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Banking and finance industry trends from ISO 20022 to digital innovation and data security.
The Payments Podcast follows on with a second event summary of this year's virtual Sibos 2020.
Marcus Hughes recaps how even through the digital platform, Sibos2020 has given insights for the banking and finance industry in topics such as digital innovation in payment and securities, regulatory compliance, data security, and a strong focus on the adoption of ISO 20022.
This year's event had a strong focus on Covid-19, with almost every session referencing the pandemic, so how will this change the way things are done in this industry?
Rich Williams: Hello and welcome to this episode, where we'll talk in further detail about Sibos 2020. Sibos, if you've been hiding under a rock for quite some time, is an event hosted every year by SWIFT. This year's event was slightly different from the norm, in that it was entirely virtual. You can catch up on our previous musings on the 2020 event specifically, by checking out our other episodes on Spotify, Apple, and SoundCloud.
Hello, I'm Rich Williams, host of the Payments Podcast, and I'm delighted to be joined once again by our very own Marcus Hughes, Head of Strategic Business Development at Bottomline. Marcus has a wealth of experience in banking, and payments in general, and today will share his insights on Sibos 2020 and what he sees as the key takeaways. Marcus, a very warm welcome back, always a pleasure to have you on the channel with us, and your episodes in particular are extremely popular with our listeners.
Marcus Hughes: Hello, Rich, and thank you for inviting me. Happy to be back, of course, and to share a few thoughts on an event about which I feel passionately. It has been one of my favourite conferences for decades, quite literally.
Rich Williams: Decades, so you've clearly been a regular attendee in the past. Marcus, for anyone not familiar with Sibos, or maybe fairly new to it, could you begin by telling us all how you would describe this year's event, and what made it so different in 2020?
Marcus Hughes: Okay, that's a great question, of course. For me, Sibos is by far the most important conference of the year for the transaction banking industry. Over the last three decades, myself and tens of thousands of banking and payments professionals have literally travelled around the world to attend this important event, usually held in exciting places, like San Francisco, Hong Kong, Boston, Dubai, and Sydney, to name but a few of Sibos’ great venues. Sibos is, as you said, hosted by SWIFT, which is a global financial messaging network. The secure messages which are exchanged on this mission-critical network cover domestic and cross-border payments, foreign exchange trading, securities processing, and, of course, trade finance.
Just to give a sense of the SWIFT network’s massive scale, in total those messages represent an average of USD$6tn of value, each and every business day. The Sibos conference is, therefore, the go-to place for the latest expert views on where the transaction banking industry is heading. As you mention, this year's Sibos was special in a very strange way, but a way which reflects the world in which we live today. As a result of COVID-19, SWIFT made the tough but correct decision to hold this important trade show as a virtual event.
Given the big pulling power of Sibos, no less than 22,000 professionals signed up to attend this four-day event. That's despite only being able to participate remotely. I felt this high attendance was a massive gesture of support for SWIFT, which reflects the importance of the Sibos event itself, but it was also a powerful symbol of how things have changed. The strange new normal for many of us is that we now work from home and attend meetings online, maybe sitting at our kitchen table or in a home office, for some of us. This Sibos was really an extraordinary event, but, more important, I have to say, for me it, kind of, worked, especially when you bear in mind that the sad alternative would have been not to hold Sibos at all this year. That would have been a terrible loss.
Rich Williams: Yes, I totally agree, Marcus. As you said, we're all trying to adapt to what this new normal is, and great to hear that the attendance was up. A very good initial overview there. Now specific to you, Marcus, what were the biggest topics of discussion this year?
Marcus Hughes: As usual, discussions covered a wide range of industry subjects. We had digital innovation in payments and securities, regulatory compliance, data security, modernising trade finance, and the adoption of new ISO 20022 messaging standards, which carry richer data. But, for me, the biggest overarching topic was a new word for banking and payments experts, which most of us had not really thought about until this year. By that, of course, I mean ‘COVID-19’, along with other new terms, like ‘coronavirus’ and ‘pandemic’. Coronavirus – well, COVID-19 – was ever-present during this Sibos, referenced in just about every single presentation, I would say.
