The push to adopt a uniform set of international messaging standards for financial transactions is gaining momentum on a global scale—even as the United States continues to weigh the business case for it.
Late in August the Real-Time Payments Group (RTPG)—a global consortium of more than 50 clearing houses, banks, vendors, and payments associations—published draft ISO 20022 as part of an international project to come up with a consistent set of message standards for cross-border, real-time retail payments. The draft standard arrives as many countries are implementing, or seriously considering, a real-time payment platform.
“Financial messaging standards” is the broad term for all sorts of details (quote requests, execution orders, confirmation requests, and so forth) about the millions of financial transactions that happen worldwide every day. A global standard for all those messages would simplify process and drive down costs, and ISO 20022 aims to achieve that by harmonizing previously incompatible data formats.
“ISO 20022 is likely to be a real game-changer globally and domestically, enabling a level of interoperability we have never seen before,” said Maurice Cleaves, chief executive officer of Payments UK, the group tasked with driving the development of ISO 20022.
ISO 20022 as a standard is not new. Developed by the International Organization for Standardization (ISO), the original version was published in 2004 to provide a common language of messaging standards for the financial industry, based on a central dictionary and business process model to facilitate the exchange of financial information worldwide.
Over the last several years, the global banking community has been collaborating with SWIFT—the interbank standards body for more than 10,800 financial institution and companies—to ensure that ISO 20022 standards are interpreted in a uniform way across the industry. Europe is the most mature adopter, driven by its need to allow euro transactions across borders there. Other countries that have developed clear implementation plans for ISO 20022 include Canada, India, Japan, Singapore, South Africa, and Switzerland.
“Financial messaging standards take a while to be adopted in the market,” says Malene McMahon, senior business manager of SWIFT. “Only now are we really starting to see broad adoption of this XML-based standard, allowing ISO 20022 to reach critical mass around the globe.”
In the United States, however, enthusiasm for ISO 20022 has been tepid at best, even as the standard continue to evolve. “It’s not going to be mainstream for several years,” says Steve Kenneally, vice president of payments and cyber-security policy at American Bankers Association.
As more countries around the world push forward with real-time payment initiatives, and use ISO 20022 as their preferred building block, the RTPG’s efforts will be all the more important to spur U.S. banks and corporate clients to do the same.
“It’s important because it is seen as the standard that all new financial transactions will move to over time, as legacy proprietary formats are slowly being replaced.”
Barry Kislingbury, Senior Principal Solution Consultant, ACI Worldwide
“This isn’t the latest fad that will come and go within a few years,” says Barry Kislingbury, senior principal solution consultant at ACI Worldwide. “It’s important because it is seen as the standard that all new financial transactions will move to over time, as legacy proprietary formats are slowly being replaced.”
According to SWIFT, there are currently about 200 initiatives around the world trying to implement ISO 20022 across payments, cash management, securities, trade finance, and treasury domains.
Progress is being made in the United States, but slowly. The Federal Reserve Banks and the Clearing House are exploring options to adopt ISO 20022 messages for the U.S. wire transfer systems—Fedwire Funds Service and CHIPS, respectively. To date, however, they have not yet determined with any real certainty the scope, roadmap, and timing for adoption.
Why the hesitation? One reason is that the demand for adoption of ISO 20022 from U.S. banks and their corporate clients isn’t at the level that it is in Europe. “Banks, like most businesses, want to have an idea of what their return on investment is going to be,” Kenneally says. “Before they spend the money on making it available, they want to make sure there is customer demand.”
The other hesitation of U.S. banks and their corporate clients stems from how difficult costs are to quantify. According to a consultation paper issued by the Federal Reserve, such costs are dependent on the technology, vendors, training, and to what extent the changes will affect the company’s core processing for technology and operations.
Then there is the whole issue of implementation. “It’s not only getting the banks’ systems up to date,” Kenneally says. “It’s making sure that their corporate customers—the ones that will actually be using all this data—are up to speed, as well.”
