Under instruction from the European Central Bank, interbank payments network Swift has drawn up a blueprint designed to mitigate complications borne from its surprise decision to delay the migration to the new ISO 20022 messaging standard.
A letter obtained by Finextra Research addressed to Swift’s CEO from the ECB requested that Swift mitigate the challenges now faced by financial institutions because of Swift’s decision to delay migration to the new financial messaging format. The release of a blueprint for tackling these challenges is the first of these measures.
On 8th May, the payments platform published its ISO 20022 for Eurozone High Value Payments with cross-border leg blueprint which “explains the measures and associated deliverables, timeline and customer impact” of the delay. Swift also published a webinar recording for firms to learn more about how Swift’s update to the release plans impact them.
In response to the publication, Stephen Lindsay, head of standards, Swift, says: “The blueprint we have published further details the scope of each measure and sets out a timeline for delivery. The usage guidelines will be available at the end of June, pilot validation and translation software in September, and a test FINplus ISO 20022 messaging service for payments by the end of November.
“We will continue to work closely with the ECB, EBA Clearing and the Eurozone banking community to ensure coexistence remains as smooth as possible for euro high-value payment system participants.”
Ulrich Bindseil, director general of market infrastructure and payments, ECB comments: “The ECB appreciates the timely publication of SWIFT’s draft blueprint on ISO 20022 high-value payments with a cross border leg.
“The blueprint shall allow Eurozone market participants to reassess their plans for those payments in the interim period between November 2021 and November 2022. It covers further details on Swift’s mitigating measures as well as proposed timelines for testing and implementation to facilitate the Eurozone market participant assessment.”
While Swift and the ECB speak optimistically about managing the change of plans, it is clear financial institutions have a challenging path ahead.
Responding to the blueprint itself, Paula Roels, head of market infrastructure and industry initiatives, Deutsche Bank, comments that it is encouraging that the ECB and SWIFT are closely working together to address the challenge for the European market: “In this respect, the blueprint provides a very good first insight into the strategy to build on.”
“However, it is currently a ‘how to’ guide on the first items that have been decided upon. The industry needs Swift and the ECB to continue to work closely together, as clarity is received, to spell out roles and responsibilities of the participating members even more concretely.”
Why the delay is causing such a headache
Prior to the arrival of Covid-19 pressures, widespread concern regarding the ability of financial institutions across the payments landscape to migrate in time to meet ISO 20022 transition deadlines was well documented.
The impact of Swift’s decision is twofold, argues Roels: “While SWIFT’s delay by one year will provide a brief respite to some banks, especially in light of the Covid-19 situation, it also increases the overall project complexity to others, such as the Eurozone banks.”
Roels elaborates that the extra 12 months to migrate to ISO 20022 in the correspondent banking space will work to reduce time constraints and allow financial institutions (FIs) to implement strategic solutions, which is particularly significant for FIs which started their transition late and initially underestimated the complexity of the project.
On the other hand, the delay holds the potential to significantly impact ongoing projects with sensitive deadlines. Migration projects for ACH/HVP market infrastructures and the TARGET2/EBA migration in particular will face further complexity due to ‘one-leg-out’ payments cleared via PMI but received or forwarded through Swift.
Roels explains that without ISO 20022 reach via correspondent banking, Eurozone banks will have to implement a translator onsite and manage potential surplus of data received through ISO 20022 as this won’t be accommodated by the MT standard.
Marcus Treacher, SVP customer success, Ripple, echoes this concern and states that the delay “will hurt thousands of other financial institutions who are ready to migrate and already migrating to the ISO 200022 standard.
“For example, Target2 migration to ISO20022 and consolidation with T2-Securities had created a clear roadmap and milestone for the adoption of these standards across European banking institutions. Swift’s delay has created frustration, technical complexity and risks for banks who had initiated the migration project and were striving for adoption in 2021.”
Exploring the wider industry response
In a letter to the ECB dated 7th May, an alliance of European banking bodies called on the central bank to delay the T2-T2S consolidation project in 12 months. The four bodies cite a combination of the challenges presented by Covid-19 in conjunction with Swift’s decision to delay ISO 20022 migration as core arguments toward a delay.
The letter spells out the impact of the delay, arguing that as Swift’s network will not be supportive in time to forward TARGET2 payments in ISO 20022 format to the beneficiary banks, banks will be required to implement market practice guidelines to ensure that there is no data truncation for cross-border ‘leg-out’ payments.
Firms affected will have to reconsider their entire cross-border payments strategy to deal with the “mismatch” of message types, requiring time and cooperation which is already stretched given Covid-19 pressures and looming deadlines.
Pointedly, the letter states that regardless of the work that Swift has and will continue to undertake in cooperation with the industry and the ECB, the identification and finalisation of detailed solutions “as well as the subsequent publication of detailed guidelines and specifications will occur beyond the limit after which banks can assess the impact of those solutions, review their projects and plans accordingly whilst staying within the current timeline to be ready for implementation in November 2021.”
The letter concludes that given the “big bang” implementation of these migration projects failure is not an option, meaning “that the project is dependent on the weakest link in the chain being ready notwithstanding any unexpected and unforeseen events for which adequate contingency is considered to be essential.”
Treacher goes further, accusing Swift of having “caused friction between Swift and the European Central Bank which will impact trust for the business, as it will further complicate other digital migrations tied to ISO 20022.”
Ripple, the blockchain-focused payments company, recently publicised its position as the first company with expertise in blockchain-powered payments to join the ISO 20022 standards body and argues that Swift’s role in payments is detrimental and antiquated:
“More than anything, the need for any delay shows that the banking world and Swift have been too comfortable operating with legacy infrastructure and messaging systems, opting for the short-term cost-avoidance of ‘no-nothing.’ Every year that this migration is delayed, the cost of the move and its complexity increases.
“Swift’s last big push to move from MT to ISO 20022 was in 2006, which was scuppered when the 2008 banking crisis deterred the major banks that use Swift from agreeing to this expensive move. 12 years later, and still stuck on legacy, the problem is now much more acute and much more painful."
Treacher concludes without pulling punches: “Currently, it’s faster to fly money overseas on a plane, than it is to send it through an existing correspondent banking model, such as those powered by Swift. In a world where we exchange information instantaneously over the internet, it is perplexing that such a slow and antiquated process for international payments still exists.”
We await feedback from industry players as to the level of their engagement with Swift regarding the Preparation of Usage Guidelines and the Guidelines’ release earmarked for the beginning of July 2020.