Payment systems and schemes around the world are migrating to ISO 20022 data standards as part of modernisation initiatives that typically involve the introduction or upgrade of real-time clearing and settlement infrastructures.
The improved structure of ISO 20022 data standards enables the transfer of rich remittance information with a credit transfer, which helps financial institutions and their customers to improve operational efficiencies, monitor fraud and risk, and provide other business insights
We invited our partners at The Clearing House to consider the opportunities beyond speed, leveraging ISO 20022 standards to create better experiences for people, businesses and financial institutions alike.
In November 2017, The Clearing House, a private firm owned by 24 of the largest US banks, launched a real-time payment service called the RTP® network in partnership with Vocalink, a Mastercard company. “The impetus for developing the RTP network for the US was about improving and driving the electronification of payments for banks and their customers,” says Peter Davey, head of product innovation at The Clearing House. “Financial institutions, third parties and their customers can leverage those tools to create better experiences in a 21st Century digital world.”
The RTP network uses ISO 20022 data standards to enable a range of payment and non-payment messages. “This makes it a very conversational system,” says Davey. “It allows you to ask a question in context of the transaction and within that same secure channel. It’s a really key component in contextual commerce.”
Perhaps the most talked about new message, though not strictly exclusive to ISO 20022, is ‘request to pay’, which allows a biller, for example, to issue a digital payment request for goods and services and enables the payer to determine how to respond. This makes it a viable alternative to existing bill payment methods such as direct debit, or payment in cash or cheque. “‘Request for payment’ (or ‘request to pay’) is giving the industry an opportunity to reinvent how bill pay is done,” says Irfan Ahmad, senior vice president for product development at The Clearing House.
“I think that's going to be the message that starts transforming how ISO 20022 is used a little farther upstream from the payments message and how it will get involved in bill pay type of activities and then broader commerce.”
Other messages using ISO 20022 data standards can also help grow trust in digital payments: “[Real Time Payments] includes an acknowledgement message that can be passed between parties to allow them to understand that something has been completed.” This surety, combined with the finality of the real-time credit transfer, can help overcome some people’s concerns relating to digital payments. It also goes a long way toward improving the user experience.
As Ahmad explains: “Imagine you're paying your credit card bill, or maybe you're reimbursing a friend for lunch, and within a couple of seconds you've gotten the ping back that the payment didn't go through… You now have an opportunity to resolve that issue right there and then.”
On the credit confirmation message, he continues: “It’s not quite as sexy as the request for payment message… but the value it adds has really transformed how corporate customers are looking at the value of ISO 20022 in context of a real time payment scheme.”
The benefits of ISO 20022 can range far, but they tend to accrue over the long term. The significant initial investment required in cost and resource creates a potential stumbling block for implementation. But despite these initial difficulties there is a strong business case to move forward.
Early adopters have shown that migrating to the standard causes less disruption to financial institutions’ back-office processes than is commonly thought: ISO 20022 offers backward compatibility, meaning it can be easily incorporated into existing back-office systems — the principal effort will be in adapting to the new message formats and connectivity requirements, and there are various technology providers that offer a solution.
At least one industry commentator has questioned whether ISO 20022 data standards provide for too much data. Ahmad is inclined to agree: “You’ve migrated to a data rich standard, but your systems may not have initially been designed for something that was so data rich.” And on the front end, financial institution may find they have to reengineer business applications to cater to it. “Finding real estate [in your consumer-facing app] to incorporate additional data can be can be a challenge.’”
We shouldn’t deny there are difficulties for financial institutions and other service providers to overcome, but making the effort to do so can drastically improve internal efficiencies and create better experiences for end users.
Realising the full benefits of ISO 20022 data standards will depend, to a certain extent, on the industry coming together. That’s something The Clearing House counts among its top priorities. Davey: “One of the things that you do as a network operator is fight for capabilities that lots of parties can leverage and work together to create new capabilities for their customers.
Making the investment now is an investment for the future: “With some of the legacy formats, there wasn't as great a degree of flexibility in terms of how those messages worked. In fact, the cost per change of those message types is very expensive,” explains Davey. “ISO 20022 gives much better capability in terms of managing message standards so that if changes are required in the future, the lift isn't nearly as high as it is with some of those other fixed format capabilities.”
In an increasingly competitive landscape, where both businesses and consumers are demanding new solutions from their financial Institutions, ISO20022 data standards are a necessary lubricant greasing the wheels of innovation and competition.
Back to Davey: “We now have something that can be leveraged with 21st Century technology and beyond for creating capabilities for our customers that inspire trust, that provide for a better degree of automation and align with business processes … I'm very excited about the adoption of these various different messages.”
2020 was set to be the year that most financial institutions migrated to ISO 20022 data standards, with the first implementation deadlines scheduled for 2021. Then the global COVID-19 pandemic hit. SWIFT announced its decision to delay its migration in March without reference to any COVID-19 related pressures, but the European Central Bank’s decision to delay its T2-T2S consolidation by 12 months cited both SWIFT’s decision and COVID-19 as key obstacles on the path to effective migration.
We asked Ahmad, who is involved with the ISO Group on standards, to predict the short- and long-term implications. “There’s been a bit of a slowdown from a practical standpoint,” he says, “but folks are still actively looking at how to leverage the standard. Certainly, when you look at the US community and the RTP network, we continue to see a lot of institutions… [that are] continuing to invest and make that change because they see value in it.”
So while the pandemic may have bought straggling institutions a little more time, the industry still senses the urgency. Meanwhile, Ahmad says, banks’ large corporate customers and the vendor community are continuing to drive adoption.
There's no doubt that ISO 20022 delivers operational efficiencies while promoting and supporting the development of advanced products and services for people, businesses and governments alike. Financial institutions that fully exploit the functionality of ISO 20022 can save time, resources, mitigate risk and support compliance while growing new revenue streams.
However, the industry is only scratching the surface of innovation. With its extensible message set and support for different alphabets and special characters, ISO 20022 messages can easily be adapted and reshaped to meet the needs of yet unknown requirements.
So what will the future bring? “We’re going to see a lot more automation and see the ISO standard built inherently into applications,” he says. He offers the example of ride share apps that integrate payments seamlessly within the user’s digital experience. “I think that's where the industry is ultimately going to go if players continue to incorporate things like ‘request for payment ‘or ‘request for information’ into how they conduct commerce.” It’s an opportunity, he attests, for financial institutions to become more involved in the broader aspects of the payments journey.
In an increasingly competitive landscape, where both businesses and consumers are demanding new solutions from their financial Institutions, ISO 20022 data standards are a key enabler of competition and innovation.
Our internal analysis shows that two thirds of countries with real-time payments have access to a system based on the ISO2022 standards. Universal implementation of the standard leads to interoperability between players, both within domestic payment systems and internationally. “It becomes a de facto standard for how money moves,” Davey explains.
Payment rails that use ISO 20022 data standards enable financial institutions to develop new ways of creating revenue while improving cost and time efficiencies. At a time when traditional sources of revenue are subject to growing pressures, it's vital that institutions develop new ways of adding value to existing and new customers while at the same time, solving increasingly complex problems in a digital age.
As the shift to ISO 20022 picks up pace globally, those financial institutions and corporates that stay wedded to older standards risk being left behind.