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SWIFT migration to ISO 20022 messages

SWIFT migration to ISO 20022 messages
March 04, 2020

Introduction:

ISO 20022 is a messaging standard for exchanging information between financial institutions. ISO 20022 is a successor to ISO 15022 and has now become a ‘GLOBAL LANGUAGE’ for payment messaging. To this date, it has been adopted by over 70 countries, primarily for real-time payments and is poised to become the ‘GO-TO’ standard for all high value payment systems and domestic payments.

Is your bank ready to adopt ISO 20022? Read this blog to know the various implementation considerations for ISO 20022. #SWIFT #ISO20022 @hclfs @swiftcommunity

Benefits of ISO 20022:

Better quality of Data: ISO 20022 messages can contain richer data when compared to the existing message formats. By leveraging additional information in these messages, banks will be able to provide related remittance information, a long-standing demand of customers. Better quality of data also helps banks in performing financial crime prevention more effectively.

Innovation: ISO 20022 messages represent data in a well-structured format. The structured information will enable banks to innovate in customer servicing functions and product portfolios.

Higher STP rates: Use of ISO 20022 messages will eventually result in higher end to end STP rates, with fewer false positives arising from poor quality risk bearing information in payments related exchanges.

Flexibility: ISO 20022 has a flexible framework which allows banks to adopt changes easily.

Interoperability: ISO 20022 can ensure better interoperability between different high value payments and domestic payments systems across the globe.

Automation: As data quality improves, banks would be able to automate their daily complex activities like reconciliation and other backend operations.

Global harmonization and standardization of ISO 20022:

To accomplish the benefits of ISO 20022 messages, it is necessary that all the players in the payments processing chain accept ISO 20022 message formats. Global harmonization of ISO messages, which is a need of the industry, has slowly starting to pick up pace. Different payments industry players are collaborating and making a conscious effort to adopt the changes. With standardization of the payment messages, there will be good chance to eliminate the proprietary standards. For ISO 20022 messages to become a ‘GLOBAL LANGUAGE’ for industry, both harmonization and standardization are obligatory.

SWIFT (stands for Society for Worldwide Interbank Financial Telecommunication) is playing its part in revolutionizing the payments messaging standards. In the quest of better and faster payments services, it has taken up major transformational programs like – Introduction of GPI (Global Payments Innovation) and Migration of MT messages to ISO 20022 based MX messages. With the GPI program already providing benefits to banks, SWIFT has now shifted its focus and attention towards migration of MT to MX messages program. Now with the collaboration between both SWIFT, different market infrastructures and national clearing & settlement houses, they can present a harmonized and standardized framework for the industry.

SWIFT with CBPR+(Cross-Border Payments and Reporting Plus) group has laid out its plans and a road map for its journey towards ISO 20022 standards. The transition to ISO 20022 will span across a four-year period to allow all participants to prepare and implement the new global standard. Below is the timeline till Nov-2021.

ISO

Move by Global Financial Market Infrastructures

ISO 20022 has already been implemented internationally by several key FMIs (Financial Market Infrastructures) for their HVPS (High Value Payment Systems) in Japan, Switzerland and China. Several other global FMIs are now on track to adopt ISO 20022 messaging over the next five years.

  • In the Eurozone, TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) and EBA EURO1 will switch to ISO 20022 in a ‘big-bang’ implementation by November 2021.
  • In UK, Bank of England plans to migrate high and low value domestic payments like CHAPS (Clearing House Automated Payment System), BACS (formerly known as Bankers Automated Clearing Service) and FPS (Faster Payment Service) to ISO 20022 by 2024.
  • In US, the Federal Reserve and The Clearing House are planning to roll out ISO 20022 for High Value payments starting in Q1 2022 for their respective HVPS, Fedwire and CHIPS (Clearing House Interbank Payments System) systems.
  • In Australia, ISO 20022 is already been adopted for NPP (New Payments Platform) and FSS (Fast Settlement Service) schemes. Currently RBA (Reserve Bank of Australia) and APC (Australian Payments Council) are in consultation with stakeholders regarding the migration of payment messaging standards to ISO 20022 for other payment systems. They are planning to complete their migration by 2024 to be in sync with global adoption.

Challenges & considerations for Banks

As banks plan their migration to ISO 20022, they will have to address below challenges and considerations

Challenges:

  1. Data handling: Due to co-existence of both legacy and ISO 20022 formats, the banks will need to handle message requests in both formats. In the processing of payments, if the ordering or next in credit chain party doesn’t support ISO 20022 format, there is always a threat of data loss and data error during stepping up or stepping down to/from ISO 20022.
  2. Collecting enriched data at source: As better quality of data can be received only at the ‘Root of Information’, which is at the time of collecting customer data during KYC process. The KYC systems must be updated to source the data at its origin.
  3. Choosing right migration partner: Choosing a right partner for such migration process is also a very risky task. A right partner who understands the banks needs and does achieves desired result with an optimized solution will really make the difference.
  4. Customer Migration: If the corporates are not sure of the impact of the migration then they will be reluctant to make any changes to their systems. The challenge for banks will be to segregate which information to insulate and what to introduce to its customers in order to onboard them for this change.

Considerations:

  1. Which of their business flows can support the ISO 20022 standard?
  2. What data do their systems need to fulfill minimum requirements for the messages they generate?
  3. Can any transformation tool that converts MT to MX message, solve their problem of migration without impacting their business flows?
  4. What will be the cost of implementation?
  5. Will their correspondents be able to accept these messages?

With many questions, banks need to go to their drawing board and start looking into their business landscape. To maintain leadership in providing services to its customers, banks must adopt and plan to be ready to support CBPR+ compliant ISO 20022 messages and other High Value Payment Systems like – TARGET2, EURO1, CHAPS, Fedwire, CHIPS etc. SWIFT has planned to provide a VBT i.e. Vendor Test Bed to support testing of CBPR+ messages by June 2020.

Role of service providers:

With disruptions happening every day in the financial world, the scope and contribution of the third-party service providers and FinTechs are worth noting. As ‘Open banking’ gains ground, the necessity of structured data flowing across different parties is very evident. Across the globe, lot of FinTechs and service providers have already commenced building solutions for banks. In the MX migration journey banks will be starting to scout for novel solutions. This provides a lot of interesting opportunities for these FinTechs and third-party service providers.

HCL Services

HCL is a trusted engineering and consulting partner with more than 3000 industry experts helping financial institutions across the globe by providing its payment solutions. Through its strong engineering services and partner offerings, custom solutions and commercial Off the shelf products can be leveraged by financial institutions. HCL has a proven capability in implementing solutions for different payment schemes like SWIFT, SEPA, SEPA Instant Transfer, TARGET2, BACS, Faster Payments, Fedwire, NACHA, NPP, G3, MEPS+ etc. across the geographies.

HCL offers consulting services to the financial institutions who are looking for a partner in their journey of ISO 20022 transformation. Negating the liquidity risks that can arise in any mismanagement of such transformation process, HCL’s team of experts and products can perform thorough impact analysis of financial institution’s payment systems & their business implications and provide best in class solutions.

HCL is working on a suite of solutions to help financial institutions manage their ISO20022 transformation program. The solutions include

  • An ISO20022 message transformation solution leveraging an industry leading transformation with built-in support for CBPR+ specifications
  • An ISO20022 message simulator to quickly validate the request message and tailor the response for commonly used SWIFT MX and TARGET2 MX messages
  • An end-to-end processing solution which will natively support SWIFT MX and TARGET2 MX messages and provisioned to support all ISO and non-ISO based Payments/Messages.