If data is the new oil, ISO 20022 is the new gasoline

By | 3 minute read | February 4, 2022

The phrase ‘data is the new oil’ has been widely used in the last number of years, but in an unrefined state, it has limited use. ISO 20022 is refined and provides the necessary structure to efficiently drive multiple engines in a bank.

Background on ISO 20022

ISO 20022 was first introduced in 2004 to provide more standardization and deliver richer information for Financial Services transactions. The benefits of providing an enhanced definition for payment transactions include the following:

  • Improving automation to achieve higher straight-through-processing (STP) rates.
  • Leveraging rich data to provide value-added services, such as real-time fraud detection, automated reconciliation, etc.
  • Improving reporting and analytics capabilities through financial services transactions.
  • Leveraging artificial intelligence (AI) for more efficient processing of transactions and introducing market-differentiating services.

During the financial crisis in 2008, the trust levels of bank clients dipped. One client we worked with had a ‘trust’ equation on how to increase the trust levels of clients (new and existing) to maintain or grow their client base:

Trust equation: Trust = Transparency + Innovation

ISO 20022 helps with the right-hand side of this equation by increasing transparency and innovation to achieve end-to-end payment transaction visibility.

Current drawbacks associated with implementing

Introducing ISO 20022 into the bank requires a sizeable investment, which can deter customers. Existing back-office systems often do not speak the its language, so they either need to be updated or a translation service needs to be put in place. This is not a trivial task. In the case where translation occurs, the compliance officers are concerned about data loss — as a result, there needs to be a mechanism in place to ensure there is no loss. By adopting it on the cloud, however, banks can reduce such losses and improve the overall cost of ownership.

There is also a possibility that various implementations of ISO 20022 could diverge and lead to banks having to support multiple dialects of the ISO 20022 language. For High-value payment migrations, as an example, there are different usage guidelines for HVPS+ for Market Infrastructures and CBPR+ for SWIFT cross-border payments. Currently, SWIFT oversees the ISO 20022 standard, so we expect coordination and harmonization will occur based on their long-standing experience in managing standards.

Evolution of ISO 20022

In the payments area, ISO 20022 has been used for the last 15+ years. In Europe, it’s been used since 2008 for cross-border payments under the Single Euro Payments Area (SEPA). Adoption was slow to start until it was mandated that all domestic ACHs in the Europe zone use SEPA. According to the European Payments Council, simplicity, convenience and efficiency are the three core benefits of SEPA.

In more recent years, there has been a move worldwide to adopt ISO 20022 for instant payments, high-value payments and bulk payments. European high-value payment systems —Target2 and Euro1 — will do a migration to it in November 2022. Accordingly, SWIFT cross-border payments will start the migration to it with a completion date of November 2025. In the U.S., the Fedwire and CHIPS payments systems will migrate to it in the coming years.

The future of payments

With the move to digitization accelerated by COVID-19, there will be a growing number of instant payment services using ISO 20022 in the coming years. Initiatives like the ‘Request to Pay’ will lead to new innovations in the payments space and likely increase the volume of electronic payments and the need for instant payments in particular.

The rich data that is provided will fuel the drive to efficient payment engines, fraud detection engines and analytics engines across banks worldwide. The structured nature of this ISO 20022 fuel also provides the opportunity for banks to innovate with emerging cloud-native technologies, such as artificial intelligence (AI) and machine learning (ML) for more efficient processing and reporting of financial transactions to change the payments world as we know it.

Learn more about how IBM Financial Manager can help with your payments and ISO 20022 journey.