The Ultimate Guide to ISO20022 Migration for Banks and Financial Institutions
International payments are a complex business that involves multiple parties. Given the various stakeholders involved, standardizing the exchange of payment messages and data is important.
The recent collaboration between the world's major central banks and SWIFT to adopt ISO 20022 marks a breakthrough in defining globally-recognized standards that promise to change the way payments are viewed. While the benefits are massive, ISO 20022 migration brings significant challenges that impact banking functions beyond payments.
So what is ISO 20022 migration all about, and why should you care about it?
What is ISO20022 Migration?
ISO 20022 is a set of standards for all financial industry messages that introduces additional data previously impossible to transmit, given the constraints of legacy messaging standards. The introduction of new data fields and standardization will allow banks to process payments swiftly and economically. ISO 20022 also addresses the issue of cross-border payments, via a subsection termed CBPR+ that replaces legacy SWIFT MT messaging. CBPR+ will come into effect in November 2022, with a grace period till 2025.
Simply put, ISO 20022 standards enrich payments messages with more data. For instance, ISO 20022 standards provide more information regarding the debtor agent's identification, account number, and contact details. As global payments become more complex, interoperability between various standards is increasingly challenging.
The standardization that ISO 20022 brings has thus arrived at the right moment. November 2022 is the most important month when speaking of migration timelines. In many regions, the High Value Payment Systems (HVPS), like Target2 in Europe or Lynx in Canada, drive banks to migrate their systems to the new standard by this time.
However, whether a grace period exists or not, ISO 20022 migration poses significant challenges for banks, given how different it is from the existing SWIFT MT or other proprietary payment message protocol.
What is the difference between SWIFT MT and ISO 20022?
The biggest difference between ISO 20022 and SWIFT MT is the volume of data that the former contains. The current SWIFT MT messaging protocol was designed by SWIFT in the 1970s when the payments world was very different. They were designed to be small and carry minimal data to facilitate quick processing. In the 1970s, bandwidth and storage were highly-priced, necessitating small datasets.
However, as financial markets grew more complex, SWIFT MT became a limiting factor, with field extensions patched over time. These patches cannot keep pace with the complexity of payments transactions these days, and a new standard is imperative.
ISO 20022 provides a better structure to payment messages while offering granular insight into payment data. In turn, the depth of ISO 20022 datasets makes it easier to automate payment information transmission and associated workflows.
Mapping SWIFT MT data to ISO 20022 is not a one-to-one task. Banks face significant challenges in migrating their systems to the ISO 20022 standard. For starters, migration is not just a cash management challenge. Everything from Treasury and IT to Risk Management and Legal is impacted.
ISO 20022 will also introduce larger volumes of data, something with which legacy systems will struggle to cope. Banks must carefully plan their migration strategy, as the wrong steps can introduce more problems in the future.
Despite these challenges, ISO 20022 presents a range of benefits for financial institutions worldwide. These benefits dwarf any migration-related challenges that firms will encounter.
The Benefits of ISO 20022 for Financial Institutions and Corporates
ISO 20022 migration might be challenging, but it presents an opportunity to future-proof payments infrastructure and increase transparency in the system. Here are some of the benefits of adopting the new standards.
Greater Transparency in Payments
With the introduction of new datasets, institutions can transmit more transaction-related information. Not only is transparency enhanced, but financial institutions will discover that compliance is simplified under the new standards. Thanks to rich payment data, banks can also offer digital STP reconciliation, enhancing their service standards.
Future-Proof Business Models
The new ISO 20022 standards allow banks and corporates to orient themselves closer to their customers than ever before. Corporates can use standardized formats to integrate vendors easily onto their systems. Tasks such as invoicing and liquidity management can be automated, thus creating an efficient corporate banking ecosystem that is robust and flexible.
Standardization always brings about cost savings. For instance, studies conducted by the European Commission highlights that SEPA adoption resulted in annual savings of 21.9 billion Euros. Thanks to the potential automation of cost-intensive workflows such as payment processing, investigation, and reporting, institutions stand to reap financial benefits.
Automating Payment Analytics
Data is the new oil, and any institution that isn't leveraging data analytics to inform new business models risks becoming obsolete. Data standardization via ISO 20022 allows firms to automate compliance analytics and dig deep into their data to discover payments trends. Thus, customer orientation is simpler, and business models can be future-proofed.
Given the challenges and benefits that ISO 20022 brings, the next question is, how should financial institutions approach migration?
ISO20022 migration strategies for financial institutions
Defining a migration strategy is essential for success. Broadly speaking, there are two approaches institutions can adopt.
Build a Translator
This solution is best suited for institutions worried about costs. However, it's important to realize that building a solution that translates SWIFT MT to ISO 20022 messages is a stopgap measure. As time moves on, payment messages will undoubtedly become more complex, resulting in the need for a complete migration eventually.
In addition, a translator cannot deliver the business benefits that a complete migration will bring.
Build a Native Solution
The second and recommended option is to build a native solution from the ground up. While this option is resource-intensive and challenging, it is the right approach for the following reasons:
- Gives more rich data access to drive data-driven insights
- Provides the ability to future-proof business models
- Integrate analytics solutions easily, instead of patching them on
- Achieve a better industry reputation
- Lock in the competitive advantages of being a first-mover
The native solution approach demands significant resources. The question is: Should institutions build one in-house or leverage third party expertise and effectively "buy" a solution?
The Big Question: Build or Buy
Timelines are a key consideration for institutions migrating to the ISO 20022 standard. November 2022 is fast approaching, and despite grace periods in some jurisdictions, adoption timelines are short. Thus, it makes sense to leverage proven expertise wherever possible.
Building a solution in-house offers the most control. However, it forces institutions to invest in areas in which they aren't experts. Delays caused by growing pains will disrupt core businesses, something no bank can afford these days, given the competitive landscape.
Leveraging third party experts such as Payment Components offers the following benefits:
- Greater ROI on investment by leveraging proven expertise
- Faster time to market
- Instant workflow upgrades to comply with best practices
- Deep technical support to minimize issues
- Install development flexibility to accommodate next-gen technologies such as instant payments, request to pay, etc.
Payment Components' aplonHUB is a lightweight financial messaging application that handles all account to account payment flows, able to modernize payment systems at a fraction of time & resources and is ideal for banks and financial institutions of all sizes. Our FINaplo libraries can speed-up your in-house development and help you build, validate, and translate your financial messages, eliminate complexity, and remain compliant at all times.