its payments infrastructure to additional personnel resources needed to integrate it into that infrastructure. Testing, for example, is also a necessary cost. So right now, a bank may find that the ROI on ISO 20022 hasn’t paid out yet, but I would counsel patience here. What you will see over time is that this single de facto standard will mean you don’t have to support some of the older standards. Eventually, data development costs will decrease, and the amount and quality of data now available will result in better analytics and reduced payment processing costs.
Part of the costs incurred will come under the heading of compliance. There are two levels of compliance to discuss here. The first is what I’ll call simple Network Compliance. Here the first question to ask is am I using the standard correctly? This level of compliance covers the correct syntax (such as XML or JSON) as well as the correct set of data for each message. ISO 20022 has a defined set of codes and implementation guidelines, and getting this right in these early days is essential.
The second level of compliance is more complex. Two examples that come to mind are around sanctions screening and compliant payments. Let’s take sanctions screening and other anti-fraud measures built into the ISO 20022 format. Because it carries more and structured data along with the payment, ISO 20022 allows screening systems and databases to be more precise and efficient. If customer A is shipping to customer B, previous messaging formats will contain that very basic level of data. With ISO 20022, that data can be matched to AML and sanction screening systems with a much clearer understanding of the actual transaction and parties involved. Allowing the right decisions to be taken on processing the transaction and removing assumptions.
Payments compliance also applies to processing. Payment instructions in older messaging standards occasionally created dead ends because erroneous data meant the transaction would be halted. That created a lot of ‘false positives’, which would later need to be reversed when the data was clarified. With ISO 20022, you can be much more granular in how you describe the parties and places in a transaction. In some markets that have been early adopters of ISO 20022, like the Philippines, financial institutions have reported a significant decrease in the number of false positives, which can reduce operational costs.
The customer experience
Keeping tabs on costs and compliance can point ISO toward a better customer experience. At a basic level, ISO will improve the speed and efficiency of payment processing and bring greater visibility into the status of the transaction. The customer experience, like compliance, has two levels to consider. The first is the basic speed and efficiency I just described. The second might not be seen in these early days because banking teams need to get used to the dual nature of ISO 20022: It is a transaction as well as a set of messages related to the transaction. As banking teams see that they now have significantly more visibility into the transaction, they will also see ways to extend more services to their customers based on the data.
A recent JP Morgan report on ISO 20022 captures this future promise: “From the corporate client perspective, benefits include efficient reconciliation, enhanced invoice information at scale, and fewer manual processes to reduce days-sales-outstanding and improve working capital. While clearing the way for more flexible payment structures, ISO 20022 helps accommodate corporate needs, along with evolving market dependencies.”
As I mentioned earlier, ISO 20022 is currently at the technical migration phase. Connectivity, to some extent, has been mandated or at least strongly encouraged, depending on your geography. Connectivity is the most fundamental level of an ISO 20022 implementation. With connectivity, all you’ve ensured is that you can technically receive ISO messages, but you're not sending any out. The connectivity phase also excludes the ability to access new payment rails, API options and overlay services like “gpi and pre-validation” that can serve as effective anti-fraud measures. The step up to “market-ready” will require a more aggressive digital migration that will enable you to extract rich data from receiving and sending ISO 20022 messages. It’s one step short of a complete digital transformation that will allow access to new payment rails and the benefits of ISO 20022.
That final step is called ISO 20022 native. Now you can access real-time payments and settlements, lower costs via straight-through processing, better transaction visibility and, as noted earlier, a path to a better customer experience. So, when we say ISO 20022 is ready to “go live”, the phrase comes with some conditions around the digital transformation journey. By focusing on the costs and cost benefits associated with ISO 20022, alongside compliance, a better customer experience is within reach. With competition for customers at a fever pitch in today’s marketplace, there’s no more worthwhile journey.