The future of payments: Scheme juggling

Following the determination that SWIFT messaging standard MT was below the mark for today’s evolving payments industry, its requirement for frictionless services and secure movement of high-quality, expensive data, ISO 20022 was established.

This is an excerpt from Finextra Research report 'The Future of Payments 2021', which is exclusively available on the EBAday digital platform. Register here for EBAday to access the full report.

According to Daniel Bardini, managing director at Bottomline Technologies, ISO 20022 is a globally accepted format that “improves the quality and structure of financial messages, provides rich data with each transaction, enabling everything from enhanced analytics to status tracking, sanction checking and automated invoice reconciliation – all while delivering an improved experience for end customers.”

Bardini added: “The ISO 20022 standard for financial messaging also reduces fragmentation. It improves interoperability on critical services such as instant payments – domestic and cross-border, open banking, API platforms and other overlay services.” Despite the advantages of adoption being evident, implementation by banks – as with any standard – has been slow.

Keeping pace with extensions

Acting on feedback from the financial services industry, SWIFT plan to enable ISO 20022 messages for cross-border payments and cash reporting businesses from the end of 2022, extending the originally announced date by one year. This will allow banks to “adopt at their own pace, and reduce the total industry costs of realising the benefits of ISO 20022 together with the new platform,” SWIFT stated.

Further to this, it is important to note that SWIFT’s new approach will only affect cross-border payments and cash management messaging. Support for market infrastructure (MI) ISO 20022 migration initiatives, including TARGET2 and Eurosystem Market Infrastructure Gateway (ESMIG) and the Bank of England’s new real-time gross settlement (RTGS) service will remain unchanged.

However, these new capabilities will ensure data and state information is retained in a central location, ensuring that the financial institutions in the payment processing chain are unburdened and are no longer responsible for passing on data.

On this move, Nicolas Cailly, head of marketing for payments and cash management, global transaction banking at Société Générale states that this “first step of a journey” will “translate into fewer frictions - more straight through processes, fewer rejects, fewer addressing errors, fewer delays due to filtering controls or repair activities - and consequently into a better customer experience.”

Considering the impact of uptake

However, Kalyani Bhatia, head of business innovation Americas & UK at SWIFT, highlights that this “transformation is well underway, and ISO 20022 has already been adopted for payments in more than 70 countries, replacing domestic or legacy formats.” Bhatia’s view is that in the next few years, she fully expects market infrastructures such as TARGET2 and ESMIG, EBA (EURO1), Federal Reserve (Fedwire), The Clearing House (CHIPS), the RTGS in Singapore (MEPS) and in Hong Kong (HKICL), the Bank of England (CHAPS) and others to switch to the standard.

“By 2025, all reserve currency high-value payments systems (HVPS) will have fully transitioned to rich ISO 20022, and more than 90% of HVPS value worldwide will move on ISO 20022 rails.” A transformation of this complexity cannot take place overnight.

For instance, Cailly explains that it is fortunate that the move to ISO 20022 has been planned “to avoid managing a ‘big bang’ migration of major currency payments the same day,” mitigating “operational risks” and avoiding “mobilising development teams at the same time on different testing or deployment activities.”

However, some payment and RTGS systems such as TARGET2 and EURO1 were forced to postpone their migration by one year due to the Covid-19 pandemic and to avoid further complexity by aligning the TARGET2 and correspondent banking payments ISO 20022 migration calendar.

Cailly says: “The realignment of migration dates will provide the euro payment market with full ISO capacities from the first day on, thus avoiding the need to translate messages during an interim period and the associated risks of potential data truncation.” While Bhatia maintains that ISO 20022 adoption is well underway, she reflects that “banks that adopt ISO 20022 early will achieve a competitive advantage across service innovation, operational efficiency, and financial crime risk mitigation.”

Is ISO 20022 prohibitively problematic?

What do financial institutions need from payments regulators or authorities to better manage converging scheme deadlines? Bhatia explains that corporates are not being subjected to an equal measure of pressure because “they can agree with their banks the terms and timing of any switch.

“However, the benefits of ISO 20022 are only fully realised when the standard is used end-to-end, including bank-to-corporate and corporate-to-bank interactions. Many banks are promoting these benefits to their corporate clients, and many corporates are already using ISO 20022 with their banks and looking forward to the additional benefits that will materialise when cross-border and domestic systems also adopt.”

On the other hand, Cailly believes that to take advantage of ISO 20022 data richness, clients and their banks must implement systems that will capture the right information so that data can be exchanged in a way that enables other participants in the payment chain to leverage it efficiently.

Using an example, he goes on to say that “the payment ecosystem will need to structure the postal addresses of ordering and beneficiary clients as soon as possible, starting from November 2022, whereas today, the clients' addresses are usually unstructured.

“With the ISO 20022 being used from November 2022, addresses will be structured in 14 different tags with, at least, a clear identification and separation of the country code and the city in two different tags for correspondent banking and euro high value payments,” Cailly explores.

In this case, payment service providers must ensure that their clients’ databases are well structured, and their infrastructures can process said structured data, “to abide by their sanction screening regulatory purposes. This is quite complex as local postal addresses specificities might exist.”

Payment services providers “will also need to evolve the front-end tools that they provide their clients with, so that clients can fill in correct beneficiary structured postal addresses, and to have a close change management to help their corporate clients in their own client/supplier database enhancement,” Cailly said.

He also mentions that it is at this point where regulator support would be welcomed. Financial institutions require much more from payments regulators when considering the management of converging scheme deadlines.