Challenges and Complexities of ISO 20022 for Banks

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The global payments industry is huge and expanding, projected to exceed $3 trillion by 2026. Banks stand to benefit significantly, as payments represent about 40% of global banking revenues and play a crucial role in customer acquisition and retention ⁽¹⁾. To capitalize on this growth, banks need to navigate a significant transformation in the financial world, the implementation of ISO 20022, a global standard for electronic data interchange between financial institutions established by the International Standards Organization (ISO)

A key part of this transition involves the introduction of MX messages, the new message types defined under the ISO 20022 framework. These messages use XML (Extensible Markup Language) for enhanced data processing and interoperability across financial systems. They are richer in data and more versatile than the older SWIFT MT messages, designed to modernize financial messaging. ISO 20022 offers numerous benefits ⁽²⁾, such as:

• Flexible structure in Payment Flows
• Richer data content
• Enhanced straight-through processing (STP)
• Cost reduction through streamlined processes and reduced errors
• Improved operational efficiency
• Opportunities for international expansion and market access

However, for banks, the shift to this new message standard brings opportunities and challenges. Let’s explore the 10 major hurdles banks are facing in their ISO 20022 journey.

Talent Shortage and Skill Gaps

1. Talent Shortage and Skill Gaps

Implementing ISO 20022 and MX message format requires highly specialized skills in data management, financial messaging, and software development. However, many banks face a shortage of in-house expertise, particularly in the technical and operational aspects of these changes. The learning curve for staff is steep, especially when it comes to understanding and handling the complexities of ISO 20022 message structures. Moreover, there’s increasing competition for experienced professionals, as demand for experts who can navigate these new standards grows across the financial sector. This talent shortage could slow down a bank's transition and increase the risk of errors or delays in implementation.

Complex Implementation Process

2. Complex Implementation Process

ISO 20022 introduces over 750 new business components and more than 1000 message definitions across various messaging categories such as payments, securities, trade services, and foreign exchange (3). This represents a steep learning curve for banks accustomed to legacy messaging formats like SWIFT MT. Adopting the ISO 20022 standard requires significant investments in both technology and training, as banks must understand the new components and ensure they integrate smoothly into their existing processes. The volume of new data points and messaging protocols further complicates integration, requiring careful planning and execution.

Legacy Systems Are a Barrier

3. Legacy Systems Are a Barrier

Many banks still rely on legacy systems that were never designed to accommodate modern, data-rich formats like ISO 20022 MX messages. These legacy systems speak a language that is not easily compatible with ISO 20022 and the message formats are typically far more strict and precise than even ISO 20022’s predecessor ISO 15022 (for example CHIPS, BACS, CPA005, and ACH) ⁽⁴⁾, These systems lack the flexibility and scalability to process the new message types, meaning banks face two costly options: upgrade their technology infrastructure or integrate additional components and hubs to their existing systems to support MX messages. Both options present significant financial and operational risks, particularly if the migration process leads to service disruptions. There are certain advantages in simplifying the handling of different schemes, instruments, protocols, and payment flows via a comprehensive solution like aplonHUB, a robust Payment HUB that manages ISO20022 financial messages. As we’ll see below, payment Hubs not only consolidate these operations but also enhance efficiency and compliance.

Legacy Systems Are a Barrier

4. Managing Two Systems During the Transition

During the transition to ISO 20022, banks will have to manage both the legacy SWIFT MT messages and the new MX messages. This dual-system environment significantly increases operational complexity, as banks must ensure that both formats work harmoniously within their infrastructure. For example, in an MT103 message, which is used for cross-border payments, fields are often unstructured, such as the payment instructions or sender’s address being captured in free-text form. In contrast, the MX equivalent, the pacs.008 message, offers more structured data fields, such as dedicated fields for sender and recipient details. Supporting both formats also raises the risk of errors, such as miscommunication between systems or transaction failures, making it imperative for banks to implement robust conversion tools and validation processes.

Legacy Systems Are a Barrier

5. Varying Adoption Timelines

While some regions have already begun using MX messages, others are still in the process of transitioning. For example, the Bank of England had a deadline of April 2023 for all CHAPS direct participants to be able to send and receive ISO 20022 financial messages while the SWIFT’s Cross Border (CBPR+) switch is planned to be completed in November 2025 (5). For global banks, this staggered adoption timeline introduces complexity, as they need to manage multiple timelines and support both the old MT messages and the new MX formats until all regions fully transition to ISO 20022. Banks must stay agile to ensure they are compliant with varying regional regulations and deadlines. Financial Messaging Libraries like FINaplo are prebuilt tools that handle both SWIFT MT and ISO 20022 message formats ensuring banks can manage message validation, translation, and compliance across jurisdictions. With regular updates the libraries also keep banks prepared for evolving standards without needing constant in-house development efforts.