Of course, the key message was that COVID-19 changes everything. The pandemic has a massive impact on the payments and transaction banking industry. For a start, an important series of major industry trends and initiatives have actually been accelerated by COVID-19. We have more people working from home in our industry, and very successfully, I might add. We have faster digital transformation, moving more rapidly than ever. There's more demand and wider adoption of supply-chain finance, and there are renewed efforts to digitise trade finance and remove paper from trade processing. Then there's now even the increased likelihood that we'll see the introduction of a central bank digital currency within a few years.
Rich Williams: You've introduced a variety of great topics there, Marcus, which, of course, we can explore later on in the episode, but firstly I just wanted to pose this one to you. I know that, historically, SWIFT has used Sibos as a platform to showcase new initiatives and services, so was there any big news from SWIFT this year?
Marcus Hughes: Yes, Rich, you're absolutely right. At every opportunity during this Sibos, our hosts at SWIFT were keen to promote their ambitious new strategy to make payments and securities transactions faster and frictionless. Over the next two years and beyond, SWIFT plan to transform payment and securities processing, and improve cross-border infrastructures. They want to enable financial institutions to deliver instant end-to-end transactions from one account to another, anywhere in the world, and with greater transparency and predictability. SWIFT's strategy is to expand beyond financial messaging now, to provide comprehensive transaction management services. These new services will span the entire end-to-end process, and they're going to deliver better visibility and control of those transactions.
These new transaction management services will accelerate innovation, and they're going to make it easier for banks and financial institutions. Whether they're working independently or in collaboration with FinTechs, they're going to be able to drive business growth and improve their own performance. In payments, banks will be able to expand their offering to small and medium-sized businesses – as well as to consumers, of course – and to enhance the customer experience. Meanwhile in securities, banks and financial institutions are going to benefit from easier reconciliation, better reporting, and asset servicing, as well as end-to-end visibility of their transactions. This is going to reduce settlement failures, and it will mitigate the risk of non-compliance with complex rules and regulations.
Rich Williams: Marcus, did SWIFT make any references to cloud technology and APIs at Sibos this year? Those topics are seemingly hotter than ever, and pretty much hard to ignore.
Marcus Hughes: Yes, you're right, they certainly did. A key element of SWIFT's new strategy is that their next-generation digital platform is going to make much greater use of APIs and cloud technology. They’ll provide a series of shared services in which, historically, banks have invested individually. This strategy is really intended to save the industry time and money. Richer data capabilities are going to make it easier to pre-validate essential information, like beneficiary account details. There'll be enhancements in fraud detection, data quality, advanced analytics, transaction tracking, and exception management. SWIFT’s board of directors have endorsed this strategy, and it's intended to serve all of SWIFT's customer segments, so regardless of their size, or geography. Importantly, the strategy is going to allow for flexible adoption, to suit the timing of each of their bank customers. That's thanks to backward compatibility that they're ensuring.
SWIFT’s strategy builds on the impressive success of GPI, which, as you know, stands for Global Payment Innovation. I know you've heard me talk about SWIFT GPI before, which has been a very successful initiative in recent years. Basically, GPI has been making cross-border payments faster and more transparent, with end-to-end tracking. In this way, GPI is already making it possible for many cross-border payments under the GPI scheme to be settled within just 30 minutes of the transaction being initiated. SWIFT’s new strategy will mean a change in the way banks work together, underpinned by strong service-level agreements and richer messaging, using ISO 20022. SWIFT’s partners, like us, will be able to deliver their own products via the SWIFT platform – for example, data analytics and insights to help better decision-making.
Rich Williams: That all sounds very impressive, and, I suppose, ambitious at a high level, Marcus. Now could you give the listeners any concrete examples of a new SWIFT service under this strategic vision?
