Four Key Challenges and Strategic Considerations of ISO 20022 on Banks

The global adoption of ISO 20022 open message standard is the most far reaching widely underestimated development in the global payments industry to date.  ISO 20022 goes someway to address inherent problems of a multitude of payments messaging formats and interoperability issues.

The implementation of ISO 20022 however comes with significant operational risk due to the size and complexity of the change involved. This has required banks to plan years ahead to manage this transformational change.  Banks across the ecosystem must be willing to rethink their operating model, which will require a strong focus on interoperability, data quality and integration of new technologies.

In Europe, the European Central Bank and SWIFT have announced go-live dates of November 2022. With the ensuing deadline fast approaching, banks ill-prepared are feeling the pressure.

SWIFT has announced a phased 3-year migration plan. However, this does not ease the pressure, as banks payment systems need to change to receive the new ISO 20022 message formats from correspondent banks that are migrating at the start of the transitional process.  

In November 2022, SWIFT will enable ISO 20022 messages for Cross-Border Payments & Cash Reporting (CBPR+).  Every SWIFT member bank must be able to receive and handle ISO 20022 messages defined by CBPR+. This is a significant step for ISO 20022 adoption.

There are four key challenges that banks must overcome:

1.    Understanding the complexity of ISO 20022 as a new payment standard

The new ISO 20022 message standard has a rich structured data set with new business rules.    ISO 20022 has a high level of complexity introducing 750 new business components and more than 1900 message definitions. This represents a paradigm shift compared to the current unstructured SWIFT MT message format.

Banks using outdated legacy systems will find they are no longer fit for purpose and will need to invest in a new technology solution in order to comply with the new standard.  As a starting point, banks will need to map their current payment message formats to the new message standard.   This is a complex task requiring payments expertise. Once the mapping exercise is completed an efficient translation system is required encompassing the following requirements:   

• Ready message definitions and mapping libraries for different ISO 20022 specifications;
• Handling interoperability across the different payment networks that will use ISO 20022 implementations, i.e. National (RTGS, ACH), Regional (SEPA in Europe) and Cross Border Payments (SWIFT);
• A future proofed solution for managing changes as they occur. A native ISO 20022 solution will make it simpler to adopt new ISO requirements as they are published.

 2.    The need for a migration strategy and an execution plan

National regulators have set different deadlines for ISO 20022 adoption, banks that operate across borders need to carefully plan their migration strategy with a detail implementation plan.  The migration strategy requires the following considerations:

• Defined objectives and strategy
• Investment budget and resource plan
• Programme governance, mobilisation and implementation plan
• Detail impact assessment including business processes, organisation and systems
• Vendor technology solution evaluation and selection process
• Data mapping exercise
• Business process change management
• IT systems Implementation, testing and cut-over plan

 3.    Understanding the migration risks and taking mitigating action

Banks must consider mitigating the risks associated with the transformational change for implementing ISO 20022. Banks must evaluate and mitigate the risks of supporting both legacy and ISO 20022 payments during the 3 year transitional phase.

From a regulatory compliance perspective, managing and storing new, additional transaction information while retaining old data also poses challenges. The change to new format means outright downstream impacts; for example, complexities in reporting, additional costs of analytics and data storage. 

Banks have used legacy MT payment messaging formats for decades and it will take time to get used to the new ISO 20022 standard. Therefore, it is important to provide banks with a solution that includes a user interface that shows original and converted messages clearly and unambiguously, whilst providing functionalities that realize the value of ISO 20022 rich message fields.

Here are some important considerations:

• Support for familiar user experience – like MT messages, at least in the early adoption stages;
• Offer different display options for ISO 20022: simplified display, expanded form, MT equivalent view;
• Flexible search criteria: structured and free text search on a string in the body of any ISO 20022;
• Work, seamlessly, with live and archived ISO 20022;
• An ISO 20022 message has extended data compared to MT; therefore, mitigate the effects of data truncation by using a long-term solution to preserve truncated data with zero loss.

 4.    Benefits of rich standards only to be fully unlocked on wider bank adoption

The essential aim and benefit of the ISO 20022 implementation is it ensures the mass adoption and migration of the standard by the whole industry and every bank is compelled to participate.

The benefits of ISO 20022 is compelling with much richer data to enhance the scope of messaging, straight through processing, automated payment processing, effective data reconciliation, improved compliance screening reducing false positives and improved financial risk reporting.  However, these benefits cannot be achieved by any one bank alone; it must be adopted in a coordinated way across the payments ecosystem.