ISO 20022 is a community-driven global messaging standard that focuses on identified business domains, representing various business message processes that enable the business community to speak in a common business language, effectively a syntax-independent notation.
In the world of finance, standardisation is a proven approach to deliver compelling business benefits through minimising business risk, effective delivery and lowering processing costs. The business case for ISO 20022 XML adoption relies on the same benefits.
Within the above remit, the core objective of ISO 20022 is to reduce the complexity of financial messaging by means of a common usage of methodologies, processes using a common repository or a data dictionary framework for unified communication. These standards have evolved since their first appearance almost 10 years ago, with XML becoming the widely accepted standard for technical communication. Although these message models can be expressed in any other syntax, XML has become the de-facto syntax.
The Real Business Benefits
The European Payments Council’s (EPC) adoption of XML ISO 20022 under the single euro payments area (SEPA) programme improved the adoption momentum, as it is mandatory in the interbank/payment service provider (PSP)-to-PSP space. The payments service user (PSU)-to-PSP space has other allowances. As a further endorsement of the benefits potential, leading messaging and clearing bodies have started contributing to the ISO 20022 message formats within the defined framework. These include: SWIFT EuroClear, CLS, EPAS, among others.
The key benefits in the specific areas are:
- Cost benefits: The published standards and message types can be used free of cost. They are available for adoption for external and internal organisational communication.
- Effective transaction delivery: ISO 20022 messages accommodate a good amount of data without compromising on the XML syntax validations. It promotes and accommodates extensive data exchange between the remitter and beneficiary of the underlying payment transaction. Furthermore, this standard with its common usage guidelines will enhance the straight-through processing (STP) of the message by reducing manual intervention as well as operational risk.
- Reduced business risk: This is a common standard defined to be used across geographies. The messages are defined by financial industry with collaborative efforts and approved by the strict vigilance of the Standards Evaluation Group (SEG). Thus, these standards are built around the needs of the industry with proven business benefits.
Adoption by Financial Institutions
So far these standards groups have created roughly 300 message definitions within the last six years since the first message was published in Q305, and the number continues to grow. While the majority of these messages support securities (130+), trade services (50+) and cash management (30) businesses, 16 messages support the payments space. However, seven out these 16 messages are yet to be tested. Although many institutions are struggling to convert their messaging and to achieve the ambitious benefits, some are forerunners. While the adoption rate appears to be slow, a view of how the industry bodies or banks are responding to these initiatives in various continents is outlined below:
A major American depositary corporation, Depository Trust & Clearing Corporation (DTCC), has completed the successful piloting1 of messages in the area of corporate actions. As per the recent wire remittances update on ‘ERI: Domestic Best Practice’, both Fed Wires and CHIPS have started accommodating the XML-extended remittance information in their native formats, and they believe their existing formats suffice their requirements. It was recommended that they use ANSI X12 formats, particularly STP820 version. The adoption of ISO 20022 messages for these major payment clearing systems is still far away.
As mentioned at Sibos 2011, the Canadian Clearing and Depository Services and also the Canadian Payments Association executives do not see much traction with ISO and certainly do not see any pressure to convert their existing local standards to ISO 20022. In the case of low value non-urgent international automated clearing house (ACH) transactions, the International Payments Framework Association (IPFA) is trying to create a bridge format between the American International ACH transactions (IAT) and the various other clearing systems’ formats. They have put in place a rule book, which is a sub-set of ISO 20022 standards. This means that these are ‘ISO 20022-like’ format messages but not a true adoption.
As stated above, ISO 20022 standards are the backbone of SEPA messaging and a cornerstone which has generated a great amount of global attention. However, there are no significant views or implementation plans for high value payments, although some initial views are emerging for Target2.
In the case of Asia-Pacific, Japan’s JASDEC is moving towards adopting the ISO 20022 standards from 2014 with a cut-off plan for co-existence of the existing message formats until 2019. The objective is to have global reach. Also, Zengin, Japan’s local clearing network, currently accepts XML messaging. Although they are not ISO 20022 compliant, they are planning to adopt the ISO 20022 standards.
In the case of Australia, the Australian Payments and Clearing Association (APCA) has recently released a non-binding ISO 20022 technical specifications for core credit and direct debit messaging. They call it an incremental approach towards a global interoperable STP approach. While there is still a significant distance to travel, they have set the ball rolling.
By and large, the above approaches suggest that there is greater adoption in low value payments area, rather than high value payments. Also, the other area of increasing importance is in securities settlement. Leading banks that are members of the Common Global Implementation (CGI) group are adopting ISO 20022 outside of EU/SEPA boundaries. Some of these banks include Citi, JPMC, HSBC, Deutsche Bank, RBS, BNP Paribas, and ICBC.
Implementation Issues and Adoption Approach
Some issues that are preventing ISO 20022 adoption include:
- Choice management: Although the intent of the standard is to allow and accommodate exhaustive information exchange, the overwhelming optional fields at times create confusion that can hamper realisation of low hanging fruit.
- ‘Mini’ ISO 20022: At times various countries/institutions who are interested to follow these standards are using a subset of these standards rather than truly adopting them.
- Value in ‘as-is’ formats: While there is progress, many financial institutions still believe there is value in ISO9735 (UN/EDIFACT), although XML has some advantages. In 2004, ISO 7775 completed its migration to ISO 15022. Certain banks still use the MT100/ ISO 7775 message formats for their internal communication although it does not officially exist in the SWIFT/ISO books. The industry has spent a fair amount of money on these initiatives, which makes a business case to consider adoption of a newer standard difficult to achieve.
Within the ‘financial messaging lifecycle’ banks can be on top of the adoption cycle by following these approaches:
- Co-existence: In order to avail of the benefits without incurring full roll-out costs, financial institutions can use the ‘interoperability’ benefits of ISO 20022 by deploying data translation tools for two-way conversion between legacy message formats/systems and ISO 20022 formats. However, such an arrangement should be viewed as ‘tactical’ approach, as such tools tend to have scalability issues for higher volumes, among other things.
- Incremental adoption: As stated above, these standards are actively being pursued in depository and corporate actions area by only a few lead institutions. The industry can wait to see if there are larger benefits in one area before they embrace the messages in other areas, for example cash, foreign exchange (FX), trade, etc.
- Legacy replacement through commercial-off-the-shelf (COTS) implementation: If an institution is embarking on a messaging infrastructure upgrade, selecting COTS products that support new standards like ISO 20022 can help reap the underlying benefits.
To explore the opportunities and benefits, banks and/or financial institutions must document a business case that must include an industry consultative view of cost versus harmonised business benefits and total cost of ownership (TCO) of adopting these new messaging standards.
While the primary adopters of ISO 20022 have been large banks keen to sustain their market competitiveness with this service offering, the next big wave of adoption will be triggered by demand from the corporate client base, following a regulatory push for standardisation and payments infrastructure consolidation. For example, the establishment of payment services hubs will act as native enablers of ISO 20022, which will provide value not only to PSPs but also enable PSU service demands.
Regulation technology is fast gaining currency by transforming how financial institutions can tackle compliance in a swift, comprehensive and less expensive manner.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.