Cash & Liquidity ManagementCash ManagementCash ForecastingISO 20022: Full of promise but treasurers remain wary

ISO 20022: Full of promise but treasurers remain wary

The new messaging standard ISO 20022 promises treasurers unprecedented control and visibility but some are wary about the toll they will need to pay to reach the promised land

Global payment has been transformed for the better over the last decade and while champions of the new payment messaging standard ISO 20022 believe it will deliver it even more profound benefits for the industry over the next ten years, corporate treasurers are more circumspect.

At a recent conference Ross Jones, head of global payments at Barclays, provided a timely overview of the migration to ISO 20022 and the opportunities and challenges it represents.

“For a long time we have been constrained by the amount and structure of data that can pass through the industry’s payments infrastructure,” he told The Global Treasurer after the conference. “Over the next four years, ISO will revolutionise the banking sector by improving efficiency, data quality and the ability for organisations to establish enhanced controls.

“Our corporate clients too stand to benefit greatly. They have been crying out for more information to be delivered with payment funds. They want enhancements to their cash flow forecasting and reconciliation processes. The industry globally is about to deliver on that ask and early preparation will position them well to take advantage.”

Jones urges firms to speak with their banks and vendors to find out what support they can expect and undertake a deep dive into ISO 20022 to fully understand its implications for their organisation, especially key operations like finance and treasury.

Richer data

One of ISO’s most cited benefits is that it enables “richer, better structured data” to be carried in payments messages. Put simply, according to Jones, “structured data” means that in every ISO 20022 payment, message information will appear in the same place in a specific format, while “richer data” provides the opportunity to include more information within that structured format. ISO 20022 adopters need to understand the implications of these key features, he adds.

“[It] may mean some changes to an organisation’s working practices are needed as there will be an increase in available payment message fields that can be used to pass on specific information,” says Jones.

“Some fields will be mandatory for certain payments and may require changes to ERP and TMS processes. It is likely that regular beneficiaries will ask for certain data fields to be populated so that they have visibility over the nature of the payment, to aid their reconciliation approach.

“Conversely, as a result of a richer set of data being available, organisations may want to start considering what data would be beneficial for them to receive.”

One area of major concern within corporates and banks that could be addressed by ISO 20022’s richer data fields is sophisticated financial crime. According to Jones, one of the main hurdles in dealing with this growing problem is that with legacy messaging standards, such as SWIFT MT, short data field lengths mean elements like names and addresses can be truncated, making it harder to corroborate identities or understand full beneficiary details. The additional data available through the new ISO 20022 standard should help to identify fraudulent payments and improve automation of investigations.

ISO 20022: Treasury pros and cons

Matthew Gorman, treasury manager at global financial administration company Computershare, who debated the merits of ISO 20022 with Barclays’ Jones at the ACT conference, agrees the new messaging standard has the potential to be beneficial for corporates. A key advantage of ISO 20022 is its bank agnostic characteristics, says Gorman, which means multi-banked corporates can engage with all their banks in a much more consistent manner

“One standard message format across all bank providers is a very attractive proposition. Currently we have to have unique payments files for each bank because everyone wants it done slightly differently.”

But he fears the road to reaping such handsome rewards could be challenging for firms and likely entail “an awful lot of work for many them”. One example of his unease is ISO 20022’s requirement for fully structured party addresses. He explains that currently, address fields for beneficiaries are merged and it would require a lot of time and effort to separate these out to meet the proposed new ISO 20022 structure, which requires the building number and street name to be in separate fields.

Gorman explains that at Computershare, tens of thousands of payments are pushed out every day and while the company has a lot of information on its customers, it does not necessarily have the full address for every one of them. To obtain this information the company would have to reach out to clients or participants to ask them to share that information with Computershare, a resource heavy task.

“Generally, from a data perspective, ISO as it stands means a lot of additional work for corporates,” says Gorman. “There are also the actual development changes themselves to consider. We’ve got several different internal systems for sending payments and that means our dev teams will have to develop multiple new payment files.”

Tight on time

Despite the additional work, Gorman senses many firms are making a conscious effort to get on board the ISO 20022 train. But there is a fair amount scepticism over timelines amongst many treasurers.

“Everyone’s looking to get ready for the migration,” he says. “However, we all also have commitments to other major pressing projects. Experience of delays to other requirements, such as Strong Customer Authentication, means there is a doubt that the current implementation dates [for ISO] will be adhered to.”

The scale of the ISO 20022 migration task at Computershare has led it to consider putting together a project team to manage its implementation.

“It does amount to a big change for corporates and managing resources is key to its successful delivery,” says Gorman. “Right now, I have to say I’m fairly sceptical about ISO. Potentially, yes, it looks very nice. But there’s a lot of work ahead before we get to the promised land.”