Marcus Hughes: Yes, of course. That's a good question, very appropriate. Actually, I think the best example would be SWIFT's plan to move into low-value cross-border payments for small and medium-sized businesses, as well as for consumers. Traditionally, SWIFT has been associated with high-value cross-border payments for banks and for large corporates. The plan to move into cross-border payments for small and medium-sized businesses and consumers is going to help banks to win back business which some of them have lost in recent years, due to the increased competition they’ve faced from non-bank, foreign exchange, cross-border payment providers which have specialised in this low-value payment space.
Rich Williams: Precisely how far have SWIFT gone with this new low-value cross-border payment service?
Marcus Hughes: SWIFT is already working with over 20 major banks on this solution. It’s essentially a new service-level agreement built on top of the existing GPI infrastructure. The initiative will enable consumers, and small and medium-sized businesses, to benefit from much better predictability, with knowing their fees and settlement times upfront. The payment originator and the beneficiary will each be able to access real-time transaction status from their banks. The basic service-level agreement for settlement is within four hours of a payment being initiated, but results already show that some test payments have been settled within just four minutes.
The new solution starts with pre-processing, which ensures that transparency about fees and payment routing is visible. All participant banks have to commit that they will not deduct any fees from the principal amount of the payments. So, the beneficiary is going to receive the amount which it is expecting – for example, the same amount that they've invoiced. Meanwhile, interbank fees are settled bilaterally between participant banks, based on management information which SWIFT will be providing. This new low-value payment service for small and medium-sized businesses, as well as consumers, is expected to be available to all GPI financial institutions during 2021, so all quite soon, really.
Rich Williams: Thanks, Marcus. Good to hear, I'm sure, for many of us. You explored the use of APIs earlier on, which is very closely linked to open banking, of course. It underpins the whole service, so was that closely related topic discussed much at Sibos this year?
Marcus Hughes: Yes, open banking was often referenced, especially in the context of being an important new way of initiating payments, and, of course, of sharing data, always with the customer's permission. That would be in order to provide faster and easier data analytics, and to drive better decision-making. In the world of SWIFT, APIs have quickly risen to prominence in the last few years, to the point that they are now viewed as a data-exchange technology which can really deliver innovative services, all in real time. Three years ago, SWIFT announced its API programme. Since then, they've invested really heavily in APIs – and in a sandbox, of course. They now offer an open platform which enables standardised and secure API services for their large community.
But, to be clear, we all recognise that the full scale adoption of API-driven solution is going to take a sustained effort across the industry. However, I would say that SWIFT's commitment to APIs is enabling an extension of the SWIFT platform, which includes, of course, allowing their FinTech partners, like Bottomline, to expose their own products on the SWIFT cloud. During Sibos, there were a good number of large banks – and some large corporates, also – speaking about their commitment to using APIs. Some of the world's top transaction banks explained that they've seen a really dramatic uptake in APIs – for example, linking corporate treasury management systems directly with multiple banks’ back-end systems. That's in order to exchange data in real time.
Historically, batch-driven processes and file-based data exchange, they were widespread, but these legacy systems are slower than today's API-driven model, which is, of course, real time. At Sibos there was a strong feeling that this is all set to change. For a growing number of global banks, APIs have already become a new channel for corporates to access that bank quickly and easily, in real time. For example, SWIFT’s GPI API provides access to data on cross-border payment status, offering much greater transparency and visibility.
Rich Williams: What's the latest position on API standards, Marcus? We've seen that Europe has faced challenges in rolling out PSD2, for example, due to a lack of open standards. Consequently, that has slowed down the adoption, so what's happening in global markets in relation to the standardisation of APIs?
Marcus Hughes: Exactly right, I'd say. Many speakers at Sibos recognised that, in order to drive the successful adoption of APIs by this international banking and corporate community, it's really essential that common standards are agreed. It was often suggested during the event – and previously, I must admit, also, and I have to say I completely agree – there's a great role here for SWIFT. They're already the registration authority for ISO 20022. They maintain the content and integrity of this really important messaging format, so it's really entirely logical that SWIFT extends their expertise into this new and fast-emerging API ecosystem. They're really well suited to coordinate the development of API standards globally and to become an API platform, I would say. That would effectively be as an aggregator for their many customers – for their community, as they like to call it. Given this background, I think SWIFT are creating a really valuable role for themselves to help standardise a whole range of API-related activities.
