Although SWIFT has broadened its focus beyond financial messaging in the past three years, the importance of messaging in the cross-border payments space shouldn’t be ignored. With the ISO 20022 standard now seeing widespread adoption in international payments solutions, financial messaging has never been more relevant.
At AFP 2020, Gene Neyer, Executive Advisor for Icon Solutions, discussed the ways in which ISO 20022 has evolved in recent years. He explained that ISO 20022 began in 2004 when market infrastructures decided to create a standard messaging format. Once the market infrastructure standardizes, that eventually flows down to financial institutions and then the corporates. It’s clearly taken some time to get to this point, but “we’ve continued to the point where we can have entire countries like Canada being able to make a decision that all of their financial industry is going to be ISO 20022-based,” he said.
The reason why so many financial systems have gradually adopted ISO 20022 is due to the multiple benefits of the format. The standard reduces complexity, cost and the risk of data manipulation and conversion in the interbank space and between banks and their customers.
“For an international corporation, being able to use the same format in any country you do business in, and being able to have your supplier take information from you and send information to your suppliers without worrying about data lost in translation or misunderstood—all of that is a major benefit,” Neyer explained.
ISO 20022 is also an attractive standard for corporates because it is bank agnostic. With it, companies can engage with all of their banks in a more consistent manner.
And then there is the regulatory benefit; for years regulators have complained that disparate messaging formats have resulted in a lack of information being transmitted along with payments. This created substantial difficulties for regulators and compliance officers. But now with ISO 20022 seeing widespread adoption, regulators will eventually become more comfortable with the format. In turn, regulation and compliance may ultimately be seen by corporate end users as simply a cost of doing business rather than overbearing restrictions that they need to tiptoe around.
ISO 20022 also has some specific, technical benefits over legacy formats, which Neyer laid out:
- New XML format: ISO 20022 uses modern, mainstream XML that is compatible with new and mature technologies.
- Rich, structured party data: Structured name and address fields replace the freeform text format of legacy standards.
- Legal Entity Identifier (LEI): ISO 20022 supports unique LEI for originators, beneficiaries or intermediary parties, as well as existing identifiers such as BIC, CHIPS, UID, etc.
- New return and status messages: Dedicated messages and status codes/descriptions for payment returns, cancellations and errors replace manual services messages.
- Expanded transaction identifiers and fields: ISO 20022 uses new and expanded identifiers to track payments end-to-end.
- Additional party information: ISO 20022 possesses better information on all parties involved in the transaction.
- Extended remittance information: The new standard provides standalone remittance and better structured remittance information to replace inconsistent/freeform remittance information.
- Special characters and extended character sets: ISO 20022 has a full character set, including non-Latin characters and even emojis.
While universal adoption of ISO 20022 is the ultimate goal, U.S. corporates are predominantly using EDI messaging for their payments instructions, and so it remains the regional standard stateside. Once ISO 20022 is adopted by all major payments market infrastructures, then these common regional standards will move to it. But that may not happen until 2025, noted Ray Fattell, Head of Product Management for MUFG Union Bank.
Based on Fattell’s observations, the majority of the U.S. companies pushing for an earlier move to ISO 20022 are large, multinational corporates. Mid-level corporates are mostly using vendor-hosted ERP systems or treasury workstations and these integrations with banks are mostly done in EDI formats in the U.S. To realize the true benefits of ISO 20022, it is important to have end-to-end adoption of ISO 20022 right from the corporate client to their banks and banks to their client. And for this to happen, banks will have to raise awareness with their clients, explain the advantages, and most importantly, clarify how it will benefit them.
In the meantime, corporates should be more proactive and start discussions with their ERP and TWS vendors to ensure that they have a roadmap to comply with ISO 20022, Fattell added. “This may take time, so starting these discussions now is preferred,” he said. “At the same time, clients can also have discussions with their banks and understand how banks can support them to convert from legacy to ISO 20022.”
For more insights, download AFP’s latest Payments Guide, The Changing Face of Cross-Border Payments, underwritten by MUFG.