Legacy Systems Are a Barrier

6. Interoperability Across Regions

ISO 20022 is designed to be a universal standard, but its implementation differs across regions, adding complexity for global banks. For example, MX messages related to payments or securities processing may differ slightly in formatting or structure across regions. This lack of uniformity can lead to interoperability challenges in cross-border operations. Banks must ensure that their systems are flexible enough to process these regional variations of MX messages while maintaining the efficiency and accuracy of transactions across different jurisdictions.

Legacy Systems Are a Barrier

7. Managing and Storing More Data

The adoption of ISO 20022 standard brings a significant increase in the volume and complexity of data that banks must manage. The richer data formats in MX messages capture more detailed information across multiple fields, including sender and recipient details, transaction types, and compliance-related data. This means banks will need to expand their data storage capacities and implement more sophisticated data management systems. Traditional storage solutions may not be sufficient to handle the increased volume of data that ISO 20022 messages generate. Banks will need to invest in scalable storage systems, including cloud-based solutions, which offer flexibility and elasticity to accommodate growing data volumes.

Beyond simple storage, one of the critical challenges that comes with handling more complex and detailed data is ensuring its accuracy and integrity during processing. With richer message formats, there is a higher risk of data being incorrectly processed or corrupted, especially when the data passes through multiple systems. Banks must implement robust validation mechanisms to ensure that the data is accurately captured, transmitted, and processed, from payment initiation to settlement.

Additionally, compliance and regulatory reporting requirements are becoming more complex, demanding that banks have the necessary infrastructure to handle, store, and analyze this larger volume of information.

Legacy Systems Are a Barrier

8. The Testing Puzzle

Given the complexity of the ISO 20022 protocol, extensive testing is critical. Banks must rigorously test how MX messages are processed internally and exchanged with external partners. Testing needs to cover everything from simple domestic transactions to complex cross-border remittances. Ensuring that MX messages are processed accurately requires banks to dedicate significant resources to thorough testing, both internally and with counterparties, to avoid costly disruptions. Additionally, the November 2025 deadline, set by SWIFT for the full adoption of ISO 20022 in cross-border payments and cash reporting, makes it crucial for banks to accelerate their testing efforts.

Legacy Systems Are a Barrier

9. The Challenge of Message Conversion

The transition from MT to MX messages is more than just a technical challenge – it requires strategic planning. Converting from the legacy SWIFT MT message format to the more structured and data-rich ISO 20022 MX messages involves translating the old message types into new ones without losing critical information. This process is particularly challenging because MX messages have a far more detailed structure and larger data capacity than MT messages. Let’s deep dive into this challenge.

Data Mapping and Consistency

Banks need to establish accurate data mapping between MT and MX messages. The richer and more structured data in MX messages can lead to mismatches if not properly mapped. For example, some fields in MT messages may not have a direct equivalent in MX, which could result in data loss or ambiguity if not carefully addressed. Ensuring consistency in this mapping process is critical to maintaining accurate and complete transaction details during conversion.

Mitigating Operational Risk

A failed or incorrect message conversion can result in serious operational risks, such as incomplete payments, compliance issues, and increased manual interventions. For instance, in cross-border transactions, incorrect message conversions can trigger delays in anti-money laundering (AML) or sanctions screening, as richer data fields are not aligned properly, potentially flagging unnecessary investigations. To prevent such issues, banks must perform extensive testing to guarantee accurate processing.

Technology Investments

To avoid these risks, banks must invest in strong message conversion and validation tools. Automated tools and validation technologies are essential for processing MX messages, ensuring that all data is correctly interpreted and transmitted without loss. Additionally, these systems should be adaptable to handle continuous updates to ISO 20022 standards and various global implementations. One such agile solution is FINaplo Online Portal which supports technology providers and financial institutions in ensuring the quality of messaging conversion.

