ISO 20022 finally got your attention. The payments industry across the globe has done a very effective job to educate and persuade financial institutions about the benefits of a more robust messaging standard. And we’ve also made a compelling case that it is a touchstone of digital transformation and the ability to compete.
Still, we haven’t reached “mission accomplished.” There’s a lot more to do in terms of meeting deadlines and some banks are under a lot of pressure to adopt ISO and adapt to the changes it will create. Banks know this is not a one-time exercise. There’s the table stakes of simple adoption this November for SWIFT and various market infrastructures including EURO1, TIPS etc., and then ISO’s use cases and utility will make it an ongoing project.
With that in mind, I think it’s important to set some signposts on the ISO journey. Specifically, banks need to embrace a three-part journey to truly deploy the standard and reap the detailed data and digital modernization rewards it will extend to them, corporates and consumers. That journey goes from ‘connected’, to ‘market-ready’ to ‘ISO native’.
ISO connected is the minimum, and while it will leave a lot of work to do later on, banks have to start here. Connectivity in the ISO context is a two-part program. There’s a technical connectivity part, and there's a messaging business data part. Understand that neither one of these is a banking, payments or cash management project. This is about messaging, data and compliance. The technical connectivity will require adaptations of core systems and payment gateways to accommodate ISO standards, and IT teams will also need to adjust architecture to change reconciliation, sanction screening, fraud and liquidity. ISO connected is your ticket to the game, but you can’t play yet.
Then there’s part two of the ISO connected phase, messaging data. This is more complicated because it’s where banks have to actually change the information they’re sending and receiving. ISO is an entire new set of information. A standard ACH payment for example, requires only name, bank routing number, account number, and payment amount. ISO’s messaging architecture has thousands of fields covering payments, securities, trade services, cards and foreign exchange. If we look at the UK, for example, the Bank of England has started to be quite specific about the additional information they're expecting institutions to use as they deploy their ISO program, and it’s completely different from the current business as usual. This stage of connectivity gets you into the game.
On to phase two: market-ready. In this stage, you get into the game, but you don’t have ‘ring-side’ seats yet. The market-ready phase is characterised by the completion of upgraded infrastructure (phase one) to the point where it does not affect daily operations. The technology part is done, but there’s more work to be done in the background. Some gaps that need to be addressed in this phase include introducing new network providers, new API options, new payment rails like instant payments and overlay services like Request to Pay. You can send and receive ISO messages at this point, which is a huge step up in the digital migration that’s so urgent for banks. But market-ready ISO doesn’t mean you’re automatically ready for instant payments. What you do get is a more automated operation and an opportunity to think about payments as transactions leading to new products and services. It also means you’re in compliance with the mandatory deadline for sending and receiving ISO messages in November.
Phase Three: ISO native. Now you’re in the game with the best seats in the house. All systems have the right architecture, the right data and the right format. Accessible elements for ISO Native (outside of the obvious data volume and analytics) include real-time payments and real-time settlements, lower costs via straight-through processing, better tracking of transactions, transparency to meet current and new regulations, payments-system stability improvements and better payment processing monitoring.
The Bottomline: The testing window for SWIFT opened in February as well as those for EURO1 & TARGET2. It is vital that banks and FIs ensure that they meet the deadlines for November 2022 to receive & process ISO 20022 messaging. If not, they risk losing visibility of messages being sent from SWIFT and also risk reputational damage from having not processed critical payment information. But the reasons to take this three-part journey go beyond rules and regulations. There’s the enhanced customer experience resulting from the data generated by the ISO format, which will also make it easier for parties receiving payments to achieve higher levels of automation and provide more services to their customers. There’s also the competitive necessity of the ISO format.
And finally, there’s innovation. As Christina Segal-Knowles, Executive Director for Financial Markets Infrastructure at the Bank of England told us on a recent podcast: “We want to help provide a framework so that innovation, as it happens, and new forms of payment add to resilience rather than detracting from it. I think that is very much possible when people have more alternatives.”