As far as I can see, to try and summarise, I think SWIFT’s scope covers a whole series of important areas, like identification, authentication, authorisation, open API specifications, data models, as well as security and non-repudiation. So, quite technical stuff, but that's what they're good at. Personally, I really welcome SWIFT's approach to API standardisation. They're really well positioned, in my opinion, with strong credentials to coordinate these open API standards on a global basis, of course, which is exactly what SWIFT are used to doing.
Rich Williams: Thanks, Marcus. Now I'm going to address the elephant in the room, which, of course, is COVID-19. I think it was somewhat unavoidable to have a question on that. (Laughter) It's clear that, during the pandemic, many supply chains have broken down, while others have been under enormous pressure to deliver vital supplies, like personal protective equipment, medicines, and, above all else, of course, just food and basic essentials. You mentioned that COVID did come up in almost every presentation that you witnessed. What specifically was said about the pandemic and the situation around it, during the trade finance sessions at Sibos 2020?
Marcus Hughes: Rich, you’re absolutely right. This was a very important topic. There were several very informative discussions at Sibos about how COVID-19 has generated a greater sense of urgency – far more immediate than ever before – regarding the need to digitise trade finance, and quickly. Something needs to be done.
Speakers described a few worrying situations where the release of goods by customs or warehouse controllers had been delayed, and the provision of finance had been slow. Ridiculously, this was sometimes simply because the required paperwork, the trade documents were received late, or they were stuck in an office, sitting on the desk of someone who was actually working from home. That was a pretty sad situation. Fortunately, in other, more successful cases – and there were plenty of them – quick fixes were implemented very efficiently, using conventional but effective technology. For example, an optical character recognition, or OCR, which is used to scan and distribute documents electronically.
This simple but effective solution meant that trade-related documents could be checked by banks, their operational staff, who were actually working from home, without any need to go into the office. It would, of course, be better still if these vital trade documents could be exchanged as structured data in a machine-readable manner. In this way, the pandemic has been really a major catalyst to drive the need to reduce paper friction in trade finance and to digitise the exchange of letter-of-credit documentation, so such as paper invoices and transport documents, like bills of lading. Solutions do exist, but they haven't yet achieved widespread adoption, but that's coming soon, and there's a greater sense of urgency now.
Rich Williams: You've stumbled on something there, Marcus, which is very close to my heart, personally, which is about sustainability, that increased efficiency and automation. Are there many of these initiatives to reduce paper in trade finance and automate the processes around them?
Marcus Hughes: Yes, it certainly is. The World Trade Organisation has recently identified there are more than 30 projects around the world, all aimed at digitising trade and supply-chain finance. Interestingly, a good number of these initiatives are actually blockchain related. These projects tend to involve consortia or large groups of major banks who are supporting distributed ledger-based platforms, on which electronic documents and transaction status can be uploaded, verified, and approved. These platforms have names like ‘Marco Polo’, ‘We.Trade’, and ‘Contour’ – and several others, of course – but a number of these programmes are already live, with a growing number of commercial transactions passing through the platform.
For example, Singapore's Networked Trade Platform is live after two years of trials, and it has already achieved really good traction. It has got 4,000 businesses using the platform to exchange documents and access trade finance from the participating banks. Singaporean government has been impressively proactive in distributed ledger technology. They've taken a keen interest in modernising Singapore's trade finance capability, which is, of course, key to the region's economic growth, but there are still challenges with these DLT-based platforms. For example, interoperability between disparate platforms, each supported by many banks. That continues to be complicated. In some cases, we've got banks who are supporting three or four of these competing platforms. They'd like to see greater consolidation, or, at very least, more standardisation and greater interoperability.
Rich Williams: I'm very glad to hear that there's a lot of important work being done to digitise the world of trade and supply-chain finance. Similar to my question on APIs earlier on, what's happening about the development of international standards here, Marcus?
