In many ways, traditional MT messages are ill-equipped to deal with the sophistication of these modern digital payment flows and the enhanced financial crime controls required by regulators. Some of them are:
- Fire-and-forget messages
- Unstructured data and free-form messages
- Customized and extended messages
The new ISO 20022 standard
Several domestic and cross-border payment protocols have emerged in the half-century since the advent of SWIFT MT messages. China and Russia have developed their Cross-Border Interbank Payment System (CIPS) and Financial Messaging System of the Bank of Russia (SPFS) networks, respectively, and the Association of Southeast Asian Nations (ASEAN) countries are connecting their domestic real-time and QR-code-based payments rails for instant cross-border payment flows. In India, NPCI and TerraPay has enabled cross-border payments on the unified payments interface (UPI) platform, while several banks have adopted distributed ledger technology from Ripple for cross-border payments.
In 2004, SWIFT defined the ISO 20022 standard, which was designed to improve payment processing efficiency and interoperability with these emerging payments mechanisms by replacing proprietary message formats with a standard format and data element definition. The new standard includes:
- A modeling methodology that captures financial business areas, business transactions and associated message flow in a syntax-independent way.
- A central dictionary of business items used in financial communications.
- A set of extensible markup language (XML) and ASN.1 design rules to convert the message models into XML or ASN.1 schemas, whenever the use of the ISO 20022 XML or ASN.1-based syntax is preferred.
ISO 20022 became a mandatory standard in 2019, with an initial cutover from MT by March 2023, and a transition to native ISO 20022 messaging by the end of 2025. It promises several operational benefits:
- Consistency
- Security
- Enhanced visibility
- Efficiency
- Automation
In addition to greater payment processing efficiency, lower costs and risks, the richer messaging enabled by ISO 20022 promises to unlock a range of new commercial opportunities. Migration to ISO 20022 is well underway. By the end of 2023, 79% of the total volume and 87% of the total value of high-value payments worldwide are expected to use the new standard.
Managing the ISO 20022 transition
Banks and other payment processors worldwide are well underway on their ISO 20022 journeys. The most immediate concerns are issues with legacy payment technology platforms, e.g., MT to MX converters and translators should enable legacy platforms to cope with the new ISO 20022 XML message formats. EY teams are supporting financial services clients worldwide to prepare for the initial technology and data problems that can be expected:
- Truncation of data
- ISO addresses
- New data fields
- Expanded remittance information
- Impact on peripheral platforms
Evolvement of payment-operating models
A period of stabilization should follow the initial ISO 20022 go-live in March 2023, with iterative fine-tuning of payment technology, operations, risk and compliance processes and technology.
- Transition from ISO 20022 to business as usual (BAU)
- Preparations for subsequent migrations
- Pay down technical debt incurred
- Internal optimization
- Customer communications
- Industry relations
Complying with the ISO 20022 implementation is crucial for banks and FIs from a global compliance perspective. However, they must look beyond incremental improvements, and to use it as a catalyst in their payment transformation journey. EY teams believe that to strategically leverage ISO 20022, changes to seven key areas of the broader payment-operating model is required.
