Kicking the Can on Messaging Switch Will Spell ISO-lation

FIs and corporates have been migrating to the ISO 20022 messaging standard, a richer, more structured format that will bring numerous efficiencies. Those who have delayed the move, however, risk being left behind and unable to communicate effectively with their counterparties. Now is the time for action.

Communicating across the world’s financial infrastructure has been like the Tower of Babel, the biblical scattering of people speaking different languages, each one incomprehensible to the others. Treasurers have grappled with banks’ proprietary standards, legacy formats, various payment systems and regional differences. So much became lost in translation, and data was dropped along the way.

That has been overcome with the open standard of ISO 20022 for financial messaging, a single language that will make the flow of money – and data – much easier. The move to the new format is well underway and Brice Goemans, Corporates Product Owner, Swift, expects ISO 20022 to dominate high-value payments and support 80% of transactions worldwide by the end of 2025. The standard isn’t just for payments; the vision is for the financial industry to use the same terminology for trades and securities.

Corporates carrying out business in Europe are already familiar with the standard because it is a requirement of SEPA. More recently the Swift community has been pushing for cross-border traffic to use ISO 20022, as well as the market infrastructures and high-value payments schemes. It has been a massive project for FIs .

“All this work has been underway, and until now the missing piece has been the corporates,” says Goemans. Bank-to-corporate communication has yet to adopt the same kind of harmonisation that can be found among FIs, and Swift has now built a universal standard which can maximise the benefit of ISO 20022’s richer, more structured data, facilitating automation and reconciliation and drastically reducing integration costs for corporates.

Many corporates understand the potential of ISO 20022, yet many others are delaying changing to the new standard. Jerald Seti, Vice President, Product Management, Financial Services, ION Treasury, says there is an urgency for the corporates to act.

“The banks have now converted from whatever legacy formats they were using to ISO 20022 and now they’re speaking ISO 20022 across these different channels,” says Seti. Given the investment that has gone into the programme, it is unlikely that banks will want to keep supporting the old formats in the long run. “It’s really a matter of time before banks are going to mandate their corporate clients to get up to speed and also adopt ISO 20022”, he says.

Procrastinate at your peril

For those who have not taken action, they risk being isolated. “Without making this change, corporates aren’t going to be able to communicate with the banks because eventually the banks are going to pull the plug on the legacy systems,” says Seti. “If they don’t adapt, they are going to be left without the ability to send payment instructions and receive their bank statements,” he warns.

Corporates are at various stages of their ISO 20022 journey. For corporates that haven’t started yet, Seti has some pertinent advice: “Don’t kick the can down the road – don’t wait until the end of the day because that’s when it’ll be crunch time. Everyone else is going to be doing the same and it’ll be difficult.” He adds that corporates should start planning immediately and begin their internal discussions – if they haven’t done so already.

Goemans says that with corporate-to-bank communication, “the ideal is for the data that goes in between the organisations to be on ISO 20022, in the same language, but that still depends on what data is being provided at the source by the corporate. If that data is correct from the start, then it can go from one end to the other”.

ISO 20022 enables more data to accompany transactions and if corporates are using this language, they can reap the benefits of utilising that richer data. For those who still need to be convinced of the benefits, Goemans emphasises the value of ISO 20022: it is more efficient for sanctions screening, it enables better automation, and processes such as reconciliation will be more efficient thanks to the detailed references. Also, there is the potential for myriad services and solutions because of the precise data that can now be tied to payments.

No more ‘blobs of data’

Accessing these opportunities might seem too difficult for some treasurers, overwhelming even. There is, however, an easy place to start. Seti advises beginning with the name and address library and adapting it to the detailed structures of ISO 20022. In the past it would have been possible to get away with just address lines that are “kind of blobs of data – information with very little structure to it”, comments Seti.

Now every data element has a designated field, which makes reconciliations and other actions simpler because everyone globally will be using this format. Corporates also need screens and import mechanisms to capture the data in the new format, and they must also invest in programmes that extract the data to formulate the ISO 20022 messages, says Seti. And that is just for the name and address information.

There will also be other information to add to transactions, which some regulators require, such as purpose codes and fields including the legal entity identifier (LEI). Seti expects regulators to expand the list of information corporates will have to send within their ISO 20022 messages in the future.

A complex task

For corporates, Goemans says, the greatest hurdle is not so much generating the messages and providing the information, it is sourcing the data. “The industry will be able to see the benefits of ISO 20022 more quickly when better quality data is available at the source,” he predicts.

Also, corporates now have to reconfigure how they communicate with all their banking partners – not just those that are already on ISO 20022 – and must overhaul their systems so they can communicate with all parties in the new language.

