Cash & Liquidity ManagementPaymentsSWIFTEverything you need to know about ISO 20022

Everything you need to know about ISO 20022

ISO 20022 is a methodology, or recipe, which can be followed when creating financial messaging standards, according to SWIFT

In the global, interconnected world of financial services cross-border harmonisation of standards is essential. After all, most firms operate across multiple geographies, but despite this the sending and receiving of payments globally is challenging undertaking and one that is far from cost-effective. ISO 20022 is a new global standard for exchanging electronic messages between various financial institutions and, though the concept is relatively simple, a universal language for transferring financial information on everything from payments to securities trading and settlement is rather revolutionary.

But for something so ground-breaking, ISO 20022 has been around for quite a while, with it first introduced by the International Organisation for Standardisation back in 2004. Nevertheless, it is still widely regarded as the standard of the future due to its ability to adapt to new technology as it emerges and is quickly becoming the globally agreed financial messaging standard due to it boasting the following key features:

  • Open Standard: ISO 20022’s development is open source allowing the standard to constantly evolve to meet users’ needs.
  • Network Agnostic: The language underpinning the stands is readable by a wide array of computer operating systems.
  • Enlarged data carrying capacity: Allowing better identification of the originators and end beneficiaries of payment instructions

What makes ISO 20022 so special?

ISO 20022 provided a platform that created the foundation for developing messages in one Extensible Markup Language (xml). This modern XML technology, which put simply defines a set of rules for encoding documents in a format that is readable by both humans and machines, allowing for fast and simple integration for corporates and financial institutions whether running legacy or state-of-the-art IT systems.

This global and open standard is also not controlled by a single interest, allowing anyone in the to implement it on any network. This single standard covers all business domains and end-to-end processes facilitating the creation of new services and enhanced straight through processing.

In short, ‘ISO 20022 is a methodology, or recipe, which can be followed when creating financial messaging standards,’ according to SWIFT, the global provider of secure financial messaging services and early adopter of the standard.

The simplicity of this potent recipe is why more than 200 market infrastructure initiatives have, or are in the process of, adopting ISO 20022 for a variety of payments and securities transformation projects, with that number growing each year.

Impact of ISO 20022 on corporate treasurers

Corporate treasurers are always looking at new ways reduce costs and make processes more efficient, so it is only natural that that they look to adopt ISO 20022 to standardise payments and reporting.

“Growth in e-commerce means card payments are also being reviewed in more detail by many organisations. This is due to the ever-increasing proportion of sales margins that card and associated FX costs take up,” Head of Treasury and Commodity Group at PwC Yann Umbricht and his colleague Thomas Knudsen told the Association of Corporate Treasurers. “It is also prompted by recent outages in the card systems exposing the risk of over-reliance on cards.”

“Treasurers should lead the organisation to reap benefits of a changing payments landscape by helping to reduce fees, choosing the right services, and maintaining correct cash reporting and controls as new services are implemented,” the pair added.

“A must-do is to understand how faster payment clearing and new payment types will impact working capital, and how treasury teams manage day-to-day liquidity.”

Adoption of ISO 20022

The US Federal Reserve Bank recently added its name to the roster of financial institutions adopting the standard. The US central bank plans to upgrade its payment infrastructure for instant Fedwire (formerly known as the Federal Reserve Wire Network), a real-time gross settlement system that permits financial institutions to electronically transfer large sums of money to one another. By updating its systems, it will enable to Fed to migrate its messaging formats to ISO 20022 by the year 2023, bringing its payments system up to speed of those in other major geographies.

A similar story is being played out in Europe, with the European Central Bank (ECB) looking to overhaul its own gross-settlement system known as Target 2 RTGS, with plans for it to adopt a new operational model supported by SWIFT’s ISO 20022 messaging standard.

German lender Deutsche Bank is also embracing the new standard, with it viewing the decision by major central banks and SWIFT to migrate to ISO 20022 as a chance for banks and corporate treasurers to improve overall operational efficiency and reimagine existing business models.

Major undertaking

However, the lender concedes that while the migration to ISO 20022 has many benefits; offering greater interoperability between various settlement networks as well as enriching payment data and improving compliance processes, it is a major undertaking.

“Treating this as just another IT project would be a mistake – it is game-changing and signifies an opportunity for banks and corporates to improve operational efficiency and reassess existing business models,” Christian Westerhaus, Head of Cash Products and Cash Management at Deutsche Bank GTB said.

“However, making the most of ISO 20022 requires a significant and complex migration, affecting not just core payments processing, but many other banking systems and departments.”

In order to make the transition to this new global standard as smooth as possible, SWIFT has said that it will begin migrating all cross-border and many-to-many payments onto ISO 20022 in 2021, aligning the start of its own migration with that of the eurozone’s high value payments system.

Over the next three years, SWIFT plans to work closely with the corporates and financial institutions around the world to help them all to embrace and benefit from this new global standard. By doing so, these institutions unlock new opportunities for collaborating with one another and increase interoperability, allowing for a streamlining of the entire processes chain.

“We look forward to working closely with all our customers during this transformation to ensure it is successful for all,” ISO 20022 Programme Manager at SWIFT Tanja Haase said.

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