ISO 20022 – Creating a cohesive payments ecosystem

The payments industry is at a crossroads. It’s witnessed many shifts: from the barter system to cash, from cheques to cards, from cards to digital banking and payments. Payments are now faster, more efficient, and more inclusive than ever before, with customer preferences being the primary driver for modernization.

But competition is fierce, there are many tech advances and regulatory changes and many new players have entered the payments arena. It has become crucial for financial institutions to invest in more robust payments capabilities to support demands for automated, real-time and cross-border payments, and adapt to changes that are here already, such as Open Banking and Open Finance. One major development that underpins a lot of payments innovation is ISO 20022, and banks need to adapt to stay ahead of the curve.

Harnessing the potential of enriched data

Besides cross-border payments, there are many domestic real-time gross settlement (RTGS) schemes migrating to the new ISO 20022 global standard in the coming years. The move from the pervasive MT formats standard to ISO MX, a consistent messaging standard, allows for the transporting of richer data sets. Users will have access to harmonized formats that would enable cross-cooperation and increase the interoperability scope between different market infrastructures. The migration brings major benefits: transparency, reduced risk, and improved fraud prevention. Seizing the opportunity means more capabilities for banks to automate processes and more efficient payments thanks to enhanced straight-through processing.

ISO 20022 offers a clear view of the payment lifecycle. We can see the purpose of a payment, the original source, who the beneficiary is, and relevant additional data. Understanding and categorizing these transactions can provide better reconciliations for financial institutions for greater accuracy and operational efficiency.

Having robust data can bring a better understanding of customer behavior, leading to a more personalized customer experience. Granular data will enable financial institutions to build better services and tailor different products based on these deeper insights into what their customers want and need.

For example, it can improve how banks make credit decisions. Traditional methods of credit scoring often exclude large groups of people who do not have the same spending habits or credit files, even if they are able to comfortably repay a loan. With ISO 20022, financial institutions can gain access to a wider range of datasets that can build a better picture of a customer’s “true” creditworthiness. Sources such as rent payments could be used for underwriting a loan for a mortgage.

At the same time, access to more data can also help identify risks and protect institutions against fraud, financial crime and from fines resulting from non-compliance. For example, consistent data tracking can streamline and improve Anti Money Laundering (AML) processes.

The future is uncertain

By November 2025, payment systems and any other connected back-office systems processing SWIFT FIN messages need to be ISO 20022 enabled, or a permanent translation solution must be implemented. The clock is ticking, and delaying the process can be dangerous.

Three transition models are available: the translation model, the complete overhaul model, and the hybrid model. This first approach involves translating incoming MX messages to the MT format and vice versa for outgoing messages. This is less disruptive, requiring a lower upfront cost. However, it can lead to heavy dependence on third parties and less interoperability. The lack of an ISO-native data model means that some banks won’t have access to the data insights and will miss out on high levels of automation. The conversion can also cause data truncation, leading to regulatory breaches in areas such as compliance, AML, and fraud.

The complete overhaul model requires a wholesale architecture transformation based on the latest payments and accounting systems. This approach can help financial institutions harness rich data and leverage new insights on the market and customers. Although it can be disruptive and require a heavy upfront investment, financial institutions can select ISO 20022 native platforms that fully leverage robust data and enhance straight-through processing while giving access to insights via payment analytics.

The third approach, the hybrid model, involves translation in some markets and complete overhauls in others. This approach can bring higher flexibility and the ability to localize a strategic response. However, the hybrid model can also lead to increased complexity.

Many current systems are unsuited for rich data formats or don’t allow the use of a translating tool. According to the study conducted by Aite-Novarica Group in partnership with Finastra, ISO 20022 will be adopted by many banks, especially smaller and mid-size banks, only as mandated because of the challenges around adoption. Another topic explored by this study is the creation of proprietary requirements, with 60% of respondents outlining the potential for banks to create proprietary fields. A few other challenges mentioned were the ability of businesses to consume the data (55%), navigating legacy applications not designed for XML (47%), and the need for parallel running of MT and MX (31%).

Banks must face the challenge head on

Even with these challenges, banks are already considering the complexities of these transition models, the rigorous timelines, and are taking this opportunity to rethink their end-to-end payments services. This is a momentous occasion for banks to reach beyond compliance, embrace new data insights, and deliver revenue-generating opportunities. It is also an opportunity for collaboration; banks can join forces with fintechs to make this transition as seamless and fruitful as possible.

This new standard is a significant step forward for the payments value chain. Many companies have already adopted it, and this shift will continue to unfold over the following years. The widespread adoption will create a more cohesive payments ecosystem, and standardization will facilitate innovations, enhance risk management, and improve the customer experience. To find out more, join the upcoming webinar on unlocking the power of ISO 20022 data hosted by Connect Global in partnership with Finastra.