ISO 20022: The future of payments

Nick Botha, Global Payments Sales Manager at AutoRek, shares his views on the purpose of ISO 20022, and its impact on the payments industry.

Late last year, ISO 20022 became the open global standard for the exchange of payment messages. After a series of delays, the 20th of March this year marked the start date for organisations within the SWIFT community to begin migrating onto the platform. The industry goal is to make ISO 20022 the priority language for payments by 2025. Firms now need to make the decision between adopting this standard as a priority or delaying their transfer, which could risk them being left behind.

Most payment firms around the globe send and receive messages in different formats. Previously, it had been down to each individual organisation to determine how they wanted to format data, which naturally created a huge number of intermediaries and required multiple different setups. This difference in formatting would often cause unforeseen delays in payment processing, which in a worst-case scenario, could leave people vulnerable as they await receipt of much-needed funds.

ISO 20022 is intended to simplify this process by implementing a common language for payments worldwide and facilitating the seamless cross-border activity required for today’s globalised, digitised economy. It also aims to standardise and enrich payment data.

According to our recent Payments industry outlook 2023: Strategic priorities, operations, regulation and data report, the majority of US firms expect there to be an increase in the number of payments methods in the next two years (69%), whilst almost half of those in the UK agree (48%). Therefore, this common language will be essential to ensure payments are sent and received safely. This user-friendly approach to payments is also the reason behind the roll-out’s delay from November 2022 to March 2023, as market infrastructure platforms are determined to make the process as seamless as possible before the platform was rolled out worldwide.

While March marked the start of mandatory migration, the standard itself is not new; it is already operational in over 70 countries, with plenty of firms having adopted ISO 20022 early. As with any new regulation, firms that have yet to adopt the standard have two choices: the first is to look at it as another mandatory burden carrying a short-term impact on the bottom line. The second (and more helpful) is to view it as an opportunity with long-term transformational effects.

By harmonising global payment systems and enabling straight-through processing (STP), ISO 20022 eliminates several common sticking points and manual inputs in financial transactions and enables faster, more efficient, and more accurate data exchange. This will have long-term benefits for all involved.

Through the implementation of a singular language, ISO 20022 offers significant flexibility to payments firms, making them more responsive and resilient to market shocks, economic shifts, and emerging technologies. This will create a global harmonisation within payments systems and infrastructure on a scale not previously seen.

Another impact of ISO 20022 is better quality data. Not only will this enhance fraud detection and prevention in payments, but it will also promote competition and innovation in the sector to the benefit of end consumers, businesses, and national economies alike. Additionally, the new standard provides the basis for enriched data and advanced analytics – a vital capability for data-driven decision-making.

ISO 20022 is not just a new database being put into place for ease or convenience to banks; it is also a safer platform for payments. Since the system uses an agreed-upon language, including terminology and format, across international sectors, there is less risk of fraud. It also requires more information about both the sender and beneficiary of payments, keeping transactions secure. 

ISO 20022 prioritises customer protection with enhanced purpose codes to supply 40 various choices to ensure better alignment with any payment scenario. Besides payment codes, which have existed for some time, the platform creates Legal Entity Identifiers (LEI). LEIs uniquely identify all legal entities under a 20-character alpha-numeric code. This extra step allows for an added verification layer, which is especially important as countries slowly transfer their payment databases to the platform. All of these extra precautions revolve around customer protection.

Updating the way data is handled is not a minor undertaking, nor is standardising data sets and adding new complex data formats to the mix. This must be managed carefully and with precision to prevent false or inaccurate data from sneaking into systems and creating new problems. 

ISO 20022 will have an impact on internal workflows, as payment firms will need to upgrade infrastructure to handle the enriched data running through their systems. This could, in turn, affect those downstream of the main payment platform. With larger data sets and analytics demanding greater computational power, there is also a risk that the speed at which data is processed becomes unacceptably slow. 

These internal processes are easy for industry professionals to understand the complexity of, but the main concern becomes how stakeholders will perceive them. As the platform is in the beginning stages of rollout as a compliance regulation across the UK, payment processors must keep careful watch of external landscaping issues that may need to be rectified. ISO 20022 has the potential to drastically change existing relationships with banks, customers, and other participants in an organisation’s payments ecosystem, meaning extra care must be taken.

At its core, ISO 20022 is a change in messaging format. It should not affect either the number of transactions undertaken or the number of people undertaking them. Once the transition is complete, it should not radically shift either revenues or the volume of transactions in the market. 

What it will do is impact the infrastructure of the payment space.

As such, firms should first establish the best possible processes and systems for transitioning to, and then operating in, an ISO 20022-compliant environment in the back office. They should then move the setup through the middle to the front office. It is important to recognise that firms should follow these processes to guarantee the most efficient and least disruptive path to implementation. 

The future is here, and its name is ISO 20022. Firms no longer have the luxury of ignoring front-office technology, as both compliance and progress demands continue to push themselves to the forefront. March marked the beginning of a new era in payments one in which firms across the world are seamlessly able to communicate with one another using the same format, language, and standards.

About Nick Botha

As the Senior sales representative for Payments and digital banking firms at AutoRek, Nick is responsible for managing client relationships within these sectors and engaging with stakeholders to ensure AutoRek’s product offering is in line with the market demands. He previously worked in one of the largest private banks in South Africa and the UK and has worked with some of the biggest financial institutions across the globe since joining AutoRek in 2019.

About AutoRek

AutoRek is a leading software provider to companies in the global financial services sector.  Its clients span the asset management, banking, and insurance sectors and include retail, investment, and commercial banks. An industry leader at the forefront of financial data management, AutoRek’s customisable rules-driven platform allows firms to automate and streamline the collection, validation, and reconciliation of data. This facilitates the necessary transparency to fulfil regulatory obligations and ensure good governance.