At its most basic level, ISO 20022 is a global messaging standard set by the International Organization for Standardization (ISO) that can be used for all types of financial communication.
To dig deeper into what ISO 20022 is and why the payments industry should embrace the shift towards adoption, PaymentsJournal Editor-in-Chief Ryan McEndarfer had a conversation with Isabel Schmidt, Global Head of Direct Clearing and Asset Account Services, BNY Mellon Treasury Services.
Defined by the ISO, ISO 20022 is “a single standardization approach (methodology, process, repository) to be used by all financial standards initiatives.” It is independent of the organizations and networks that use it.
ISO 20022 stands as a comprehensive representation of the business model in the financial services space. In Schmidt’s words, it is essentially a business dictionary for financial services: “It defines who the actors are, their roles and responsibilities, and the information they need to exchange; and it defines them from their singular business components and elements in the financial services ecosystem.”
The ISO 20022 standard creates logical messages that support business processes within this ecosystem. This is important because the industry today runs on a patchwork of messaging systems and standards.
In other words, there are numerous types of messaging covering different forms of payments, in different geographical areas, all ultimately trying to accomplish the same thing. For example, cross-border payments are generally sent through the SWIFT message type (MT) system, while ACH payments use different standards.
Payments organizations need to prepare to have the capability to source, store, and process data that is more structured and granular than what they can handle today. Accordingly, larger changes in infrastructures and processing will be needed for a successful global rollout of the ISO 20022 standard.
What this actually looks like, noted Schmidt, is that there will need to be changes made to areas beyond payment and financial messaging platforms. Implementation will require extensive coordination for ISO to be implemented as a global standard. How data is collected and stored, how risk and account systems use it, how it is reported, and other factors must also be taken into consideration.
As a result, it will take substantial time and effort for the industry to reach the global “Nirvana” moment of interoperability. The current global rollout plan in the cross-border payments space for ISO 20022 is from 2022 to 2025, as not every major system will be migrating to ISO at the same time.
If rolling out the standard is going to be so challenging, why do it at all? Through the widespread adoption of ISO 20022 by the payments industry, innovation can become quicker because a single standard makes interoperability, process automation, and an improved client experience possible.
Digitization is the name of the game in the modern world, so it no longer makes sense for payment networks and processes to be unable to operate seamlessly—and as of now, many of them don’t. Since ISO 20022 clearly defines the business model in a granular and structured way, it can enable the automation of processes that are currently still largely manual.
In addition, the ISO standard comes with enhanced remittance data information far past the capabilities of SWIFT. “Rich and structured remittance data allows the receiver of a payment to much better automatically reconcile funds received, assign it to a counterpart, reduce day sales outstanding, and create capacity for new sales,” Schmidt added.
Lastly, as processes become more automated and there is a corresponding decrease in friction across the payment lifecycle, organizations can invest their time and energy into new prospects that deliver added value to clients instead of having to dedicate time to solving issues.