Richer data poised to become the pre-condition for cross-border payments to thrive

Data gained through ISO 20022 migration will impact corporate efficiency at different levels

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September 10, 2021 Categories

Data is fast becoming a crucial enabler of faster and more frictionless cross-border payments. As payments become more commoditised, the ability to tap into data that accompanies payments is becoming increasingly important for compliance and reconciliation.

“It’s definitely about data richness,” said Stephen Grainger, head of cross border services and executive vice president at Mastercard. “The more data that can be provided to you, the easier it becomes to simplify the reconciliation process.”

According to EY, cross-border payments are expected to value over $156trn by 2022, growing 5 percent annually, with B2B transaction making up for the overwhelming majority of the flow ($150trn). But while the value of cross-border transactions continues to grow, the infrastructure underlying them has lagged.

In a speech earlier this year Piero Cipollone, deputy governor of the Bank of Italy, said, “in this era of fintech and high-frequency trading, we can say that cross-border payments have lagged behind the rest of the global financial system.

“Fund transfers across different jurisdictions can still be difficult to arrange and remain slow, costly, opaque and less secure.”

The importance of cross-border payments has also caught the eye of the G20 recently, with Italy, which holds the G20 presidency this year, reiterating the group’s agenda of developing faster, cheaper and more transparent cross-border payments.

“Easier and less costly access to international funds transfers improves the participation of consumers in the markets for goods and services and the integration of SMEs into global value chains and e-commerce platforms. It also facilitates the management of liquidity and currency risks by large corporations,” said Cipolone.

ISO 20022 expected to boost efficiency on different fronts

With much of the friction and inefficiencies around cross-border payments coming from a lack of data accompanying the money, migration to ISO 20022 message standards is poised to help address this. The discussion around ISO 20022 is also growing as more domestic real-time payment networks (SEPA Inst, P27, FedNow pilot) support the richer messaging standard, said Rachel Hunt, vice president at Volante Technologies.

“We’re all driving towards 2025. That’s when a lot of ISO 20022 migration will have happened at various pockets, whether it’s at a regional level or at a correspondent banking level.”

Inquiries and debates about the use cases and benefits of ISO 20022 have accelerated among corporate clients, said Ben Matthews, partner at Baringa Partners.

“The conversations we have with clients around international cross border are almost all ISO focused,” he said. “They’re looking at how richer data can be used to drive insight, better propositions and ultimately better revenues and greater profits.”

SWIFT has already seen a successful rollout of SWIFT gpi, which accounts for nearly 60 percent of the cross-border payment the correspondent banking network processes. It boasts that more than 50 percent of transactions are credited within 30 minutes.

Having accelerated the speed of payments, the group now looks to tackle the data question with ISO20022 migration, set to start next year. This will ultimately phase out the older MT messaging standards by the end of 2025.

“ISO 20022 is the vehicle for getting richer, better data,” said Harry Newman, head of market initiatives EMEA at SWIFT.

Compared with existing MT messaging, ISO 20022 will allow for 10 times more information to be sent with a payment. Through a standardised messaging format, the migration aims to help reduce the amount of manual intervention needed for cross-border payments and also enable faster reconciliation if manual intervention is required by providing richer data as part of the payment.

“It will open new doors for corporate clients in terms of easier reconciliation, better information about payment invoices and the background trade that is involved, Newman said. “The data sets in ISO will allow for more information to flow more easily, allowing for better cash management and reconciliation.”

Grainger agreed, adding that not only does better data provide faster oversight, it can also enable cost savings.

“If you can simplify the reconciliation process you can start to take cost out of the reconciliation process. That starts to have a material impact on the way that you run a business.”

Another challenge richer data is expected to help address is within compliance, particular around AML and sanctions screening. Newman added that richer data will help to streamline those procedures.

“Compliance requirements internationally have gone up over the years. The old [MT] data set doesn’t have the room for that data. In order to satisfy the compliance concerns, more information is required and ISO 20022 is the way to start to help deliver that with less friction.”

“Richer data will provide both the lower friction particularly around compliance, and will add more value in reconciliation.”

Lower-value transactions still an underserved segment

One of the deficiencies the G20 and the Financial Stability Board identified as needing be addressed is making smaller cross-border payments more affordable for both retail and wholesale users. Grainger from Mastercard said low-value transactions (<$100,000) have been a somewhat underserved market segment, one their own service is hoping to address.

“We’re looking to deal with low value cross-border payments in the most efficient and effective manner that enables both a good experience for the customer.”

The correspondent banking network has traditionally been a poor value for these types of payments. To address this, SWIFT earlier this year in July launched SWIFT Go, an initiative aimed at making low-value payments more affordable and predictable.

Both fintech’s and traditional money wire services are also expanding to cover lower value B2B payments, said Hunt.

“We’re seeing fintechs looking at the cross border b2b market with a lot of interest. They are starting to see this as a very attractive market, that they could disrupt in the same way as they have done in the retail payments.”

Preparing for ISO: regulators’ role

Overall, adopting richer messaging standards is not an easy process. Tom Patience, a director at Baringa, described the transition to ISO 2022 akin to learning a new language.

“Your whole business has been built around MT messaging. You’ve got a brand-new language to use now. It takes time to learn, get comfortable with, correspond in and then finally start to use it to its fullest.”

For firms that have already transitioned to SaaS and cloud-based ERPs, APIs are the way forward for them in their ISO 20022 migration, said Matthews. Many ERP and TMS solutions are already prepared or preparing for the new messaging standard.

He added that those corporates with more legacy tech will need to support from their tech providers.

“The more established institutions, which have a mix of old/new [on-premise] tech, will need to work more closely with their tech provider.”

Increased data however, is also a two-way street: if one party is providing more data on a transaction, there will be an expectation of reciprocity.

“Do I actually want to share all that data with other people? Because it’s mine and quite rich and insightful,” said Patience.

“If I do share data, then I expect to also receive similar data. It becomes a balance of ‘how much do you share versus how much do you keep to yourself’, with payment regulators playing an important role on mandating the ‘bare minimum’ and client expectations driving the rest,” he said.

 

 

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