The payments industry is undergoing a quiet transformation. New market infrastructures, such as instant payment systems, are appearing in every major market. Meanwhile, existing systems – from domestic ACH to high-value – are being upgraded to offer easier access, better services and lower transaction costs.
Underpinning these initiatives is a common standard – ISO 20022 – an open international standard that defines key business processes and data, and is compatible with existing and emerging technologies. The main benefit of a common standard is clear: end-to-end consistency of data and processes leading to cheaper, faster automation of transaction and compliance processing. It will also, not to forget, lead to improved customer service.
Unlike many of the legacy formats it replaces, ISO 20022 provides detailed, well-defined structures for important information – including all the parties involved in the payment, rich remittance information and payment purpose details. If ‘data is the new oil’, ISO 20022 data is the refined stuff, ready to power big-data applications like business intelligence and customer insight.
The payments market in the UK is one of the leaders in the move to ISO 20022. Ambitious plans foresee a movement of the country’s key domestic schemes, Faster Payments and BACS, and its RTGS system (currently CHAPS) to a common ISO 20022 format. The UK’s Open Banking initiative also specifies ISO 20022-derived API specifications to ensure that payments data, whether exchanged via message or API, is well and consistently defined along the entire value chain.
A new body – the New Payment Services Operator, NPSO – has been created to manage the transition of the domestic schemes, working closely with the Bank of England, which is responsible for the new RTGS implementation.
The Bank’s most recent consultation identified several key benefits of ISO 20022 for the UK:
Increasing resilience and reducing risk. In particular, moving to a common standard makes it possible to switch payments between different schemes – for example, from RTGS to Faster Payments, should any disruption to one of the services occur.
Improving UK productivity and outcomes for users of payments. Convergence on an aligned standard reduces barriers to entry for Payment Service Providers (PSPs), encouraging innovation and the development of value-add services for end-users.
Enabling organisations, households and policymakers to take more informed and effective decisions. ISO 20022’s richer data will help ensure that users of payment systems receive better services; it will support greater competition in the provision of value-added services across PSPs; and is a resource to ensure policymaking is effective and timely.
Adoption makes even more sense when an international dimension is considered. In the eurozone, the Target high-value payment system will switch to ISO 20022 in November 2021, and in the US, the Federal Reserve and The Clearing House plan to roll out ISO 20022 for high-value transactions starting in Q1, 2022. We estimate that, by 2023, around 80% of the volume and 90% of the value of high-value payments worldwide will use the standard.
For global banks that participate directly in multiple high-value payments systems this is a great opportunity to consolidate and re-engineer payment services and applications around a single common data model. The only missing piece of the puzzle is cross-border payment messages, where the SWIFT ‘MT’ standard is currently widely used. ISO 20022 for cross-border would enable payment transactions that originate or terminate in a high-value system to benefit from rich, consistent data end-to-end.
Following a detailed industry consultation, SWIFT now plans to facilitate a migration of cross-border payments to ISO 20022 to coincide with adoption by the high-value systems. This is a complicated proposition, because the SWIFT community encompasses 10,000 banks of all sizes and types – and it will be critical to ensure all remain interoperable while migration is underway. It is envisaged that a centralised translation service will help to guarantee this – along with other measures both technical and organisational.
A common standard model for payments worldwide is a big prize, with major long-term benefits for the industry and its customers. While there is much more work left to do, that prize is finally in sight.