The adoption of ISO 20022 is well underway, especially within central banks and larger institutions. This International Organization for Standardization (ISO) format for electronic payment data interchange between FIs is heralded as the solution to boost efficiency, cut costs, and enhance transparency between organizations.
In a recent PaymentsJournal podcast, Laura Sullivan, Senior Product Manager at Form3, and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, discussed how the implementation of ISO 20022 is affecting SWIFT, the benefits and barriers to adoption, and the state of organizational infrastructures that could inhibit the ISO standards from fully benefiting the organization.
How ISO 20022 Is Affecting SWIFT
In March, SWIFT began the migration of its cross-border payments functionality onto ISO 20022. Under the auspices of ISO 20022, financial institutions will be able to modify the payment messages they send and receive through SWIFT from the message type (MT), which is a legacy format, to the new message type XML (MX) format. This new format not only holds more data but also is expected to increase interoperability between financial institutions.
Many instant payment schemes have already adopted the ISO 20022 standard, including real-time payments. Wire payment networks such as Fedwire, SWIFT, and Lynx have announced their plans to adopt these standards fully by the end of 2025.
Newer schemes have an easier time adopting ISO standards, according to Sullivan. However, when it comes to Fedwire and SWIFT, converting from an already existing format can prove more challenging.
She recounted what she learned at a recent conference and how banks that had been sending ISO messages enabled their core processing systems to send additional address information, which led to additional exceptions on the receiving banks’ sanction systems.
“A payment might have been flowing through for years successfully. Now, it suddenly had another line of address which had something that would trigger sanctions review,” Sullivan said. “So that was really interesting.”
The Benefits and Challenges of Embracing ISO 20022
One of the many improvements to ISO 20022 will include having structured addresses to improve the sanctions scanning scenario. With this improvement, banks will be able to make a clear distinction between a street and a country.
“There is a massive spreadsheet that the BMPG has put together country by country, which indicates where to map the various elements of an address for each country,” Sullivan said. “It’s quite impressive. That is a big hope, a big advantage, that people believe will happen with ISO.”
Corporations will greatly benefit from implementing ISO 20022 when it comes to their accounts receivable and accounts payable departments. When a company pays another for a certain amount different from the invoiced amount, the explanation will be given and accessed easily.
Ultimately, to benefit the end user, Sullivan believes that fintechs and banks must work together.
“The banks and the fintechs have got to collaborate on providing tools both for customers to seamlessly provide that information when they’re initiating a payment and for the bank to be able to send that information back to them,” she said. “Because both of those channels are very oriented towards the existing SWIFT and Fedwire.”
The challenge, Sullivan pointed out, is for the banks and the fintechs to come up with the best solutions to make it easier on customers.
It’s also dependent on who’s ISO-ready and who isn’t.
“We’re all happy to report that most countries are going to be live with the ISO standard by 2024,” Bodine said. “Some countries, however, have reported that they don’t plan on adopting ISO 20022 at all. Are those countries going to be in OK shape or out of the game—and are they going to just have a harder time transacting with the countries that are on the standard?”
Sullivan noted that it’ll be the latter. They’re likely to have a harder time transacting. But it will also vary by situation. “If they’re members of SWIFT, for example, they have to be able to support receiving that data,” Sullivan said. “Whether they pass it on to their customer is a different question.”
Current Limitations
As the financial industry moves forward with the implementation of ISO 20022, significant challenges must be addressed, including the current limitations posed by its legacy infrastructure.
These limitations can negatively affect the successful implementation of ISO 20022, leading to delays, inconsistencies, and a lack of interoperability.
“I saw one study that estimated that even at a medium-sized regional bank in the U.S., there were 200 different systems that could be impacted by ISO 20O22,” Sullivan said. “For banks to be able to leverage both a customer initiating and receiving all that data, there’s a lot of work to be done behind the scenes, and banks are going to be very creative. I don’t think many banks will attempt to tackle all 200 systems, but they will find ways to translate that and focus only on the most critical. That is going to be one of the challenges. You have all this data, but you’ve got to be able to ingest it, and you’ve got to be able to send it out.”
Enabling Banks to Embrace Iterations of Fedwire
To stay competitive, banks must adopt an API-first approach. This enables banks to open their systems to other third-party developers, which means more collaboration and faster innovation.
When it comes to high volume, APIs are more efficient, producing more throughput per second.
APIs also work well in the cloud, and more banks want to transition their processing there. However, with any new system that’s implemented, constant iteration is key.
“As payment rails grow and expand, I’m sure there will be tweaks made as they get more mature and we realize some of the mistakes that we’ve made along the way,” Sullivan said. “Our belief is the API provides that layer between whatever channels you have at a bank initiating payments or receiving payments and the actual networks.”
Considering the current legacy infrastructure panorama, having an API-first approach would seem to be the perfect solution.
“Rather than having to take all these different message formats being spit out from 100 different systems, you feed them into the API and then it handles whatever the variations are,” Sullivan said. “Those systems don’t have to be aware of the different payment schemes, the different rules, the different timing.”
Final Takeaways
With the financial industry always evolving, it is critical that fintechs, banks, and other organizations stay abreast of the latest developments, especially when it comes to faster payments.
By adopting ISO 20022, organizations can ensure that payments will be faster, safer, and more transparent than ever. For most smaller banks and organizations, the implementation will not be without hurdles, especially when it comes to dealing with legacy infrastructures. Luckily, with APIs this impediment to adoption has been eliminated.
As with any new system, there will always be room for improvement. But it is a worthwhile journey on the coveted road to interoperability.