December 6, 2023

Adoption of ISO 20022 is well underway, especially within central banks and large institutions. The International Organization for Standardization (ISO) format for the exchange of electronic payment data between financial institutions has been hailed as a solution to improve efficiency, reduce costs and increase transparency between organizations.

In a recent PaymentsJournal podcast, Laura Sullivan, Senior Product Manager shape 3and Albert BodinDirector, Commercial and Corporate Payments, Javelin Strategy & Research, discusses how the implementation of ISO 20022 affects SWIFT, the benefits and barriers to adoption, and the state of organizational infrastructure that may prevent ISO standards from fully benefiting organizations.

payment journal

There are challenges in adopting ISO 20022, but the advantages outweigh the challenges

payment journal There are challenges in adopting ISO 20022, but the advantages outweigh the challenges

How ISO 20022 affects SWIFT

In March this year, SWIFT started migrating its cross-border payments functionality to ISO 20022. With support from ISO 20022, financial institutions will be able to modify the payment messages they send and receive via SWIFT from Message Type (MT), a legacy format, to the new Message Type XML (MX) format. Not only will this new format hold more data, but it promises to enhance interoperability between financial institutions.

Many instant payment schemes have adopted the ISO 20022 standard, including real-time payments. Wire payment networks such as Fedwire, SWIFT and Lynx have announced plans to fully adopt these standards by the end of 2025.

According to Sullivan, ISO standards are more easily adopted by newer schemes. However, converting from existing formats can be more challenging when Fedwire and SWIFT are involved.

She recounted what she learned at a recent meeting and how a bank sending an ISO message had enabled its core processing system to send additional address information, causing an additional exception to the sanctioning system of the receiving bank.

“A payment may have been successfully circulating for years. Now, suddenly, it has another line of addresses with content that would trigger a sanctions review,” Sullivan said. “So it’s really interesting.”

Benefits and challenges of adopting ISO 20022

One of the many improvements to ISO 20022 will include the use of structured addresses to improve sanctions scanning scenarios. With this improvement, banks will be able to clearly distinguish between streets and countries.

“The BMPG has put together, country by country, a huge spreadsheet indicating where the various elements of each country’s address are mapped,” Sullivan said. “It’s really impressive. It’s a big promise, a big advantage, and people believe that ISO will deliver on that.”

Companies will benefit greatly from implementing ISO 20022 for their accounts receivable and accounts payable departments. When a company pays another company a certain amount that differs from the invoiced amount, an explanation is given and easily obtained.

Ultimately, to benefit end users, Sullivan believes that fintech companies and banks must work together.

“Banks and fintechs have to work together to provide tools so that customers can provide this information seamlessly when they initiate a payment, and enable the bank to send this information back to them,” she said. “Because both channels are very much geared towards existing SWIFT and Fedwire.”

Sullivan noted that the challenge for banks and fintech companies is to come up with the best solutions to make things easier for customers.

It also depends on who has the ISO ready and who hasn’t.

“We are pleased to report that most countries will adopt the ISO standard by 2024,” said Bodine. “However, some countries report that they do not intend to adopt ISO 20022 at all. Will these countries perform well, or be eliminated – will it become more difficult for them to do business with countries that meet the standard?”

It would be the latter, Sullivan noted. Their trade may be more difficult. But it also varies from case to case. “For example, if they’re a member of SWIFT, they have to be able to support receiving that data,” Sullivan said. “Whether they pass it on to customers is another question.”

current limitations

As the financial industry moves forward with the implementation of ISO 20022, significant challenges must be addressed, including current limitations imposed by its legacy infrastructure.

These limitations may negatively impact the successful implementation of ISO 20022, causing delays, inconsistencies and lack of interoperability.

“I saw a study that estimated that even at a mid-sized regional bank in the US, there were 200 different systems that could be impacted by ISO 20O22,” Sullivan said. “There’s a lot of work going on behind the scenes for banks to be able to take advantage of customers originating and receiving all this data, and banks are going to be very creative. I don’t think many banks will try to address all 200 systems, but they’ll find ways to transform those systems and focus on just the most critical ones. That’s going to be one of the challenges. You have all this data, but you have to be able to ingest it, and you have to be able to send it out.”

Enabling Banks to Accept Fedwire’s Iteration

To remain competitive, banks must adopt an API-first approach. This enables the bank to open up its systems to other third-party developers, which means more collaboration and faster innovation.

When it comes to large volumes, the API is more efficient, producing more throughput per second.

APIs also work well in the cloud, and more and more banks are looking to move their processes to the cloud. However, with any new system implemented, constant iteration is key.

“As payment channels grow and expand, I’m sure there will be some adjustments as they become more mature, and we recognize some of the mistakes we’ve made along the way,” Sullivan said. “We believe that APIs provide a layer between any channel where a bank initiates a payment or receives a payment, and the actual network.”

Given the current state of legacy infrastructure, an API-first approach seems like the perfect solution.

“Instead of getting all these different message formats from 100 different systems, you feed them into an API and it handles any changes,” Sullivan said. “These systems don’t have to understand different payment schemes, different rules, different timing.”

final points

As the financial industry continues to evolve, fintech companies, banks and other organizations must keep up with the latest developments, especially when it comes to faster payments.

By adopting ISO 20022, organizations can ensure payments are faster, safer and more transparent than ever before. For most smaller banks and organizations, the implementation process has not been without obstacles, especially when it comes to dealing with legacy infrastructure. Fortunately, with APIs, this barrier to adoption has been removed.

As with any new system, there is always room for improvement. But it’s a worthwhile journey on the coveted road to interoperability.