Marcus Hughes: Yes, this is a really important point, I do agree. Banks are still only part of the way through this ambitious migration to digitise trade finance. A lack of standards and legal certainty, they've really proven to be quite a major barrier to adoption. There's an important digital standards initiative underway now, which is actually led by the International Chamber of Commerce. This was initiated by that blockchain-based trade finance platform, Marco Polo, but it has actually been handed over to the International Chamber of Commerce, as a way of driving greater adoption by the global trade finance community.
Recent SWIFT statistics show that, not surprisingly, global trade volumes fell during COVID-19, but it's also striking that there was actually a double-digit growth in corporates using quite specialised SWIFT MT 798 to trade finance messages, and FileAct also. This was being used to exchange trade-related data in a structured format, with their trade finance banks. Supply-chain finance of open account transactions, which is effectively finance of invoices that have been approved quickly by the debtor or by the payer, they also saw really significant growth. It's a very efficient way to help suppliers get paid quicker and to improve their cash flow – and, indeed, at favourable interest rates, of course. Research by McKinsey, presented at Sibos, actually indicated that supply-chain finance is now the fastest-growing product in global transaction banking, which I personally found fascinating.
Rich Williams: Wow, it certainly is. Sticking with the blockchain or DLT theme, you mentioned at the start of this podcast that discussions at Sibos suggested the issuance of digital currencies by central banks is getting closer. That's clearly really exciting, so could you tell us a bit more about that, please?
Marcus Hughes: Yes. I've been watching the evolution of blockchain for years now. I’ve followed, with great interest, the ups and downs of this exciting new technology as it has travelled along Gartner's famous Hype Cycle. Yes, as mentioned a few minutes ago, there are already several live, multibank platforms using blockchain to make trade and supply-chain finance faster and less risky. These initiatives have great potential, but, at the other end of the spectrum of blockchain use cases, I can completely understand why regulators have concerns about the idea of volatile cryptocurrencies becoming a widely used way to make cross-border payments. What's more, of course, anonymous cryptocurrencies have also often been associated with financial crime, and money laundering and so on.
The relatively recent arrival on the scene of stablecoin has shown good potential to solve the volatility problem which cryptocurrencies face – of course, provided these stablecoin are truly pegged and backed one-to-one against their chosen fiat currency – or real currency issued by a central bank, I mean by that. Anything less than that strict matching offers less stability than is implied by the name ‘stablecoin’, but now, at last, I do sense we're reaching the next level in blockchain’s evolution, especially relating to digital currencies. Recent work and statements by various central banks make it really increasingly likely that, within a year or two, one or more central banks is going to decide to issue their own central bank digital currency. There are a number of central banks have announced initiatives to do this, while others want to make sure they're simply ready on the side-lines, just in case adoption gains rapid traction. Ironically, I think the controversy around Facebook's Libra stablecoin has actually made the launch of a central bank digital currency more likely than ever, but, for me, it has now become more a question of when, not if, a central bank launches a digital currency.
Rich Williams: That is somewhat ironic. I remember us discussing Libra a previous time. According to you, Marcus, which of the central banks do you think will be the first, or among the first, to go live with a digital currency?
Marcus Hughes: There are quite a number of central banks working hard on exploring the best way to approach digital currencies and which model to adopt. For example, the Bank of England and the Bank of France, separately, have been looking at both retail and wholesale options for central bank digital currencies. Even the European Central Bank has just launched a consultation and is really talking up the advantages of a digital currency across Europe, and partly to protect the euro’s sovereignty and to prevent private initiatives getting in first. Another great example is the Central Bank of Sweden, which is really quite advanced in developing a retail e-krona, which may be one of the first to launch, but I have to say it's probably the People's Bank of China which is the most advanced of all. They've been holding large-scale pilots for their e-yuan, in various cities across China, such as Shenzhen, which is just across the border from Hong Kong, which I’ve visited quite a few times.
Major retailers, like Starbucks and many others, have been participating in this really important pilot. During Sibos, the People's Bank of China announced that during these tests they've already processed 3 million e-yuan payments, worth $160m in equivalent. During these tests, over 100,000, personal digital wallets and 8,500 corporate digital wallets have been created. Typical use cases that have been tested like, bill payments, transport, shopping, government services and so on.
