Banks will embrace a variety of innovations in the years ahead as cutting edge technologies, such as artificial intelligence and digital assets, define the future of the financial industry. But these emerging fields are likely not the most impactful changes on the horizon. That honour might go to a seemingly mundane initiative: a global overhaul of payments messaging.
Payment messages – the means by which information is exchanged about a transaction before money changes hands – may not be exciting, but it is important to ensure successful execution. Messaging, and the language used in it, are an essential part of financial market plumbing, a series of pipes that facilitate the flow of money around the world. Today, these messages are not standardised. As the payment information moves from pipe to pipe – or, more precisely, from one messaging format to another – some of it can be lost or altered. At best this delays payment settlement, and at worst it proves a significant obstacle to automating transaction flows.
In order to overcome these challenges, the industry has embarked on an ambitious project to replace and standardise the existing financial messaging architecture. The preferred format is ISO 20022 – and over the next few years all payment actors, from market infrastructure to banks and corporates – will introduce the new standard or lose access to core payment networks.
In doing so, they will technically alter all existing payment systems – and, in the process, transform payment services and even global commerce. But there is a staggered rollout between regions that is adding complexity to an already challenging task.
A common language
The most far-reaching change in the messaging overhaul will be global money-transfer network SWIFT’s requirement for bank members to receive new industry standard MX messages by November 2022 and send them no later than 2025. MX is based on the ISO 20022 messaging format being adopted by payment infrastructure providers around the world and is designed to promote error-free, quick and transparent cross-border payments. The new format will also give banks much greater payment insights, which will facilitate the development of innovative products and services, as well as analytics.
‘When banks start to understand better which markets customers’ payment flows are going into, they can develop optimal FX products and a range of risk management solutions,’ says Isabelle Bouille, principal product manager at BNY Mellon’s Treasury Services unit. “They can measure how often customers make payments and to which jurisdictions—all sorts of information that can be leveraged to serve clients better.”
All this is expected to come about because MX will be the common language that all SWIFT participants use, compared to today’s ‘MT’ messages. And unlike MT, it will offer highly-enriched, structured data that is paired to different business activities, allowing payment providers to send money with greater straight-through-processing (STP), accuracy and trackability.
Harmonising without harmony
Unsurprisingly – given the scale of the project – the road to ISO 20022 has been far from straightforward. The project to harmonise global payment messaging is – rather ironically – not itself harmonised. This is creating several hurdles.
The first challenge arrives in November 2022, when all banks must be able to receive SWIFT’s MX messages and those operating in Europe must ensure their own payment systems can send and receive full ISO 20022 compliant messages in order to continue using the region’s Target2 and Euro1 high-value payment systems.
All banks must be ready to receive cross-border ISO 20022 messages by this November. Those not yet ready to process full-blown ISO 20022 messages can take advantage of SWIFT's FINPlus ‘In-flow Translation’ service, which translates ISO 20022 messages into the MT format.
For domestic high-value payments, however, some banks will have more time to prepare. In the US, for example, banks must be ready to receive and send ISO 20022 messages domestically when their high-value payment systems go live with the new standard. This transition may not be fully seamless because it remains to be seen whether the two US high-value payment systems, CHIPS and Fedwire, will be migrating at the same time, with only CHIPS having an intended go-live date set in November 2023.
For cross-border payments, those not yet ready to process full-blown ISO 20022 messages can take advantage of SWIFT's FINPlus In-flow translation service, which translates ISO 20022 into the MT format.
Before November, any bank facilitating cross-border payments must ensure its SWIFT interface, or that of its vendors, is ready to receive those translations. “It’s a different process from the one to consume MT messages that the bank has been running for many years,’ said Stephen Lindsay, head of standards at SWIFT.
Banks must also consider the associated compliance obligations. A bank processing the translation in messaging formats may still have to screen data sent in the full MX message that pertains to sanctions, anti-money laundering, and other legal and regulatory requirements, requiring it to develop a way to store the different sets of data.
The fact that payment infrastructure providers and banks will be migrating at different times does create a longer-term challenge. FINPlus enables banks without full ISO 20022 capabilities to process the MX translations. But faster-moving banks that can process the data-rich MX messages in an automated fashion must still accept MT-style messages – and this may require extra steps to process through 2025.
The competition will likely pressure banks to adopt the changes sooner. After all, the long-time goal of aligning physical and financial supply chains and transporting data efficiently from one to the other, using a common messaging format, is now within reach. The possibilities of what they can do with the newly enriched data are also becoming clearer.
‘Such interoperability will create better, faster payments, credit transparency, less friction - essentially all of those things that enable more efficient supply chains,’ said Andrew Foulds, director of EMEA clearing solutions at Fiserv.
Foulds said he views ISO 20022 more as a common language than a standard. That may be a useful way to look at its adoption globally since regional payment infrastructure providers around the world are migrating to different variations—different dialects—at different times. Some already use earlier, less detailed messaging standards that banks will have to accommodate, and many regional payment infrastructures are upgrading legacy systems to implement ISO 20022 rather than build new, more efficient platforms.
That can be ‘quite an uplift,’ according to Luke Perkins, head of global cross-border payments at ANZ Banking Group, potentially resulting in nuances banks must take into consideration. To be sure, differences between payment infrastructures is nothing new for banks. But the staggered ISO 20022 migration means having to monitor and adjust for new and shifting differences over the next few years.
Longer term, regions may have different data requirements for cross-border payments: Whether they be purpose-payment codes, regulatory-reporting codes, or something else, the different languages will be reflected in their payment infrastructures and the messaging requirements banks will have to recognise in their payment systems.
‘Therein lies probably the biggest long-term challenge in terms of cross-border payments,” Perkins said. “Aligning cross-border and local payments will create the need for translation between the two.’
About Isabel Schmidt
Isabel Schmidt is Head of Product Management, Global Clearing and Asset Account Services for BNY Mellon’s Treasury Services division. With more than 20 years of experience in global cash management, strategic planning, business development, as well as risk and regulatory management, she shapes and executes the product strategy for USD, EUR and GBP clearing services to domestic and global clients and banking and cash management services for non-bank financial institutions. Prior to joining BNY Mellon, Isabel was responsible for leading Deutsche Bank’s Product Management function for all Cash Management products in the Americas.
About BNY Mellon
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