Why is There so Much Talk About XML and ISO 20022?
Banks and corporate clients have for years been frustrated about the lack of end-to-end straight-through processing (STP) in the market for wholesale payments. EDIFACT, an international electronic data interchange standard developed under the United Nations, tried to deal with this problem, but did not succeed, mainly because it never was accepted as an international standard. Now, a new format plus a new standard have entered the scene: eXtensible Markup Language (XML) and ISO 20022. But will they be able to address this deficiency more efficiently?
It seems so, and the benefits are obvious. XML and ISO 20022 are not a proposition for the future; they can be achieved and implemented today. More and more users are seriously taking-up XML, even though the standard is still new and young in its lifecycle.
The harmonisation work on XML standards, the introduction of the single euro payments area (SEPA), the initiatives to embed XML into enterprise resource planning (ERP) systems and the limitations of electronic data interchange (EDI) are all factors driving towards further widespread adoption and promotion of XML and ISO 20022, the future standard for the financial industry.
Originally, XML was a syntax used for transporting inventory data, but later it was extended to cover a wide range of services, such as financial data. Today, a standard XML core payment kernel for corporate-to-bank payment initiation and status messages is available. This core payment kernel consists of an agreed set of key financial data components required for a payment message in any currency. The payment kernel can be processed by any bank irrespective of location and can be issued by any corporation irrespective of the business line.
Two factors in particular have been critical to the success of this project. First, all parties agreed to use the latest ISO standard, ISO 20022, for the definition of the core payment kernel message models and XML schemes. Second, all have committed themselves to include it in their own existing sets of standards. The objective of ISO 20022 is to enable communication interoperability between financial institutions, their market infrastructures and their end-user communities, all using XML messages.
Many international forums have been working to develop the new ISO 20022 messages and several banks have participated in this work, including Nordea. One of these ‘ground-breaking’ forums is the Common Global Implementation (CGI) Working Group, which was established in 2009 by major global banks, corporates, ERP vendors and SWIFT. The goal of this forum is to ensure the introduction and success of XML on a global level. The overall objective of the work is to simplify implementation for corporate users and thereby to promote wider acceptance of ISO 20022 as the common XML standard used between corporates and banks.
So far, CGI has published a set of implementation rules covering the latest versions of credit transfer initiation (pain.001), payment status report and account statement report. Work will be carried forward to include credit and debit notification reports, transaction reporting and direct debit messaging.
Major players in the global transformation of the present financial infrastructure are the ERP vendors. Close co-operation with the software vendor community is therefore important. Banks are currently co-operating with ERP vendors, including SAP, about implementing the CGI XML standard, so it can be understood and used by all banks and ERP vendors. In addition, SWIFT is working with ERP vendors to help them integrate the new ISO 20022 standards.
Most of the major ERP systems are already supporting XML which means that corporates do not need to custom-build solutions. The move by ERPs to embed XML into their systems and core business applications will no doubt encourage the whole progress.
The current EDI systems and standards were insufficient in aiding the reconciliation process. XML is well placed to supersede EDI, but naturally this change will take place over a number of years.
Today, EDI is accommodated in most bank systems because many customers are still using it. But mapping across applications and the lack of clarity across legacy formats makes the task of getting a reconciliation number across the clearing system a daunting task. EDI and XML are likely to co-exist for some years. However, XML is expected to gradually overtake EDI because it is easier for corporates to use across their entire supply chain.
Another expected milestone in the use and implementation of XML standards is SEPA. SEPA enables consumers, businesses and governments to make cashless payments throughout the euro area from a single payment account using a single set of payment instruments as easily, efficiently and safely as they can make payments today in the domestic context. Among the first to benefit from SEPA are all customers doing business or travelling within the EU. Over time, the benefits of the standardised and more competitive infrastructure will benefit citizens.
SEPA will have a huge effect on accounts payable (A/P) and accounts receivable (A/R), as all SEPA countries will replace their standards and automated clearing houses and adopt new formats and networks. SEPA will be an accelerator for the adoption of new technologies and more universal formats, such as XML, and it will allow more information to be transmitted through the payment systems.
On an end-to-end basis, the European Payment Council (EPC) is going down the XML road in its requirements for the implementation of SEPA. All banks will offer the XML format before the end dates. XML will be the format used for customer file content to and from the banks.
In December 2011, the EU Council completed the process for creating a regulation that establishes technical requirements for credit transfers and direct debits in euros, and end dates towards their implementation replacing existing national instruments. The regulation was finally approved by the EU Parliament in February 2012.
The regulation sets the migration end date of 1 February 2014. Finland, as a full euro-member country, took a faster national path to migrate credit transfers already by 2011. The solutions used are fully compliant with the coming regulation. Non-euro countries (such as Denmark, Norway and Sweden) will have a longer transition period until October 2016.
The new regulation puts an end to speculations which were inspired by the slow voluntary migration from legacy to SEPA products. Now, the users of payment services have a firm perspective and certainty to invest in and complete the changes required to start using the new services based on SEPA infrastructure.
The coming end dates will no doubt force all corporates to deliver SEPA payments to the banks in the XML file format only. The regulation will be even more interesting for corporates in non-euro countries inspiring them to use CGI XML, since from October 2016 the EU will demand that all corporates use XML for all payments and direct debit transfers between customers and banks. If only the SEPA XML definition is used, corporates will have to deliver one file type for euro payments and another file type for domestic payments. CGI implementation plans allow more flexibility for corporate clients to make several payment types, such as salaries, urgent payments, domestic, and cross-border transactions, with a single implementation guide, and the market is already seeing solutions where payment is a payment is a payment.
The first ISO 20022 implementations in the Nordic countries were based on version 2 for payment messages and payment status message. All Nordic banks present in Finland have implemented this. The next ISO 20022 version for payments, version 3, is used by the CGI forum. Banks are therefore supporting two parallel versions and naturally the generic recommendation is to use the latest one. In case there is a burning need to go for the next versions (which are not yet even in the pipeline), then the oldest will be dropped and not supported by the market. Needless to say the transition will take place over a period of time.
Complying with the requirements of SEPA schemes and the new regulation has required Nordea to invest in changes in the payments systems in all ‘Nordea countries’. The bank today offers Corporate eGateway as a single point of entry for corporates, which supports one technical interface in terms of file format, communication and security. Nordea will add XML format to this service and has already implemented the payment, credit/debit advises and the account statements.
The purpose of implementing XML is to deliver harmonised file format services to Nordea customers whether they are operating on a local or global basis. This process will make sure that information is delivered and/or received according to global standardisation rules (ISO, CGI, SWIFT, etc) in worldwide standard formats, such as SWIFT FIN, EDIFACT and XML ISO 20022 formats, and the relation of information across these messaging formats. This work will include message implementation guides and customer documents.
Nordea believes that the ISO 20022 standard and the CGI implementation guide will be the main stream for standardisation and implementation in ERP systems for the coming years. Moving to CGI XML will be a huge advantage for both corporates and financial institutions.
There is still much to be done to reach a consensus on how ISO 20022-based payment message standards should be used and implemented. Finland is ahead of the pack in Europe, but naturally this will change with the forthcoming directive (through the SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD)). Full benefits won’t be realised until there is a critical mass of banks, corporates and ERP vendors all using the same standard and implemented in a similar fashion.
However, we are getting close to a situation where the core ISO 20022 XML standards are available in the field of payments, and where both the banking community and technology vendors are able to offer more harmonised services for the benefit of all parties.
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