Legacy Systems Are a Barrier

10. Compliance and Reporting Difficulties

With the introduction of ISO 20022 and MX messages, banks face new compliance and reporting challenges in meeting regulatory frameworks like FINTRAC in Canada or the FinCEN CTR (Currency Transaction Report) ⁽⁶⁾ in the U.S. where Financial Institutions are required to report large currency transactions, including detailed payment information. The richer data provided by MX messages must be processed correctly to meet regulatory requirements, particularly in areas such as anti-money laundering (AML) and know-your-customer (KYC). Furthermore, the transition phase may result in incomplete or missing data, which could slow down transaction processing and introduce risks in compliance reporting. Banks will need to develop new processes to handle these issues and ensure they remain compliant throughout the transition.

Where Banks Stand on the ISO 20022 Journey

According to “ISO 20022: Preparing for US adoption” report from Deloitte (7), banks are at various stages of ISO 20022 adoption, largely influenced by their participation in regional versus global payment schemes and the complexity of their payment infrastructure. At a high level we can consider the following 3 stages for the majority of financial institutions globally:

• Smaller regional/community banks are often in the early planning stages or focusing on meeting minimum compliance.
• National and mid-tier global banks are planning but debating between meeting mandates and using ISO 20022 for broader payments modernization.
• Global leaders (Tier A banks) are the most advanced, aiming to comply while leveraging ISO 20022 to unlock long-term strategic benefits like real-time payments and expanded offerings.

Why Payment Hubs Are the Best Solution for ISO 20022 Adoption

Payment hubs are the ideal solution for banks to navigate the complexities of ISO 20022 adoption, addressing key challenges such as integration, data management, and interoperability. They support multiple payment types and provide seamless integration across systems, enhancing operational efficiency and real-time processing. 58% of banks are expected to increase their investment in payment hubs in 2024, driven by the need for adaptability and cost reduction ⁽⁸⁾. Their centralized, microservices-based architecture simplifies the complex implementation process, enabling banks to efficiently handle the richer data formats, test new message protocols, and manage both legacy and modern systems. They offer flexible deployment options, whether on the cloud or on-premises, ensuring banks can choose the best approach for their infrastructure and operational needs.

Payment Hubs like aplonHUB are a great way to decouple payment handling from an inflexible core system and future-proof a financial institution against continuous market changes in the payments area.

Conclusion

The transition to ISO 20022 framework represents a significant challenge for banks. The complexities of implementing these new message formats, managing legacy systems, and handling larger volumes of data are only the beginning. However, banks that successfully navigate these challenges will be rewarded with greater interoperability, richer data capabilities, and improved regulatory compliance.

For financial institutions, investing in the right infrastructure, training, and testing will be crucial to overcoming the hurdles of ISO 20022 and MX message implementation. By preparing now, banks can ensure they are well-positioned to thrive in a more data-driven and interconnected financial ecosystem, ready for the future of global banking.

Get in touch with us to learn how we can help you with ISO20022 migration

References

References

1. “How banks can thrive in an evolving payments environment” Capgemini https://www.capgemini.com/us-en/insights/research-library/how-banks-can-thrive-in-an-evolving-payments-environment/
2. “Distinguishing Advantages of ISO 20022” Faster Payments Council https://fasterpaymentscouncil.org/userfiles/2080/files/CBPWG_Distinguising%20Advantages%20of%20ISO%2020022_09-17-2024_Final.pdf
3. “The era of financial messaging coexistence is here” by Bill Lumley, THE BANKER, https://www.thebanker.com/The-era-of-financial-messaging-coexistence-is-here-1683272510
4. “Will ISO 20022 overcome its delays to unlock huge opportunities?”, IBM https://www.ibm.com/think/insights/will-iso-20022-overcome-delays
5. “Understand key challenges and benefits to ISO 20022 migration”, EYhttps://www.ey.com/en_us/insights/banking-capital-markets/understand-key-challenges-and-benefits-to-iso-20022-migration
6. “Assessing Compliance with BSA Regulatory Requirements”, Bank Secrecy Act https://bsaaml.ffiec.gov/manual/AssessingComplianceWithBSARegulatoryRequirements/05
7. “ISO 20022: Preparing for US adoption” Deloittehttps://www2.deloitte.com/us/en/pages/consulting/articles/preparing-for-iso-20022-migration.html
8. “Embracing the RevenueGenerating Opportunities of a Modern Payment Hub” Finastra https://www.finastra.com/sites/default/files/file/2024-04/resource-embracing-revenue-generating-opportunities-modern-payment-hub.pdf