China is planning to use the e-yuan at their Winter Olympic Games in Beijing in 2022. As well as this domestic e-yuan we're talking about, the People's Bank of China also believes that digital currencies would also be used to make cross-border payments at a lower cost, lower risk, and more efficiently than the payments we make today. So, very exciting times for central bank digital currencies, I'd say. For a few years, my personal favourite use case for blockchain is making trade and supply-chain finance easier and more joined up, but now I actually think that central bank digital currencies are rapidly becoming the most exciting blockchain innovation, which is at last emerging. That's after many years of lots of experimentation and investing huge sums of money in blockchain, but maybe it'll prove to be worthwhile after all.
Rich Williams: You raised, a few moments ago, the risk of cryptocurrencies being caught up in financial crime and money laundering. That's an unfortunate connotation of the currency, which is a label that's hard to shake off. Did Sibos discussions raise the growing problem of cyber fraud during this year's event?
Marcus Hughes: Yes, Rich, you're absolutely right. This problem continues to grow in importance, and there were several sessions on this big topic. SWIFT highlighted that sophisticated cyber-attacks on SWIFT member banks continue all around the world. We already know at Bottomline that SWIFT mentioned that the typical pattern can be broken down into, probably, four steps. Step one would be cyber attackers compromise the target banks’ environments. Then, as a step two, the attackers obtain valid operational credentials for certain key users. Then step three: the attackers submit fraudulent payment instructions. Then, finally, step four: they quickly hide the evidence of this fraudulent activity and move on.
Understandably, SWIFT have always been really at pains to emphasise that their SWIFT network itself has not been compromised. It's the customer endpoints which are compromised, typically when fraudsters somehow obtain user credentials to access SWIFTNet. The focus from fraudsters is still heavily on banks, and much less on corporates, but everybody does, of course, need to remain alert. The old joke remains as true today as during the days, I don't know, of the Wild West. Why do bank robbers steal from banks? Simple answer, of course: because that's where the money is, so that's what they go for.
The duration of those four steps I mentioned in the hacking process is quite interesting. What surprises some people is that, once fraudsters are inside the bank network, they can sit there, unobserved, for anything between one month or even two years. But once the fraudsters actually gain access to the SWIFT messaging system, which is what they're after, everything can happen very quickly, typically in just a week or so. Generally, the fraudulent attack is going to last just a few hours, with fraudulent payment messages being sent out every ten minutes. Then they exit as fast as they can, having hidden the evidence. The highest-risk regions for victim banks are in Africa, South Asia, as well as Southeast Asia. Latin America, Europe, and the Middle East are still considered to be medium risk, whereas North America and Australia are quite low risk. The typical location of beneficiary banks, who are receiving fraudulent funds, is different to the victim banks that we just mentioned. The highest-risk region is Asia, followed by Western Europe and the Middle East. North America, Eastern Europe and Russia are, kind of, considered medium risk, I'd say. Meanwhile, lower-risk beneficiary banks for receiving these fraudulent payments would be in, say, Latin America, Africa, or Australia.
Looking back on that, so SWIFT's Customer Security Programme has been running for quite a few years now, as an important way to ensure that SWIFT user banks are making their systems as secure as possible. Next year, as usual, the Customer Security Programme is going to be made even more strict. From 2021, the programme is going to require an independent assurance to SWIFT, so an attestation from the in-house chief information security officer will no longer be sufficient for SWIFT's Customer Security Programme certification. It's important that banks continue to talk with SWIFT, and their fraud and financial crime solution providers, like Bottomline, so that they can make sure that they are properly prepared for tightening of these SWIFT audit requirements.
Rich Williams: Marcus, very convenient inclusion there about compliance in your previous statement, which is that complying with anti-money laundering sanction screening is often very difficult. Was there any discussion about how businesses can actually stay on top of this?