ISO 20022 Implementation: Best Practices
Below is a partial excerpt of best practices for ISO 20022 implementation provided by SWIFT; this particular section describes how to undertake an ISO 20022 impact assessment.
Business Impact Assessment
This stage reviews the institutions’ current ISO 20022 landscape from an external business perspective, and summarizes unilateral/bilateral dependencies, business flows and message types with external financial institutions, corporate customers, third-party service providers and market infrastructures. Typically, it addresses the following questions: Which market infrastructures will I need to support and by when? Which features will I be required to use? Which functions might I want to use in order to provide better service or increase my efficiency? What customer requirements would need to be supported? What business capabilities will I need to address for my corporate and financial institution clients?
This stage reviews the institutions’ current ISO 20022 landscape from an internal application perspective and summarizes business flows, message types and interface specifications with all internal applications within the organization, including the possible new functions that will be needed. Typically, it addresses the following questions: Which existing applications will be affected? What are the requirements to produce or consume ISO 20022 data? Will these applications manage these requirements directly within the application, or indirectly via an integration or middleware solution? What new application capabilities will be required?
‘To-be’ business architecture and ‘roadmap’
Whether the project is an organization-wide, multi-year process, or simply a tactical implementation limited to a specific internal business process, this stage outlines the proposed business scope, phasing and the expected organizational impact by business area, system or geography, and addresses any items raised during the impact assessment. The proposed roadmap should list, by phase, all impacted external organizations, internal business applications, message flows, message types and versions, as well as the specific business benefits, all of which should be set against a high level timetable. It is important for this roadmap to be agreed by all impacted stakeholders so that the broader interdependencies are fully understood, and the need for action is recognized
This stage assesses the expected costs and benefits of the proposed roadmap, across all the stakeholders, by phase. Ideally, ‘costs’ should aim to quantify the one-off and recurring costs, and ‘benefits’ should aim to quantify cost savings, incremental revenues as well summarize the strategic benefits.
“U.S. financial institutions have very heavy legacy platforms, so the upgrades that financial institutions have to make is quite substantial,” McMahon says. “Changing to XML-based technology is a big step. These are very large investments for the financial institution.”
Why Are We Doing This?
For many banks, particularly small banks with few customers that do cross-border transactions, the business case for change is difficult to justify. “The systems they’re using now, while maybe not the most efficient, work well,” Kenneally says.
At the other end of the spectrum, some large international U.S. banks with operations in Europe have already made that transition. “I can confirm that we’ve implemented and are fully supported on ISO XML 20022 for our corporate clients,” says a spokesman for Bank of America. “It is our format of preference to support industry standards.”
Citigroup says it now supports more than 500 clients globally using ISO 20022 XML, and processes an average of 4.8 million transactions per month, according to a spokesman.
“Late adopters will benefit from all the hard work that the larger banks have put into laying the foundation,” Kenneally says. Some groups have begun to issue guidance to help banks in their efforts, he says.
For example, NACHA—the Electronic Payments Association recently developed an ISO 20022 Mapping Guide to assist banks in translating ISO 20022 payment instructions for their global corporate customers into ACH payments. NACHA is the trustee of the ACH Network, managing the development, administration, and rules for the ACH payment network, which currently has 12,000 participating financial institutions in the United States alone.
The ISO 20022 Mapping Guide standardizes the practice of mapping ISO 20022 formatted payment messages to corresponding NACHA file formats. “The ISO 20022 Mapping Guide is an important step in helping to support ISO 20022 adoption in the United States,” said George Throckmorton, managing director of network development for NACHA.
SWIFT has also issued a guidance for banks outlining best practices for implementation of ISO 20022. The framework lets banks understand, for example, adoption approaches undertaken by different market infrastructures, and how to make informed decisions about the implementation roadmap, based on a business and technology impact assessment.
Once ISO 20022 has been adopted on a global scale, “it’s really going to make the flow of information a lot easier,” Kenneally says. “It may be a little bit of a difficult transition, but the end result will help everybody.”