Creating standards in financial markets is an inherently useful exercise. However, the real value comes when those standards are widely adopted and used. The ISO 20022 financial messaging standard has been around for more than ten years. But its adoption by increasing numbers of domestic payments systems means that there are now huge opportunities for banks to improve their service levels and enhance their compliance obligations in international payments.
“Every major reserve currency is either live with ISO 20022 in their domestic payments system, or has declared they will be live in coming years,” says Sheikh. “Because of that convergence, our community has said that now is the time to move cross-border payments to the new standard.” The Japanese, Chinese and Indian domestic payments systems are already using the standard, while the Eurozone, UK and US have declared they are adopting it in the next two to three years.
Taking payments to the next level
For international banks, the adoption of this messaging standard will be a game changer in two key ways. Firstly, it will allow them to challenge the international payments push from nascent fintech companies. At the same time, it will help them to meet the increasingly tight compliance obligations on international payments.
“Wholesale payments from corporates to banks already support ISO 20022,” says Sheikh. “The problem is that the cross-border leg hasn’t been prepared for the rich standard, which gets concatenated into a limited, flat file with ambiguous, unstructured data. That bottleneck is resolved with ISO 20022. As a result, banks can send rich, structured data, end-to-end. Banks are also able to send much better remittance, invoice, tax and purpose code information all the way through to end beneficiaries.”
Over time, the adoption of this messaging standard will support many areas of banking – from payments to securities settlement – although the most immediate areas of focus are payments and cash reporting.
Benefits for banks and customers
According to Sheikh, banks currently receive ambiguous, unstructured strings of data to identify the originator and the beneficiary of a payment. When banks receive a payment in their local jurisdiction, they have the burden of parsing that information, making sense of it and trying to match it against sanctions and anti-money laundering screening lists. ISO 20022 will bring structure to those strings of data, which will greatly improve compliance efficiency.
In many ways, this will level the playing field on which banks compete with the newer fintech firms, who face fewer compliance obligations and less regulatory scrutiny. ISO 20022 will be a key standard that allows banks to offer their customers improved levels of service.
“Banks are facing competition from hungrier and more agile technology firms that view themselves as digital first,” says Sheikh. “They are also seeing increasing pressure from regulators pushing them to be more innovative, while simultaneously improving compliance and security.”
ISO 20022 will allow banks to meet these competing requirements. It will allow them to revamp all their legacy systems towards a future-proof data model and standard. This will allow them to offer better quality of service to their clients and to do that with agility and at speed.
The adoption of ISO 20022 will also improve the quality of existing correspondent banking practices that have incrementally evolved over decades. Global banking is a network of federated payment systems, where fiat currencies are settled in different jurisdictions, each with their local regulations and requirements – independent, yet interdependent on each other. ISO 20022, supported by a mutually agreed market practice will bring convergence and harmonise the disparate and variant practices in correspondent banking today. “Correspondent banking is there to bridge those federated payment systems into a meaningful value transfer system,” says Sheikh. “Banks, in partnership with Swift, have co-created this pervasive, reliable and secure platform for exchange of data and value.”
A new standard for a new era
For Swift, ISO 20022 is incredibly important. Alongside its global payment innovation (gpi), its focus on end-point security with the Customer Security Programme (CSP) and financial crime compliance (FCC), the new standard is another key pillar of its vision for the future of payments.
“Swift provides a set of rails for the banking sector and payment systems,” says Sheikh. “With Swift gpi, these rails are transparent and fast. With CSP, they have become safer. With FCC they are increasingly compliant. ISO 20022 will allow our community to modernise these rails, enabling rich services, to create more value for their clients. It is incredibly important both for us and for our community of banks and payments systems.”