Marcus Hughes: Yes. As usual, sanction screening was a hot topic of discussion, mainly because banks – even large and generally sophisticated banks – they continue to incur big fines for breaching money-laundering requirements. Nowadays, sanction screening really needs to be done in real time. There are too many false positives. There are major pain points for banks of all sizes, along with the poor quality of data in payment instructions. Cloud-based AML sanction-filtering solutions, machine learning and fuzzy logic, they're all helping in this fight on crime, but, just as we've been telling our customers for quite a few years now, it was really highlighted during Sibos that the adoption of ISO 20022, these new messaging formats, that's really going to greatly improve the completeness of data. This will make AML compliance much easier. That's because ISO 20022 formats can carry much richer data than conventional SWIFT MT FIN messages. Importantly, this structured data is machine readable. So, this really should increase automation and real-time processing, greatly improving the banking and payments industry's ability to fight fraud and financial crime.
Rich Williams: Speaking about ISO 20022, again, as I referenced earlier, you and I have discussed that very important data-rich messaging standard previously, which is due to be rolled out globally over the next few years. What's the latest news about this industry migration, please?
Marcus Hughes: This is a really important programme across the entire world's payment systems. The good news is that this message schema, known as ISO 20022, is now globally accepted as the best way to standardise and modernise payments and financial messaging. Global adoption of this standard will make interoperability between different payment systems so much easier, whether they run on SWIFT or on other proprietary networks. It will also enable much more automation and real-time, straight-through processing. The overall plan is that, by the end of November 2025, ISO 20022 will be adopted around the world for practically all payment messaging. In March this year, it was very important when SWIFT announced plans for a one-year delay before starting this ISO 20022 global migration for cross-border payments and reporting. This is partly due to COVID-19, of course.
This core element of the global migration was originally due to start in November 2021, but, despite the 12-month delayed start – now set for November 2022 – it's really important to note that the proposed end date of 2025 will not be modified. So, there's actually now an even smaller window to become compliant with this new format. As a result of SWIFT's announcement and the COVID-19 challenges, a number of major market infrastructures have also subsequently decided to delay their own migrations to ISO 20022. For example, EBA Clearing has just announced that the migration for their important pan-European payment systems, known as EURO1 and STEP2, they've also been delayed by 12 months. That's until November 2022. This date will now align and coincide with the revised TARGET2 and TARGET2-Securities timetable, which was also recently announced by the European Central Bank. Other payment systems, like the UK’s RTGS, which is currently known as CHAPS, although that might change in the future, and the US Fedwire, they're also reconsidering their timings. Their migrations are probably in 2023, possibly the following year. So, it's all a lot of change at the moment, but there's a major programme ahead of us.
Rich Williams: Certainly, and the benefits seem clear and abundant. However, what are the greatest risks of this ambitious migration?
Marcus Hughes: As mentioned, the migration of cross-border payments to ISO 20022 is going to start in November 2022. The coexistence, I should say, with the MT standard, is going to continue until November 2025. During this this period, there's a risk that the richer data carried by ISO 20022 might get truncated or cut off when these XML messages are converted into the legacy MT FIN messages. Unfortunately, these FIN messages are not able to carry so much structured data as the new ISO 20022 formats, so SWIFT is working with FinTech solution providers, like Bottomline, to help financial institutions through this transition period. We'll be providing mapping and translation services, as well as a cloud-based data vault, to ensure that data is not lost.
The improvement in data quality and quantity which ISO 20022 is going to deliver is going to really play a central role in helping SWIFT to achieve the vision that we mentioned earlier about making payments faster, and simpler, and more efficient. This is going to enable richer data analytics and insights, which will enable better decision-making. At the end of the migration period in November 2025, MT FIN messages, in the categories called MT 100, MT 200, and MT 900, they're all going to be withdrawn by SWIFT, but it's noteworthy there are two significant exceptions to this retirement of those MT FIN messages.