Gorman says that he has also seen varying degrees of support from Computershare’s banking partners and would urge other corporates to reach out to their relationship teams for regular updates and to ensure that they understand the full impact of the new standards on their businesses.

Addressing ISO 20022 concerns

Mark Sutton, senior manager at treasury and risk consultant Zanders, has been a prominent critic of aspects of the proposed implementation guidelines of the new ISO 20022 (version 9) payment messaging standard and echoes Gorman’s concerns over the proposed mandating of full structured address lines.

“That one requirement alone will have quite a significant impact on corporates,” he says. “Whilst structured data is a good thing, possibly an understandable exception to this rule is around the first line of the address.”

He explains that in the UK an address like “12 Phoenix House, 18 High Street” would typically be set up in the first line of address field in the ERP or TMS master data record, with  Town/City, state, post code and country code being entered in a separate structured field.

“An essential precursor for adoption of ISO 20022 is the migration from the legacy MT standard to the newer, ISO 20022 compliant XML-based MX message standard,” says Sutton. “However, as part of this MT-MX migration, at some point, possibly closer to the 2025 end date, non-compliant messages will be rejected.”

Therefore, if the address data is not in the correct structured fields – the payment will fail, according to Sutton. “This is serious stuff. Is everything in place to support this fully structured address? Sadly not. The XML message standard that will be used for ISO does not currently support all the required data points – there is no street number at the moment.”

Lobbying for a compromise

Sutton says another major concern is that ERP vendors are not ready to support a full address structure that includes matching the field length of each structured address tag. This is a material limitation as no corporate can comply until the ERP vendors have completed their updates and this means every software vendor that offers payments functionality, not just the likes of SAP, Oracle and Microsoft.

“A couple of global corporates  have indicated the financial cost of demerging the current line 1 address data into a full structured format could cost half a million euros excluding testing with your banking partners,” he says.

With the SWIFT MT to MX migration starting its three-year adoption plan in November 2022 within the interbank payments messaging space, Zanders has formed a corporate focus group and is planning to raise its concerns to the SWIFT Payment Market Practice Group (an independent SWIFT advisory group comprised of payments experts from within the banking sector) at its June meeting in London.

“The focus group’s objective is to secure a more pragmatic way forward in terms of the submission of the line 1 address – basically to allow the current unstructured model to continue, but accepting that the other key address data points like City and State must be provided in the correct structured XML tags,” says Sutton.

Payment regime proliferation

Barclays’ Jones does not deny ISO 20022 represents challenges for organisations but is sure those prepared to invest in it will reap many rewards over the long term as it evolves into the universal, shared language for payment messaging. He points out that the world’s biggest payment schemes, banks and SWIFT are foursquare in support of its adoption by 2025.

Over 70 countries have already adopted ISO 20022 in their payment systems including Switzerland, China, India and Japan. SWIFT, which begins its own migration journey to ISO 20022 in November 2022, estimates 80% of global, high-value payments by volume will be processed through the standard by 2025.

“If you look at the payments landscape today, the concept of being standardised and consistent does not really exist,” says Jones “We have geographical differences with how payment schemes exchange data for instance. Even within single geographies different payment schemes exist and employ different formats for exchanging data.”

In the UK alone, the plethora of payments systems include CHAPS clearing scheme (which is MT based), Faster Payments (ISO 8583 based) and Bacs (Standard 18). Europe, US, Asia and other jurisdictions, meanwhile, all have their contrasting concoctions. A similarly bewildering state of affairs can be found in the ‘customer-to-bank’ and ‘bank-to-customer’ space.

Jones says there are several reasons why so many payments regimes are a big drag. One is that there’s often more than one leg within a payment, which can result in data getting lost and truncated during translation. Also, working with multiple sets of standards is inefficient for corporates and banks, making it more difficult for organisations to innovate and grow.

“We are now at a crossroads as this proliferation of payments standards is holding us back,” says Jones. “The good news is that banks, payment system operators and regulators not only understand the need for consistency, they are actively working to address it.”

While there are no plans for universal phasing out of non-ISO 20022 formats, he expects these will start to take a back seat over time.

“Through the migration and wider global adoption of ISO, corporates will want to use the same payment format in any country, or at least many more countries, without the translation issues currently seen within the payment chain.

“ISO should be viewed as an enabler. Its roll-out will allow corporates and financial institutions to adopt a consistent approach for exchanging payments data that will, if executed well, improve the way we all work,” he adds. “If we really want truly frictionless payments, with all the benefits that implies, then standardisation and consistency across the payments ecosystem will take us one big step closer to achieving it.”

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