Why the Payments Industry needs ISO 20022

3-minute masterclass

Author: Jacob Rider

By 2025, the high value payment systems of all major reserve currencies will have moved to ISO 20022. ISO 20022 is a rich, structured, and extensible messaging standard that is increasingly becoming the de facto standard for exchange of payments and reporting in high value, instant, and other domestic payment schemes.

As a result, the banking community have decided that all financial institution to financial institution (FI to FI) payments need to move to the standard. Adoption of ISO 20022 began in November 2021, followed by a four-year period of coexistence with legacy MT standards which will end in November 2025.

The industry is keen for the adoption of ISO 20022 to happen quickly to reap the many benefits it provides sooner rather than later. For this to happen, the rate of adoption of ISO 20022 by the community at large needs to accelerate.

What is ISO 2022?

ISO 20022 is an emerging global and open standard for payments messaging. It creates a common language and model for payments data across the globe; one that provides higher quality data than other standards which means higher quality payments for all. One that improves compliance, increases efficiency, and enables a better customer experience as well as payment system harmonisation.

The drivers

The payments ecosystem continues to change and evolve at a rapid pace, and there are three key drivers of this. The first is the increasing pressure from regulators on banks and financial institutions to innovate and to improve safety and security. The second is the intense competition from new entrants who are bringing compelling propositions to the international payments market. The third is ever-increasing customer expectations. Customers now expect payments to be instant, transparent, and seamless and the related services more relevant, valuable, and personalised.

The good news is that progress has already been made. Payments have become faster, more transparent, and more trackable thanks to the widespread adoption of SWIFT gpi. But problems persist, which means that the customer experience continues to be compromised. For example, compliance and AML processes regularly result in delays, particularly where key information is missing from the transaction.

This and other payment-related problems all stem from a common cause: insufficient or poor-quality data. The solution to this is richer, better structured, and more granular data. Data that is consistent end-to-end. In short, quality data. The current MT cross-border payments standard is not capable of delivering this quality of data because it was conceived in the 1970s when messages were optimised to be small, carrying minimal datasets for ease of processing by the mainframe computers of the time. A more modern and open standard is now required; one that prioritises richness of data over message size and processing costs. One where quality data means quality payments. That standard is ISO 20022.

It consists of more than 11,000 interconnected financial institutions and market infrastructures in more than 200 countries and territories. It supports all currencies, and messages can be sent anywhere in the world in just seconds. An average of 29 trillion USD – the equivalent of a third of global GDP – is transferred through it every day. No other platform can address the scale, precision, pace and trust that this demands. And it’s growing. Annual growth on FIN payment traffic is 12%. In a connected and challenging era, this approach has never been more relevant.

With all reserve currencies adopting ISO 20022, everyone is set to reap the benefits of this rich standard. To realise these benefits, every connected institution needs to play its part. And by doing so we all win: the platform, the community, and the customer.

What are ISO 20022’s benefits?

Rich data

The rich data that ISO 20022 provides means you can include much more information about the payment than you can with MT. For example, you can include details of the remittance but also the purpose of the payment, the original source, and ultimate beneficiary as well as any other relevant supplementary data. This means more efficient and more cost-effective payments as well as an improved customer experience.

Rich data end-to-end

With ISO 20022 the rich exchange of data can extend from one end of the transaction to the other. This is currently very difficult, if not impossible, for banks to achieve because of the mix of standards, applications, and connectivity solutions. Rich data end-to-end means all actors in the value chain are acting with the same data, resulting in more transparency and faster and more efficient payments processing.

Right data, first time

ISO 20022 also provides you with the ability to get the right data first time. This means that not only will you be able to transmit more data, but you can also examine it in much more detail due to its granularity, allowing you to more accurately and more easily comply with regulatory and risk-related requirements. In turn, this means that the number of failed payments, false positives, and associated investigations can be significantly reduced.

Structured, meaningful data

ISO 20022 provides more structured, more useful, and more meaningful data. More detailed and better structured reference information means better analytics and better decision making. As the standard will – for example – specify what the minimum viable data for sanctions screening and AML are, it will also enable more accurate and efficient regulatory compliance processing.

What does ISO 20022 enable?

Better customer experience

Banks currently have little or no insight into the business purpose of a payment. End customers are similarly restricted by the intelligence – for example spending patterns or habits – they can extract from their own payments data. In both cases, insufficient or poor quality data limit a bank’s ability to develop relevant, valuable, and personalised new services for customers. The rich data end-to-end that ISO 20022 provides means a richer data set for banks to mine for customer insights and business intelligence, enabling them to develop more compelling value propositions for customers.

Improved compliance

Compliance and AML processes are currently plagued with false positives and delays in processing payments, particularly where key data is missing from the transaction. SWIFT estimates that some 10% of international payments are held up somewhere along their journey for compliance checks, most of which are false-positives and wasted investigations. The improved data quality and structure that ISO 20022 provides will significantly reduce these issues and deliver more accurate and efficient regulatory compliance processing.

Improved efficiency

The data related to a payment can in some cases be incomplete or misleading, resulting in the payment being flagged as problematic which invariably requires manual intervention to review. Related investigations and remediations are time consuming and costly. With the richer and higher quality data provided by ISO 20022, much more detailed information about the payment is available. This means fewer errors, less manual intervention, fewer delays for the end customer and ultimately a more efficient, cost-effective, and higher quality payments system and experience for all.

Payment system harmonisation

Over 70 countries today use ISO 20022 in domestic payment systems, and more are on the way. By 2025 the high value payment systems of all major reserve currencies will have moved to the standard and messages will be harmonised around the world. Harmonised messaging standards will create efficiencies for payment system participants and establish the foundation to develop new services. It will also provide a simpler, faster, and more cost-effective way to be compliant with future emerging standards and technologies.

Want to realise the benefits of ISO 20022? We can help. Let’s talk.