Two categories of users fall outside the current scope of the ISO 20022 migration. These are organisations which currently use SCORE, which is a special user group for corporate members of SWIFT, with their own SWIFT address or BIC. Other users outside the migration scope are certain market infrastructure closed user groups. These two categories are about the only users of SWIFT that are not yet directly affected by this major global migration. All of the 11,000 – all of the other 11,000 – members of SWIFT are actually affected and need to take action to get ready. During Sibos, SWIFT announced that they understand that most of the large payment banks anticipate migrating to ISO 20022 during the first year of the transition period. That's effectively during 2023. SWIFT are, therefore, advising smaller banks and other financial institutions not to get left behind, and definitely to avoid leaving their migration until the last six months of the three-year transition period.
Rich Williams: Yes, it's certainly not something to leave to the wire. Marcus, this is clearly a major programme over the next few years, and it's clearly important that those affected talk to financial messaging experts, like Bottomline, to understand what's expected of them. Could you just remind us, then, what the main advantages of ISO 20022 are, compared to traditional MT FIN messages?
Marcus Hughes: Yes, that's important for people to bear in mind. The switch to ISO 20022 is going to allow payments to carry a great deal more structured data, as well as standardising payment formats, which were previously inconsistent in different parts of the world, and even in the same country. A major reason why regulators are keen to see widespread adoption of ISO 20022 is that it will make it easier to ensure compliance with anti-money laundering requirements. This will help enormously in the fight on fraud and financial crime.
ISO 20022 has many structured fields which can be made mandatory for including important detail, such as the name and address of the ultimate beneficiary, as well as full details of the originator and any banks involved in the transaction. This means payments using ISO 20022 can be forced to include all the information necessary to comply with FATF 16 requirements and EU Wire Transfer Regulations, for example – and many other regulations as well, actually. Another important advantage of ISO 20022 messaging is it's going to increase efficiency, so it's going to result in lower cost and higher straight-through processing rates. The increase in information provided can also be used to make it easier to track payments in real time, across multiple banks and different payment systems.
It's also going to reduce the risk of errors, as users will be able to include additional payment details and references. Using rich data in a structured way is going to make it easier for parties receiving payments to achieve higher levels of automated reconciliation. It will also enable a much richer level of data analytics and insights. This is going to help better decision-making, of course. ISO 20022 even carries non-Latin character sets, so names and other details in languages such as Mandarin or Arabic can also be accommodated. Another important advantage of adopting ISO 20022 is a greater level of interoperability between different payment systems. This avoids the need to perform data transformation on payment messages which were originally intended to go into one payment system. Just for example, UK Faster Payments, which today uses ISO 8583 format, which has been actually designed for card processing. But then, for whatever reason, that payment now needs to be sent into a different payment system – for example, CHAPS, which still uses MT FIN messages today.
But the good news is there are now plans in the UK to create a common credit message, which will use ISO 20022, of course. This is going to be adopted by the Faster Payments system, and also by the UK’s new Real-Time Gross Settlement system, which is set to replace CHAPS in the next few years. For the first time, there'll be robust interoperability between these two important UK payment systems, which is going to provide a better level of contingency or disaster recovery arrangement than we've actually had before.
Rich Williams: I'm sorry to say that we've fast approached the end. We've covered a lot of ground today, with some great insights on 2020’s event. I wonder if we could finish by hearing what your thoughts on future Sibos events are, please.
Marcus Hughes: Next year’s Sibos is due to be held in Singapore, which is a really exciting and dynamic financial hub. It's a major centre for FinTech and, of course, for trade finance. Singapore is an important part of Bottomline’s own international representation. Of course, I love visiting the Asia-Pacific region, which is really diversified in culture and history. It plays an increasingly important part in the world economy. I sincerely hope that, by next autumn, the world will have recovered from the pandemic, to a point where the Sibos community can once again meet in person, in Singapore, and enjoy a fully interactive trade show, just the way Sibos is supposed to be.
Rich Williams: Absolutely agree. Marcus, once again, thank you so much for joining us again. I'm sure we'll have you back on the show again at some point very soon.
Marcus Hughes: Thank you, Rich. I'm sure we'll speak again soon. Bye for now.
This webinar identifies the key strategies to ensure a smooth, structured transition to ISO 20022 that provides value and speed to market.
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