ISO 20022 – A Hero for Our Times

ISO 20022 has been hailed as the lingua franca in payments and securities for some years now. It offers great potential for reengineering the payments industry, and for process improvement.

Neil Burton is director of product service strategy at Earthport

For a standard which promises so much ISO 20022 is still relatively unknown. Europe has required regulatory involvement (SEPA) to drive adoption. In the USA, a 2012 survey by the Remittances Coalition showed that fewer than 10% of the 468 respondents (mostly corporates) had heard of it, and only 1% were “somewhat familiar” with it, write Neil Burton and Gareth Lodge.

But perhaps the SEPA end date is the global tipping point? The SEPA end date mandates the adoption of ISO 20022 for all intrabank € – € transfers. Furthermore, under the European Commission (EC) SEPA end date regulation, the majority of corporates sending most types of payments must now adopt it. This will force smaller firms to adopt the standard alongside multinational corporations.

The effect of the end-date is therefore to move billions of transactions to SEPA credit transfer – which of course is based on ISO 20022. Add this to other payment infrastructure projects in other countries including India, China, Brazil, Canada and Australia, all of which are embodying the standard, and it begins to look like more than half of all electronic payments globally will be using ISO 20022 within a few years.

Round the world in 20022 days

There is sometimes a perception that ISO 20022 means SEPA and vice versa. Certainly SEPA is playing a large part in driving the uptake, with both the SEPA direct debit and SEPA credit transfer being based upon it. But it is certainly not just payments – for example, the proposed standards for e-invoicing and eBAM are both based on ISO 20022 schemas. This will create a ground swell of usage over a much broader value chain as the SEPA regulation stipulates end-to-end usage. This means many, if not most corporates, will need to be able to generate payments in ISO 20022 format. It is not just low value transactions either – TARGET2 has published a strategy envisaging the beginning of adoption in 2014 or 2015 and allowing for co-existence with MT until ISO 20022 becomes the norm.

Gareth Lodge is senior analyst, corporate payments, at Celent

But what about outside of Europe? In Japan both high and low value payments are ISO 20022 based. Similarly Russia’s new domestic debit card scheme is being built on ISO 20022, while India has mandated the standard as a prerequisite for inclusion in the new RTGS system, NG RTGS. China and Brazil have also announced the adoption of certain ISO 20022 messages. And still they come – the Canadian Payments Association is proposing an adoption timetable for ISO 20022 to begin in 2016 and be completed by 2020. Similarly most submissions to the Reserve Bank of Australia’s payment system review (Feb 2012) support the adoption of ISO 20022.

In percentage terms, ISO 20022 is undoubtedly the most utilised format of all, signalling that the day when most payments will be ISO 20022 based is quickly approaching.

All that glitters – the downsides

Of course, ISO 20022 has its detractors. Some have argued that ISO 20022 has been designed around the four or six corner store-and-forward correspondent banking model, and hence tends to preserve that model, which even SWIFT acknowledges is outdated.

Another issue is the question of interoperability and encouraging mass adoption. However, when it comes to interoperability, the problem is not lack of connectivity, it is the lack of common means of sharing data over that connectivity. Furthermore, one of the consequences of welcoming a broad range of legacy and new capabilities, and with new participants joining at different stages of their own investment cycles, is that there are many flavours of the ISO 20022 standard. This creates a first mover disadvantage; the first firm to invest won’t see payback until many other firms have migrated. Without regulator-enforced migration, early investment is not rational.

However, many infrastructures in many countries have either already adopted it or are irrevocably committed. Deciding not to join it until later may be a good decision for some. Avoiding making any decision no longer is.

The case for adoption

Absent a regulatory driver, there needs to be a business case. How does making this investment make processes more efficient or enable more business in a measurable way, with tangible payback?

Vendors for the banks following the market have incorporated ISO 20022 but for corporates it is less easy. They are not getting, in many cases, guidance from their banks as to how to proceed. Nor are they all convinced that they will see much, if any, benefit over and above the current state.

A few options are emerging. Some of the vendors are providing versions of software that was originally designed for banks directly to corporates. Equally, some large vendors are preparing cloud based options for the market. As the payments are now in the same format across far more countries, there is greater opportunity to extract value from both analysing the data in the payment, but also utilising that data more smartly.

So what exactly?

That last point is perhaps the most significant.

Standards make things simpler. Simplicity in this case seems to be leading to a belief that payments are becoming commoditised. This is particularly the case in SEPA land where one of the original “selling” points was that it would open up the market to greater competition as now any bank should be able to reach any other bank (and therefore corporate or consumer).

That may be true, but it is as much as a misunderstanding as to what commoditisation actually means. A commodity, according to the dictionary, is an “article of trade” or “anything useful”.

If payments are being commoditised, we’re saying they’re becoming more useful and therefore more valuable. Standards should therefore be about how to harness that value.

ISO 20022 is on a triumphant march, but we must not lose sight of the fact that it is supposed to be an enabler for something more, rather than the end-goal itself. To do so is to lose that value.