Goemans adds: “ISO 20022 should not simply be seen as an IT project. The benefits will be apparent to the whole business, in treasury and beyond.”

There will be complexities as each corporate has to accommodate the differing paces to which its banks work. Seti notes: “Some have as few as five banks; some multinationals have more than 100 globally and some of those banks might not be on Swift.”

For corporates in this situation, Seti says, they should prioritise their key banks and focus on communicating in ISO 20022 with them first. “Typically, when a corporate has more than five banks there’s usually a handful that handles 90% of their traffic, so they want to focus on these,” says Seti.

Same language, different dialects

Another complexity is that there are different versions of ISO 20022, which are being applied in slightly different ways in various regions. “There are standards and then there are nuances that go into that,” says Seti.

The Cross-border Payments and Reporting Plus (CBPR+) specification, which defines how ISO 20022 should be used for cross-border payments over Swift, has different versions – but importantly, these share consistent elements. Each message can now be huge, containing thousands of pieces of data, explains Goemans, and different countries can propose their own information, such as Chinese characters. “Even though there is the same language, there are so many optional fields”, stresses Goemans.

As well as the annual release updates to CBPR+ versions that institutions may be using, there are also local and regional systems, and each country has its own real-time gross settlement system (RTGS), and “they all have their own nuances of what a payment should look like. There are all these different layers of requirements and versions that everyone has to be able to support simultaneously,” explains Seti. “There is a harmonising on a common language, but there are lots of different dialects to which we have to cater,” he adds.

Implementing change

To harmonise payments, and other financial messages, into a common language treasurers cannot work in isolation; they must involve all of their stakeholders. “Somebody has to be the champion of the project and have management allocate resources to making this transformation,” points out Seti.

Goemans suggests starting small and asking where payments usually get stuck and focusing on that. “For payments to be processed as a priority by their bank, this is not something that a corporate can decide on its own; they should talk to their banks, to their partners and to their vendors to see where to start and how best approach it.”

Also, the complexity of the migration can depend on the set-up the corporate has, whether it is a full-cloud TMS or with data being stored locally. “There are different kinds of profiles of corporates and there are different degrees as to how to get the most out of this migration,” Goemans adds.

For those still working with an on-premise solution, this migration could be the perfect opportunity to upgrade their set-up, suggests Seti. He comments that many corporates are using the move to ISO 20022 as an opportunity to rethink how they’re operating, particularly those that are looking to automate processes.

Once they have made the switch, it’s not like the migration to a single bank’s standard; this is a long-lasting change that impacts the global financial infrastructure. As Goemans notes: “It’s easier to switch from one version of ISO 20022 to the other than from an old legacy system to ISO 20022.”

Crunch time is looming

Goemans highlights the need for everyone to adopt the same language, and says Swift is working to help financial institutions take ISO 20022 to their corporate customers easily, with no need to create their own standards.

The major global banks are currently on board with ISO 20022, but many smaller banks are struggling to make the necessary changes.

There is a translation service in place, which is offered by Swift, that provides a workaround for those that need to communicate in ISO 20022 but are not yet equipped to do so. It works by converting an MT message into the ISO 20022 format and vice versa. “That has worked out really well for institutions in the short term, but they’re stuck in that lane now,” says Seti. At some point it will be crunch time and they will have stop translating and speak ISO 20022.

The Swift community has scheduled this period of coexistence (of MT and ISO 20022 formats for cross-border, inter-bank transactions) to end in November 2025. The translation service has been helpful for institutions on ISO 20022 that were sending instructions because they didn’t need to maintain a directory of who could receive ISO 20022 messages. With the translation, everybody was able to read ISO 20022, and this enabled banks to adopt the new standard at their own pace, says Goemans.

Swift also introduced Transaction Manager, a solution that meant that information from any ISO 20022 message could be reinstated in full even if the intermediary parties were unable to receive all of the data.

“If one payment is being sent with ISO 20022, we want to make sure that the data gets delivered and preserved to the end even if there are banks in the middle that are still sending legacy MT messages,” says Goemans. This is a solution that Swift is intending to expand to corporates, he adds.

Be smart, start small

As ISO 20022 evolves, Goemans anticipates that institutions will rely less and less on the translation service because banks will be moving away from the legacy format. With the richer, structured, name and address format as an example, eventually the information will no longer be sourced from a legacy message.

Given this momentum, it is important that corporates get on board with the ISO 20022 migration. For those that delay migration they risk being isolated from the global financial infrastructure. For some, it might seem like too much to navigate at the same time, but Goemans has some advice as to how to approach it.

 “It’s about looking at the data at the source first. The migration shouldn’t be to just create the same content in a new envelope.” He also suggests corporates start small. “Identify where you see your use cases are and build from there so that you get the benefits as soon as possible,” Goemans concludes.