Why ISO modernization is so important for financial institutions

With the migration to ISO 20022 financial messaging standard, the world is moving toward a standardized system of payment messaging. ISO 20022, which SWIFT will enable for cross-border payments beginning August 2022, will significantly benefit financial institutions (FIs). But these institutions’ journey to adoption may prove quite challenging. To successfully implement the new standard, FIs will need a comprehensive solution for translation between legacy message formats and ISO 20022.

Opportunities in ISO 20022 adoption

This transition offers a golden opportunity to enhance how payments operate. In a world of instant payments and escalating payments fraud in the digital payments space, we must take this opportunity to reduce fraud, enhance compliance and build a better, more robust payment infrastructure. Ideally, a solution will offer ongoing interoperability across the different ISO-compliant payment networks.

Since the standard, and its adoption, continues to evolve, the solution must be future-proofed for ISO 20022 changes as they occur. An ISO-native solution will make it easy to adopt new requirements as they are published. Businesses will have the option to integrate payments into their complete order-to-pay business processes, instead of having to use separate business processes to invoice, receive a payment and ultimately reconcile that payment. The integration simplifies the process from start to finish.

ISO-native messages can contain more data than under previous standards. By leveraging this additional data, FIs can reach a higher standard of protection against financial crime, AML and sanctions. Businesses can better manage cash and liquidity risk through faster cash application, and both corporations and FIs can predict cash flows.

With easier access to standardized data sets, FIs can get data analytics faster and use payment stream data to provide business intelligence not previously available in other payment streams.

Developing an ISO API-enabled Transformation layer helps FIs create a business strategy that clearly defines the differentiated experiences and products the firm offers. And with an ongoing focus on the ISO APIs, FIs can connect to their ecosystems to deliver on their differentiated experiences and products.

With an ISO 20022 message-based API transformation layer solution, an FI can transform its legacy payment system messages into an ISO 20022-specific message format for the downstream system. This is almost a prerequisite for many FIs to bridge the gap until they have native ISO 20022 capability in their systems.

Accommodating legacy payment formats

Legacy proprietary formats such as SWIFT MT are already well-known and widely used in the industry, so it will take time to get used to ISO 20022. There is a strategic opportunity to allow for a few years of coexistence between legacy and ISO standards. But it is important to provide end-users with an interface that shows original and converted messages clearly and unambiguously, while providing functionalities that realize the value of ISO’s rich message fields.

A successful adoption of ISO 20022 should meet several objectives: reduce IT complexity, enable agility, enable partners, integrate seamlessly, and comply with regulatory requirements. These objectives may sound familiar: they are objectives for most FI IT systems generally. But they take on heightened importance when prioritizing ISO 20022-enabled systems.

This is especially true for the first objective, reducing IT complexity. Simply adding in an ISO 20022 layer to an existing complex system as a tactic to address the immediate gap may solve the immediate issue, but it does not address the longer term strategic objective of reducing complexity. In fact, as one moves to ISO 20022-native architectures and processing, a tactical solution may be throwaway or even a barrier to meeting that objective.

The future of financial messaging is still being written with respect to ISO 20022. But long-term strategic planning can’t wait. Institutions that adapt now will be better prepared for future changes.