It’s not very often that people get excited about a new ISO standard. There are 22000 of them so far, the stars of which are probably ISO 9001 (Quality Control), ISO 27001 (Information Security Management Systems) and ISO 14001 (Environmental Management Systems). Each standard is designed to bring order to the chaos of industry best practices developed in geographical silos.
The banking and payments industry is one of the worst offenders when it comes to a byzantine mass of regulations, legacy processes and maybe later approach to innovation. Globalisation is here to stay and now, thanks to ISO 20002, cross-border payments are finally moving into the 21st century.
“It’s quite exciting,” says Isabel Schmidt, Global Global Head of Direct Clearing and Asset Account Services at BNY Mellon Treasury Services. ISO 20022 means “automatic reconciliation, increased payment speed and reduced costs. By removing all the busy work, every actor in the payment chain can spend energy on things that are new and that add value to our clients and our businesses.”
What is ISO 20022?
ISO 20022 is all about messaging, specifically the messages banks send to each other when a cross-border transfer is made. One of the more common messaging networks is SWIFT, which processes more than 46 million messages each day. The problem is, says Schmidt, “It’s not the only one. Payments are a patchwork. ACH, CHAPS, CHIPS – they all try to do the same thing. But they are not the same. Networks don’t integrate well with each other or the business processes they support.” According to SWIFT, ISO 20022 will create a dictionary of messages that are common to every financial institution around the world, similar to how the airline industry works. The idea is that a central repository of terms, processes and best practices will significantly reduce misunderstandings, failed transactions and fraud.
Why is ISO 20022 relevant?
The current messaging format is unstructured, meaning there are no data fields. Without regulations for what the messages should contain or in which order the data should appear, it’s very difficult to apply AI or other automation to the process of moving money.
Standardising the message will remove the geographic variables for programming, make data analysis a lot more straightforward and in general, and make every business process relating to payments much, much easier.
Is ISO 20022 mandatory?
The ISO has no regulatory or legal power, so all standards they release are technically optional. However, once a standard is widely adopted, holdouts usually lose their competitive advantage. Andrew Foulds, Director of Global Clearing Solutions and Product Management at Fiserv, explains, “financial institutions that avoid ISO 20022 could be making an expensive mistake as they come under increasing competitive pressure from fintechs and BigTech that are eager and ready to take their place, evolving at a very agile pace. These tech-forward organisations have clearly demonstrated they have the bandwidth and ability to understand the value of data and to use it to offer customised services to customers.”
When does ISO 20022 come into effect?
150 countries adopted the ISO 20022 standard when it was first proposed, but the transition process is expected to continue to 2025. In this co-existence period, institutions will use both SWIFT (MT) and ISO 20022 messages (MX). More than 70 countries, including Switzerland, China, Japan and India have already transitioned and several low value payments systems in Europe are already working with the new standard. If your European bank now offers instant transfers, it’s likely that they have already adopted ISO 20022.
2022 – SWIFT and the European Central Bank will go live with ISO 2022 for high value payments in November TARGET2, also in Europe, will adopt ISO 20022 in November all at once instead of phasing the new standard in.
2023 – The CHAPS network in the United States will start their ISO 200222 transition in spring 2022 and aim to complete the process by early 2023.
2024 – MT and MX messages will co-exist in Australia until 2024 2025 – ISO 20022 is the global standard for high value payments systems of all reserve currencies and will support 80% of transaction volume and 87% of transaction value globally.
What is the difference between high and low value payments?
In banking, there is a distinction made between transactions made between banks either for themselves or on behalf of their corporate customers, which include overseas banks. Low value payments are transactions initiated by everyone else. This includes everything from the €5 you transfer to your nephew for his birthday to the big invoices companies pay their suppliers. For example, in Australia, high value payments total $122 bn AUD daily. But since the average payment is 3.2 million AUD, it amounts to just 38,000 transactions. Low value payments are the inverse – significantly higher transaction volume but much lower transaction amount. In 2020, European retail payments averaged 294 million transactions per day, with an average card transaction value of €41.
What is the difference between SWIFT and ISO 20022 messages?
MX messages (ISO 20022) look very different to MT (SWIFT) messages. Instead of a text box with some data in it, in some format like what you would find in a legacy MT message, MX messages have 940 separate fields. Not all of them need to be filled in, but it does mean that an MX message now takes up several pages if printed. The designers of MX messages have taken care to make the format future proof. The current XML can be easily translated should another markup language become standard in future.
Why is ISO 20022 an improvement on SWIFT?
MX messages are better than MT messages mostly because of the data they are able to transmit. But really, this new standard will affect nearly every aspect of banking.
More data means more information about customer behaviour and needs, which means more competition between financial institutions, fintechs and payment processors. To remain competitive, players will have to develop products customers at all levels of banking will want to use.
The business of business runs a lot more smoothly when the tech stack just works. It’s the same for banking. Previously, financial institutions developed and implemented standards in a silo. The result was inconsistency, a lack of customisation and overwhelmed IT departments stuck fixing poor infrastructure instead of innovating. A single global standard means sending money from Germany to Argentina should be just as easy as it is from Germany to France.
When companies are able to reconcile payments in near real time, they will also be able to manage their cash flow with the same kind of transparency. This improves forecasting and leads to better business decisions.
Fraud and Compliance
The XML format can be easily integrated into nearly every market infrastructure and payments system around the world. This means better analytics, fewer mistakes from human error, more accurate regulatory compliance, improved security and fraud prevention.
Standardising non-Latin alphabets
The character set for MX messages is ten times longer than for MT messages, which gives a lot more scope for messages in non-Latin alphabets like Chinese, Russian or Greek. Asia is the world’s most innovative market when it comes to banking and payments, so it’s not much of a surprise that the People’s Bank of China started adopting ISO 2022 more than ten years ago.
How does ISO 20022 affect ecommerce?
The two main ISO 20022 changes affecting ecommerce businesses directly relate to increased transaction speed and more efficient reconciliation How obviously these things will affect your business depends on a few factors, namely the size, international reach and accounting management of your business.
The bigger your business, the more likely it is that you will be making larger payments to international suppliers. If all parties involved in the transaction are using payment processors and banks that have fully adopted ISO 20022, you should notice that transfers are processed faster, especially if it involves two different countries.
If your business has a wide international customer base, then it’s also likely you’ll be doing a lot of transferring of money between currencies and tax jurisdictions. This will become simpler and quicker. In addition, if you offer invoice payments, bank transfers or direct debits, the time between the customer making the payment and it being booked in your account will be significantly reduced. This new real-time cash flow visibility will make forecasting and inventory management much easier.
Your accounting department will likely notice the biggest change, especially if your business is large enough to use commercial accounting software like SAP. Because of the standardised fields and additional information in MX messages, straight through processing rates (meaning the number of transactions that are completed without human interaction) will sky rocket. The AI reconciliation piece of your accounting software will be able to match payments with invoices much more accurately when there is more information to compare.
This increase in straight through processing should, in theory, reduce the per transaction fee banks, credit cards and digital wallets charge to use their products. On that point, all we’ll say is that even ISO 20022, the most game-changing shift in banking in decades, has its limits.