SWIFT: The Road To ISO 20022 Adoption

PYMNTS recently spoke with Saqib Sheikh, global head of SWIFT’s ISO 20022 program, to learn more about SWIFT’s commitment to assist the financial community in the transition to the new standard in cross-border payments: ISO 20022.

Cross-border payments are a fragmented space with disparate standards, service levels, and compliance and reporting regulations varying from country to country.

Financial institutions have relied on their own IT systems, operations teams, the SWIFT messaging service and domestic payment schemes to acquire, construct, screen, relay and report customer payments. These infrastructures and processes form the backbone of the global correspondent banking model. The data underlying payments in this ecosystem can be interpreted, translated, truncated, enriched and corrected multiple times in the course of remitting funds from debtors to creditors. This is a complex proposition for financial institutions that can create challenging experiences for their customers.

In 2004, financial institutions around the world had had enough. Fed up with disparate standards and poor data plaguing the cross-border payment lifecycle, and in need of a financial standard that would be rich, granular and consistent, the International Organization for Standardization launched a standard for the future: ISO 20022.

Since the launch of ISO 20022, adoption has gained incredible momentum with financial institutions worldwide. As the world’s payment market infrastructures and their currencies complete their adoption of ISO 20022, they are reaping the benefits that interoperable and data-rich standard can offer. With a common language, payments increasingly have more reach, are processed faster with fewer manual interventions, and are more meaningful with richer remittance data.

To advance these benefits to the global financial community, SWIFT is facilitating the adoption of ISO 20022 in cross-border and domestic FI to FI payments and reporting messages.

Richer Data With A Little Help From Our Friends

While there are many benefits to adopting ISO 20022, the key factor that has consistently garnered the most attention is the delivery of richer payments data.

“All major reserve currencies — the Euro, the Dollar, and the Pound Sterling — plan to adopt ISO 20022 within the next two to five years, and several countries have already instituted the standard,” Sheikh said. “Market infrastructures in China, India and Japan have used it for a long time, and as the remaining major currencies adopt ISO 20022, we are receiving more inquiries from banks with questions about how to accelerate their own move to ISO 20022.”

However, at the moment, not all financial institutions are using the standard.

“This means institutions sending rich and structured data using ISO 20022 will see that data truncated further down in the payments chain,” Sheikh explains, noting that this is due to the fact that previous standards were never designed to carry the amount of high-quality data that an ISO 20022 message contains. Banks using these previous standards can run into difficulty ‘translating’ the rich data of an ISO 20022 message.

“When such a mistranslation occurs, a bank can witness significantly degraded service quality for their customers and compliance issues for downstream banks if originator and beneficiary details are incorrect or incomplete.” Cross-border payment messages carry a significant amount of risk-bearing information, so they must be both complete and accurate, or payments can be held up.

Issues like these have prompted many banks within the SWIFT community to approach SWIFT directly to ask for the creation of an initiative that will help the 11,000+ institutions on its network to either adopt ISO 20022 or become interoperable with those that have.

A Gradual Move With Big Benefits

At the request of the community, SWIFT agreed to act as a facilitator in the adoption of ISO 20022. SWIFT is easing this process by facilitating a coexistence period to help financial institutions progressively adopt ISO 20022 in different markets before SWIFT MT standards are eventually retired. The program’s design stage is complete and the testing phase will begin soon.

Sheikh said migrating to ISO 20022 gradually rather than taking a “big bang” approach will be key to its adoption. Abrupt and sudden changes are not only hard to implement at the institutional level, but also bring risk because your correspondents must also be ready for the change.

SWIFT has also ensured that financial institutions adopting ISO 20022 later in the coexistence period are not impacted by early adopters. “SWIFT will provide translation services in-network such that those receiving ISO 20022 payments will also receive the SWIFT MT equivalent message,” Sheikh said. “This will allow banks to process payments as they do today, until they are ready to move to ISO 20022.”

To get the community on-board has meant working to communicate the benefits of adopting ISO 20022, which extend far beyond payment teams alone. Adoption of the standard will also mean significant cost reductions for compliance teams, who deal with a high volume of false positives resulting from poor quality or incorrectly formatted data.

For example, cross-border payment recipients whose names feature sanctioned countries, such as a restaurant with Cuba in its name, can inadvertently trigger investigations, adding time and money to the process — as the transactions are manually reviewed.

“The format of ISO 20022 gives you structured fields, and it makes those fields mandatory in specific use cases,” he explained. “So when you make the payment, you make sure you put ‘Cuba’ in the structured name field so that screening systems know not to flag it and trigger an investigation.” This means saving compliance teams a lot of manpower by reducing the incidence of false positives, but it also means allowing them to focus their attention on solving more significant problems.

The global financial community is well on its way to adopting ISO 20022 as its language for payments. Many financial institutions have already incorporated it into their everyday operations, and those that have not are not far behind. SWIFT will add value to our community by giving them the documentation, tools and support they need during the move to ISO 20022.