Universal standard sought for real-time payments
ISO 20022 – the messaging standard that underpins the Single Euro Payments Area (Sepa) regulation and other regional payment systems – initially emerged for securities messages and is now considered the best option for completing real-time payments. However, the upfront costs involved to implement the standard is moderating the pace of global adoption.
From its origins as a standard for securities, messaging standard ISO 20022 evolved for use in trade finance, helped to facilitate the implementation of Sepa and is now the messaging standard of choice for real-time payments.
Despite looking like a potentially global standard for payments messages, it was not developed for several of its current uses. Instead, it has gradually become mainstream across transactions thanks to its strengths.
It’s difficult to get over the hurdle of reaching critical mass
Containing greater levels of detail with up to 140 characters per field – when some previous messages only allowed 18 – and supporting Asian and Cyrillic text, the standard has the potential to be used universally and set the rules for details included in each transaction message.
The appeal also comes from its simplicity of use. Paul Thomalla, senior vice-president, global corporate relations and business development at ACI Worldwide, says: “It contains all of the information needed and doesn’t require a synchronous response. Once sent, the process is completed.”
As real-time payments began to emerge, it seemed to be the ideal solution. Both Australia and Singapore use it for their payments. Gareth Lodge, senior analyst, banking at Celent, says: “When real-time was implemented in many countries, it was using the card standard of ISO 8583, but limitations in the field length meant it wasn’t ideally suited.”
The standard was not created for use on real-time payments, but it best fits the bill of what is required.
Thomalla says: “There is some discussion that a different format could be better for real-time payments, but it is beyond the point of no return now.”
While it is proving to be useful, it is not being universally taken up as the standard for real-time. Canada and Singapore are among those that use it, but despite being a front-runner of real-time implementation, the UK still runs on ISO 8583.
The universal use of the standard allows for greater inter-connectivity and a homogenization of the rules around what is required in a message. At present, countries will have different requirements on information to be included and the terms can vary. As a result, market players' global adoption of the standard will gather pace.
However, there is a collective coordination problem.
Even if it is adopted, implementation will not bring about any quick financial benefits, and implementation can be slow and costly.
The ability to have access to rich data and use it
Paul Thomalla, ACI Worldwide
For many institutions, there is not yet a clear business case for implementation. It does not bring about cost savings or dramatically improve approval rates. "It’s a critical mass challenge," says Stephen Lindsay, head of standards at Swift.
Any expectation that it will bring overnight benefits to the individual banks may bring disappointment.
Lodge says: “The level of investment that is needed to change everything across the chain to see intangible benefits rather than an immediate cost saving will make adoption slow.”
Fixes can be found in the form of adaptors that convert messages going in and out.
“Platforms can be implemented from the back office and replace the existing systems," says Lindsay. "The other option is to connect the platform to an adaptor. The internal system remains the same and the messages are converted on the way in and on the way out.”
ACI Worldwide is one company offering an adaptor with its Money Transfer System, which allows messages to be converted to ISO 20022 without the need to completely overhaul back-office platforms in the short term. Thomalla says: “If 400 institutions want to sign up to use it today, then they need to use the gateway system as wholesale changes will have to go through a review process. Then these institutions are likely to update their systems over time.”
Implementation requires more than just changing the messaging system. It is a larger in file size, requiring a larger system to simply cope with receiving the volume of messages. The file size, with its additional information, can be kilobytes larger than the existing files.
These files can be compressed, but this needs to happen at both ends of the message transfer. To meet the increased capacity requirements, bandwidth and processing capabilities have to be reassessed, adding further cost.
Thomalla explains that for the UK the banks might not be rushing to adapt, even though ISO 20022 and future real-time capabilities could have wider advantages.
“From the bank side, there is possibly not a strong business case, but the regulators are pushing as it is good for UK GDP [by potentially increasing money supply]," he says. "There is a business case for it – it just may not be for the direct benefit of the institution itself.”
Rather, banks need to look at implementation of the standard in terms of what it can do for the industry at large.
Swift's Lindsay says: “It’s difficult to get over the hurdle of reaching critical mass, particularly if it will not bring about greater efficiency or cost savings, because the straight-through processing rates are already good.
“It is generally understood the upgrade brings improvements to processing, from which the whole community benefits.”
Bringing the US on board could exact greater change, but there is a reluctance to move to real-time.
Celent's Lodge says: “The US had argued there was no case for real-time, but when they were showed it was live in 30 countries they realized they needed to implement the system just to be as good as everywhere else.”
Any bank with a European presence could find being able to send euro messages in a native format might give them an edge over their competitors.
Gareth Lodge, Celent
Lodge adds: “The US banks could in time find they lose out on business to banks that can send a Sepa payment in the native format, versus having to use a partner bank in Europe to do that. The biggest US banks can already do that.” Over the long term, the greatest advantages of ISO 20022 adoption will be beyond real-time and cross-European transactions, and will likely come from the level of detail each message contains. As well as the longer character fields enabling greater detail, it also allows for both the remittance and payment data to be included.
“Data management is the most significant aspect in the long run," says Thomalla.
If the global inter-connectivity of the standard does not push its increased use, the level of data, how it can be used and the advantage that this could give might be what pushes greater interest in implementation.
Thomalla concludes: “The ability to have access to rich data and use it is the real prize. The fact that you can do real-time processing with ISO 20022 is great, but that is the utility of it. The value comes with the richness of the data.”