FinTechBlockchainIs it time for corporates to embrace ISO 20022?

Is it time for corporates to embrace ISO 20022?

Ben Buckingham, CPO at Identitii, discusses the migration to ISO 20022, reveals why corporate treasury departments should care and outlines the potential benefits of blockchain in the journey.

Cross-border payments migration to ISO 20022 is finally becoming a reality. And with it, the ability to share more information with a payment message over the existing payment networks. But what impact will this have on corporates and why should corporate treasury departments care?

There are a few things at play.

  1. Tight migration timelines: The timeline for migration is tighter than some anticipated. The Eurozone’s High Value Payments System is migrating by November 2021, and the United States’ Fedwire Funds Service by the end of 2023. SWIFT has announced a co-existence period of four years ending 2026 and the Reserve Bank of Australia recently called for consultation on its own plans.
  2. Technology updates: The change in standards does require a change in technology for banks. So funds and attention will be diverted to ensure they can continue to use the payment rails going forward.
  3. Continued manual effort: While ISO 20022 does allow more structured information to be shared with a payment, the manual processes needed to connect, collect, reconcile and report against incoming and outgoing payments will remain. As will the knock-on effect this has on cash flow visibility and unallocated cash rates.

With these considerations in mind, what should shared financial services teams be asking their bank to ensure they get the most out of the ISO 20022 upgrade?

The first is, when are they migrating? Not least because the benefits of ISO 20022 adoption are clear and more data is never a bad thing. The second question is have they thought about taking this a step further to look at all of the data requirements for payments settlement?

If we look at a specific example:

The customer of a New Zealand based company on Cuba Street in Wellington wants to pay an outstanding invoice. Today, they initiate this payment as an MT101, with the full address communicated in a single field. The bank can’t determine if ‘Cuba’ refers to the street, or to the sanctioned country and creates a hit, which needs to be manually cleared by a compliance officer and leads to payment delays and potentially missed cut-offs. Under ISO 20022, the same payment is initiated as a pain.001, with each of the components of the address enshrined in its own tag in a new field. This makes it easy for the screening solution to see that ‘Cuba’ is unambiguously a street and not a country – therefore it doesn’t raise an alert and the payment is processed straight through.

Then it arrives in the company’s system. There’s no invoice number to quickly connect the payment to, so the funds go into a suspense account while an internal team manually tries to reconcile the payment to a buyer and an invoice. After two emails and a phone call to the customer, the payment is reconciled, and the funds are released from the suspense account.

In this example ISO 20022 has helped the payment move faster but hasn’t enabled it to get from end-to-end as the settlement data needed still has to be collected manually.

Adding value

This is where blockchain adds value. It can create a trusted, auditable and unalterable record of activity that can be securely shared between multiple internal and external parties. Going back to our New Zealand supplier example, what if they were able to directly collect and send the settlement information in parallel to the payment payload? For example, the buyer initiates a payment that includes a unique TokenID which links directly to the invoice which has been recorded on a distributed ledger-based platform and sends the payment for processing. The New Zealand company receives the payment and the invoice on their end, and can automatically reconcile it, releasing funds straight into their bank account. That’s straight through processing in its finest form.

The benefit of blockchain here is twofold. Firstly, the audit trail of activity and the ability to share any structured or unstructured information with the payment value message itself and secondly the use of TokenIDs to grant permission for those who need it – whether external (e.g. buyers, suppliers or regulators) or internal (e.g. the company itself) – to access some or all of the information related to the transaction.

Tokenisation here is an interesting idea. In this context it’s not related to cryptocurrency but is a unique identifier that can be input into any type of payment message so the receiver can use it to access and review the underlying settlement information that has been uploaded.

Using blockchain and TokenIDs to enable the supplier to create a single, direct ecosystem around payments, receivables and collections ensures faster straight through processing, reduces unallocated cash and vastly improves cash flow visibility.

We’re advocating here that corporates understand the impact of ISO 20022 but also the possibilities for even further STP if we look at all data related to payments instead of just remittance, clearing and regulatory reporting information. ISO 20022 is capable of carrying ultimate debtor and creditor information in the payment message itself if both sides are using a reporting method that supports this information, such as ISO 20022’s CAMT formats. And beneficiaries can take advantage of the availability of ultimate creditor information – allowing a collections processor for example to receive transactions on behalf of all their entities while enabling easy reconciliation against the ultimate creditor tag.

But most corporates will continue to initiate payments in the MT format. And while banks will undoubtedly continue to support MT initiation and reporting for decades, these formats will no longer see new functionalities or evolutions, with all innovations focused instead on ISO formats. So it’s important that corporates have a way to future-proof their payment systems, without facing costly technology upgrades themselves. And using blockchain to create a secure ecosystem for collecting and sharing  any type of structured or unstructured data around payments is a good way to achieve this goal.

Ben Buckingham, CPO, Identitii.

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