The biggest development since the Euro: how ISO 20022 will transform payment market infrastructures

Paula Roels, Deutsche Bank

Paula Roels, head of Swift and Market Infrastructures, Cash Management, Deutsche Bank, explores how the introduction of the ISO 20022 financial messaging standard will transform primary payment market infrastructures

The world’s primary payment market infrastructures (PMIs), which together form the central cog that drives the global economy, are set to undergo a huge transformation over the next five years.

PMIs, from real-time gross settlement (RTGS) systems for high-value payments and Automated Clearing Houses (ACHs) for low-value payments, to and real-time payment systems for retail transactions, play a critical role in the financial ecosystem. And as a heightened focus on automation, market integration and real-time services sweeps across the banking world, these infrastructures are now embarking a half-decade transformation to keep pace.

So what is being done? At the core of this transformation is the near-universal implementation of ISO 20022 financial messaging standard. Seen as the future of PMI, ISO 20022 is both flexible enough to work with the latest technology, and able to adapt to upcoming technological advancements.

Currently, the standard is available for high-value payments systems in Japan, Switzerland and China, and is also being used for instant payments in Europe, the US, Canada, Australia and Singapore. The incoming modernisation effort will extend this reach to a number of major PMIs, including the Federal Reserve and The Clearing House (in the US), the Eurosystem (in the euro zone) and the Bank of England’s RTGS (in the UK). What’s more, SWIFT’s cross-border payment messaging service will phase out its FIN MT payment messages over the coming years in favour of ISO 20022.

ISO 20022: a watershed moment?

The advent of ISO 20022 lays the foundation for the future – with vastly improved payment processing efficiency and interoperability set to become the standard among high-value, low value and instant payment systems. The benefits abound from both a customer experience and compliance perspective. For instance, the data processed through ISO 20022 is of a much higher quality than that provided by other formats. This helps accelerate straight-through processing, while also reducing the number of errors – saving customers time, cost and administrative effort. The improved data quality will also simplify compliance, including sanctions screening, anti-money-laundering (AML), counter-terrorist-financing checks and support fraud detection.

But the transformation for banks, corporates and financial stakeholders will not necessarily be easy. The migration to ISO 20022 represents the most significant payment industry development since the introduction of Euro two decades ago. As a result, its successful integration will require CEO commitment, and the sufficient allocation of budgets, resources and project teams.

That said, a project of such huge scope may represent a key opportunity, too. It could allow for senior management teams to reassess their existing business models and, subsequently, redesign any substandard business processes. Regardless, ISO 20022 is not simply “another IT project”, it is an all-encompassing force that will irrevocably alter the payments space for the better.