2022 will be an auspicious occasion across the global payments industry because of ISO 20022, which is a global and open standardization approach for financial services-specific electronic communication.
By enabling multiple markets to communicate in a universal messaging language and model, ISO 20022 marks a significant turning point in payment digitization. ISO 20022 was originally introduced in 2004 by the Internal Organization for Standardization to help universalize and advance real-time payment messages.
What are the benefits of ISO 20022? At its root the standard expands the amount of data from about 100 characters to approximately 9,000 machine-readable characters that define payment messaging to enhance both context and content readability. What additional benefits do the expanded characters provide? ISO 20022 users can leverage the machine-readable XML format to clarify data types and tags per message components.
The augmented data dictionary allows messages to offer more information pertaining to business processes and activities, and payment roles. Cultivating a native ISO 20022 capability enables FIs to leverage high quality data specific to every payment and push data-first approach.
Intelligent technologies like artificial intelligence (AI) and machine learning (ML) will be critical to the realization of these benefits, which will require strategic investment and monumental change at scale. Part of the nexus of rationalizing ISO 20022 is increased automation and speed. AI and ML will be necessary for process automation that decreases friction across the payment lifecycle. The end result will be highly automated and efficient outcomes data results.
Planning for success in the ISO 20022 world should begin immediately if not sooner, and financial institutions and payment providers should expect to see a great deal of impact on their customers as well as their processes. IS0022 will lead to a superior client experience, and quality data via ISO 20022 will in turn lead to more robust, granular data across payments messages that particularly elevate the client payment experience.
In certain instances, payment data and information is incomplete or fragmented, which can lead to time-consuming, expensive manual intervention and subsequent customer delays. A prevalent data dictionary and universal messaging standard enhances the level of detail surrounding payment information to minimize errors, improve information accessibility, and facilitate more efficient payment systems. Richer customer insights enable FIs to extend more personalized, relevant, and competitive services, and improved speed and efficiency of messaging leads to enhanced customer satisfaction.
Additionally global integration becomes heightened. ISO 20022’sfinancial messaging standardization addresses interoperability and integration challenges between various clearing systems within a cross-border payments landscape. The new standardization approach facilitates speed, agility, harmonization, and greater interoperability within both the domestic and the international payments and currencies ecosystem. The application of XML syntax as a global open standard minimizes friction for automated transfers and improves straight-through processing throughout the end-to-end processing chain.
Of course, the rationale with a new standardization method is to achieve better fraud detection and compliance management. Granular payment data and standardized data augments information for continuously changing fraud detection and prevention models, and enables more efficient, accurate compliance reporting. The capabilities to structure both payments messages and data components equates to faster, more relevant analytics and deeper customer payment activity insights, which can inform value-added services based on shifting customer behaviors and preferences.
ISO 20022 is widely acknowledged to be highly complex and ever-changing. The process of adoption won’t be easy, and adopting these new standards will consume a significant amount of time and resources to realize the final transformation. To balance the negative aspects that a project of this magnitude represents, financial service providers need to remember that regulatory pressures are rising for FIs to introduce better safety and security measures and innovation. Furthermore, customers are expecting immediate, streamlined payments and greater customization and value across related services, and competitors are ramping up efforts to innovate within the international payments market.
But there are additional considerations that should be factored into any ISO 20022 transition strategy. First, most legacy systems at financial institutions generally cannot support or leverage the ISO 20022 standard, therefore FIs are required to evaluate their current infrastructures to ascertain how to approach potential system, technology, and tool decommissions, replacements, and upgrades. Infrastructures will probably need newer capabilities to automate and manage data collection, storage, and processing of structured, granular data.
With this comes the risk of data truncation. FIs that approach ISO 20022 migration via application-by-application replacement or middleware solutions rather than a holistic platform approach risk potential siloed applications and data truncation. Of course, sitting here in 2021, many institutions lack an implementation roadmap for ISO 20022 implementation, and fact that will have to change or risk straining risk management across project planning, testing, quality insurance, and stakeholder involvement.
What are other areas that may be affected by the transition? New payments messaging formats will demand the development of new data schemas in order to effectively add new data attributes, which typically demands support from experienced IT specialists. Additionally, data models throughout the payment lifecycle and any payment processing systems will be impacted, such as account data, reporting, sanctions screening, and messaging, and will need to be optimized for ISO 20022. Fraud and financial crime teams will need to rethink risk management approaches and solutions to account for new XML processing and data models.
Given that every major system won’t be migrating simultaneously, global rollout is planned to occur from 2022 through 2025. However, ISO 20022 is already being utilized in more than 70 countries, and it’s estimated that the high value payment systems of all major reserve currencies will have pivoted to this standard by 2025. FIs must start planning their migration strategies quickly in order to benefit from ISO 20022 compliance and avoid positioning their organization at a significant disadvantage, such as exclusion from international payments networks, and greater costs attributed to lower straight-through-processing rates.
FIs who ambitiously accelerate ISO 20022 adoption are positioned to leverage greater value throughout payment chains while exploring new potential to enhance payments outcomes, compliance, and client experiences with quality data. Compatibility across technology platforms alone is worth the price of admission.
ISO 20022 symbolizes the need for everyone to see this initiative as a means of excelling in a future marketplace where only the fittest will survive in the technological jungle.