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  • Writer's pictureRoy Urrico

Payment Systems Facing Messaging Format Changes Under ISO 20022

Industry Expert Offers Insight on What to Expect

By Roy Urrico

Source: BHMI

As the demand and adoption of peer-to-peer (P2P) and other digital payments has grown, subsequently, so has the need for better data messaging to support these transactions in the back office. With the rise of faster payments and the need for better cross-border payments infrastructure, more contemporary payment networks are moving towards the International Organization for Standardization’s ISO 20022 standard, which offers a richer data format, improving processing transparency while reducing potential issues.

ISO 20022 is a multi-part international standard prepared by ISO Technical Committee 68 (ISO/TC 68), which creates global standards for the financial services industry. The initiatives around ISO 20022 coincide with the emergence and development of real-time payment systems. The first iteration of ISO 20022 was published in 2004, and the second edition arrived in 2013. This latter version is seeing extensive use now and the near-future.

The ISO 20022 platform for the development of messages uses a modelling methodology to capture in a syntax-independent way financial business areas, business transactions and associated message flows, a central dictionary of business items used in financial communications, a set of XML (extensible markup language – a markup language and file format for storing, transmitting, and reconstructing arbitrary data) and ASN.1 (a standard interface description language for defining data structures) 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

The ISO 20022 design functionally supports old data messaging standards, while adding attributes that resolve any possible ambiguity remaining in the data contents. However, while integrating ISO 20022, any older messaging standard may not maintain the enriched data offered by the new standard, so until the switch is complete, there may be an interim period with some limitations.

Dr. Jack Baldwin, chair and CEO of Omaha, Neb.-based BHMI — which provides software solutions focused on the back-office processing of electronic payment transactions — offered Finopotamus some insights into ISO 20022 and its purpose.

Summarizing ISO 20022 and Its Purpose

Baldwin described ISO 20022 as a worldwide standard for describing and transmitting information about financial services. He attributes the specification’s power to its design. “Essentially, the ISO committee (and other contributors) reviewed classes of financial transactions around the world to assess all financial service business processes to determine transaction flows and data needed to support those processes.”

He added that because not all financial business services have the same profiles, the standards committee derived different domains of business areas that had shared profiles. “Currently, there are over 45 different domains of business processes in the ISO 20022 standard with messaging defined to support those processes. But, unlike some other standards, ISO 20022 messaging includes additional detail to remove ambiguity from interpreting and processing such messages.”

This improves message processing transparency, which assists in areas like reconciliation, settlement, detection of money laundering and fraud. Because of these qualities of the standard, any new payment network uses ISO 20022, Baldwin noted.

Messaging in the Payment Process

“Messaging is the mechanism that a sender uses to convey information to a receiver about the payment under consideration,” explained Baldwin. He also noted in its simplest form, a payments message must specify:

• The amount of a payment.

• Where the payment is coming from.

• Where the payment is going.

To cover different payment types requires a great deal of additional information and complexity, according to Baldwin. For example, ISO 20022 has different categories of messages to deal with fee collection, financial settlement reporting, card administration, fraud detection and many other financial environments. “And the messaging underpinning those environments has to convey information between sender and receiver in such a way to ensure that the two parties are in perfect harmony about the meaning and processing of a message. This is the reason that ISO 20022 messages typically include significantly more data than provided by previous standards – to minimize misunderstanding between the parties involved in a financial transaction.”

The Effect on the Payment Process

“Real-time payments are a comparatively recent phenomenon in the financial services marketplace,” the BHMI's Chair and CEO pointed out. This necessitates new networks and messaging to support them. “ISO 20022 is currently the go-to standard for new payments environments because of its data-rich qualities,” the Baldwin said. He added, all global real-time payment networks have either used ISO 20022 in its development or are moving to ISO 20022 from an older standard.

The impact of ISO 20022 on non‑real time payment environments is dependent, at least in part, on the geography of the payment participants. According to the Global Treasurer, more than 70 countries have already adopted ISO 20022 in their payment systems including Switzerland, China, India and Japan.

In Europe, where there is a significant amount of cross-border payment activity, ISO 20022 has made significant market penetration as a messaging standard, such as with the Single Euro Payments Area (SEPA).

In the U.S., there has not been extensive adoption of ISO 20022 because of significantly less cross-border transaction traffic. “The attitude appears to be that current standards are ‘good enough.’ However, this will change as more financial institutions link to real-time payment networks,” said Baldwin.

Payment Systems Affected

The Society for Worldwide Interbank Financial Telecommunications, more commonly known as SWIFT, begins its migration journey to ISO 20022 in November 2022. SWIFT estimates it will process 80% of global, high-value payments through the standard by 2025.

ISO 20022 most affects current real-time and cross-border payment networks. In the United States, financial institutions in the SWIFT network will be most affected by ISO 20022. SWIFT is switching its cross-border and correspondent banking messaging from MT (message type/text) to ISO 20022 starting this November. Baldwin said, “For the next three years, SWIFT will support both MT and ISO 20022 messaging, but financial institutions interfacing with SWIFT will have to switch completely to ISO 20022 by November 2025 when MT support terminates. So, financial institutions in the SWIFT network will have to convert to ISO 20022 if they have not already.”

Not all financial institutions have SWIFT codes. Many U.S. credit unions and small banks do not connect to the SWIFT network. Instead, these institutions process international transactions, or wire transfers, through intermediary financial institutions. And financial institutions that use SWIFT might not register for SWIFT codes for all of their branches.

Baldwin noted, one catalyst that will force movement to ISO 20022 in the U.S. is the advent of new real-time payment networks like the European Commission adopted Regulatory Technical Standards (RTS) and the soon-to-be-live FedNow (a new instant payment service the Federal Reserve Banks has in development). “These networks are ISO 20022-based, and any financial institution that wants portal access to these networks will have to support ISO 20022 in some form.”

The Clearing House Interbank Payments System (CHIPS), owned by the financial institutions that use it, is the primary clearing house in the U.S. for large banking transactions, remains on course to implement ISO 20022 as planned in November 2023.

The Federal Reserve recently indicated it would delay implementation of the ISO 20022 message format for its electronic funds-transfer Fedwire Funds Service, originally scheduled for November 2023, to the first quarter of 2025.

The Impact on Financial Institutions, Including Credit Unions

Baldwin pointed out the main impact of ISO 20022 for the vast majority of financial institutions will occur when adopting real-time payment services to better serve clients. Networks supporting real-time payments, including the currently available real-time payments platform RTP (real time payments) network through The Clearing House and forthcoming FedNow will use ISO 20022.

“Therefore, any financial institution, either bank or credit union, will need to address the issue of supporting ISO 20022 in some way. The good news is that different third-party organizations will provide portal services to these real-time networks via APIs that will semi-isolate financial institutions from ISO 20022 complexities,” Baldwin said. He added, “Nevertheless, financial institutions will need to support the additional message types and related data associated with ISO 20022. For this reason, both networks and financial institutions may only support subsets of ISO 20022 message types to simplify the process.”

Independent of ISO 20022 issues, supporting real-time payments will subject financial institutions to new challenges, cautioned Baldwin. For example, real-time transactions can occur on a 24x7x365 basis, which will require an expansion of normal financial institution hours of operation. Additionally, reserve account levels require 24x7x365 maintenance to ensure the preservation of payment liquidity. Smaller financial institutions, such as credit unions, may outsource support for these operations to third‑party providers, Baldwin suggested.


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