On message: ISO 20022
ISO 20022 has the potential to bring considerable benefits to regulators and regulated institutions, although the integration challenge should not be underestimated.
As more financial institutions adopt ISO 20022, the goal of a common global standard for processing becomes a reality, enabling extensions of payment and remittance processing (including reporting).
“Furthermore, where the standard has been implemented, customer transaction details are readily available,” observes David Dunmire, senior vice-president product solutions at iGTB. “When used in conjunction with centralised transaction processing systems such as transaction hubs, financial institutions have a powerful tool for meeting regulatory reporting requirements.”
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ISO 20022 defines more data elements that regulators want access to, but it will take a lot of time and effort before financial institutions have the ability to integrate into a fully ISO 20022-compliant messaging system, suggests Tim Sloane, vice-president payments innovation at Mercator Advisory Group. “Most institutions will likely implement a data mapping exercise to convert data elements already being captured into the ISO 20022 format.”
Compared with some payments standards, ISO 20022 defines very granular and complete structures for key data like name and address of ordering customer and beneficiary for payments, says Stephen Lindsay, head of standards at Swift.
“Although regulators don’t necessarily require the use of structured data, it is clear that the motivation behind [Financial Action Task Force Recommendation 16] FATF R 16 (and its various interpretations that have been written into law) is to improve the transparency of payments and the industry’s ability to detect illegal activity. Better structured data would definitely help improve the efficiency and effectiveness of the detection process.”
ISO 20022 customer payments messages also provide specific definitions for ultimate beneficiary and ordering customers, which are beginning to be required by some regulatory regimes.
The industry needs a more flexible structure that allows information to pass end-to-end in a way that is easy to validate, says Simeon Parker, head of banking AccessPay, adding that priority must be placed on shaping the transformation of payment messaging standards in the migration from Swift FIN to ISO 20022 payment formats.
When asked if the use of ISO 20022 has directly contributed to increased competition for banking services by making it easier for ‘new’ banks to access payment systems, Christophe Vergne, global payment centre of excellence leader at Capgemini, refers to common standards enabling the removal of country barriers for clearing services.
“However, as the Payment Systems Regulator in the UK has stated, the ability to work with a certain message format is not the only consideration for a new entrant looking to participate in payment systems. Other initiatives are being looked at (such as a technical payment aggregation initiative) in the interests of introducing additional access options.”
Before ISO 20022 can lower the cost of entry, there will need to be entire core banking systems that are designed around business process and data modelling principles embraced by the standard, adds Sloane. “While some core systems utilise modelling tools for particular areas of business, I am unaware of any that orchestrate all aspects of a bank’s operation utilising these models.”
According to Lindsay, ISO 20022 lowers the barriers to anyone’s participation in financial messaging because it uses standard and well-understood XML technology. “It is clear that regulators are keen to encourage competition in financial services and see new technology approaches such as public APIs [application program interfaces] and instant payment platforms as a way to achieve this. ISO 20022 is emerging strongly in the instant payments space, and it is therefore clear that mastering it will be key for any innovator or new entrant that wants to build value on top of these new industry platforms.”
Many countries are planning to migrate automated clearing houses to ISO 20022, but this process will take many years
Fiona Hamilton, Volante Technologies
ISO 20022 it is especially useful in the ability to more completely include extended remittance information and many more creditor and debtor parties, although in its raw state it allows for much of this information to be conveyed in free format elements, warns Fiona Hamilton, vice-president Europe and Asia at Volante Technologies. “To really reap the benefits it is essential that jurisdictions impose market practice guidelines that forbid the usage of free format elements and instead mandate the use of codified content, thereby allowing for much easier monitoring and retrieval from archives and also automation of AML/KYC checks.”
Hamilton also observes that ISO 20022 is a long way short of being implemented as the payload structure for all payments systems or banking channels.
“Many countries are planning to migrate automated clearing houses to ISO 20022, but this process will take many years. In addition, many alternative payments channels such as Ripple are not based on ISO 20022 and, to complicate matters further, many of the back end systems responsible for payments processing do not natively support ISO 20022, so there is often a need for a transformation layer.”
Considered solely as a global standard, ISO 20022 facilitates access to payment systems, but Dunmire says there are many other factors necessary to enter the realm of payment processing, including access to origination channels (such as central bank connectivity and various payment processing systems), support infrastructure and investment.