Nitin Sirohi, TCS Financial Solutions
Stakeholders in the payments value chain and its ecosystem have always been innovating to deliver new products and services. Interestingly, in today’s world, they stand at the threshold of a global payments situation, which can deliver value manifold. ISO20022 standards are one such vehicle that will help realize this leap into future.
Traditionally, a payment transaction was considered as complete, when the transaction amount has reached the seller from the buyer, and through the intermediaries facilitating this transfer. In today’s world of financial services, this definition has to be extended to – not only having the payment completed in a stipulated time but also having the information relevant to the payment reach relevant stakeholders in its entirety with regulatory authorities being one among them.
The challenge of a successful and complete hand-off of a Payment (money as well as information) is addressed holistically in ISO20022 standards.
An interesting use case described below proves its advantage:
Party A is making a cross-border payment to Party B against an Invoice for a gross amount. Party A is also sending to party B the break-up of items (multiple items, e.g. > 10 in number, of various amounts adding up to the gross amount) in the same transaction. In the traditional set up of Payment systems, Party A will send this payment instruction to their Bank A in a format, which is proprietary , as in a MT101 or a similar message, only 140 characters (4*35X) of information can be accommodated. Even if this information is sent by Party A to Bank A, it will not be possible to send this information along with the payment over a MT103 message to Bank B owing to the restrictions on the size and structure of the Remittance information. ISO20022 has addressed this with 140 Characters* n occurrences as part of the payment initiation and clearing messages with provision for structured and unstructured information. Having this type of a remittance Information field in the customer instruction, pain.001, in the interbank clearing message, pacs.008 and in account statement, camt.053 greatly simplifies the complexity of managing reconciliations, statutory/regulatory reporting for payment transactions.
There are still challenges; e.g., in the interbank space regarding the size of data to be transmitted, which we will look at later in this article. Mass Adoption of ISO 20022 has the potential to revolutionize the integration of market participants throughout the banking and financial services industry and realize multiple benefits across business, operations and IT.
ISO20022 standards are:
- Being adopted by banks, corporate institutions and communities playing a significant role in the payments and cash management domain
- Already confirmed as the de-facto standards for the future for SWIFT
- Taken as the standard for building
- National Payment Systems in multiple countries
As in the adoption curve of any salient evolution, inertia against change is a significant barrier. There are leaders in some pockets and both adopters and naysayers abound in the industry – be it banks or customers. We believe that there are compelling reasons (and leading to compelling business cases) for the adoption of ISO2022.
The ISO2002 standard is more seen as a set of payment messages, which tends to hide the immense potential associated with it. When looking at adopting ISO20022, one needs to adopt the whole framework – business model concept, associated data and process model, the implementation guidelines, and the messaging. Once a team is trained in all of aforementioned areas, they will be able to deliver value consistently over a longer period of time, specifically when conversations take place about onboarding / connecting / exchanging data between bank and clients or a bank’s partners.
Integration becomes much more efficient and seamless when different teams are speaking the same language such as in EndToEndIdentification, UltimateCreditor, Remittance Information (Structured or Unstructured) and more so when these conversations take place over email or the phone.
We are in the era of ‘apps’ today and the future of ‘apps’ and collaborative platforms look bright. An app will very soon analyze the payment information available in an organization and deliver valuable outputs.
ISO20022 is becoming the standard of choice for new payments applications/ solutions being built—thanks to the prudent choice of XML (Extended Markup Language) as the de-facto standard for payment message exchange. Needless to say, no-one should be lagging behind or left out from creating or consuming these solutions simply because they are not part of ISO20022 standards.
XML being a language which is easily understood by both computers and human beings, is increasingly being used for development of web-based applications. Payments Data in the form of XML files can be rapidly integrated into web and mobile based applications.
Global, long-standing banking and financial institutions work with a plethora of formats for payments and Cash management services that they deliver electronically to their customer in different countries. Multiple versions and layers of mapping, truncating, expanding overlaying payments and cash management fields have built up in IT systems of a bank rendering even small changes for business or regulatory reasons, complex and time-consuming. Also, fixed length formats are complex to maneuver with higher risks of regression, when making a change. ISO20022 standards have captured the essence of the payments experience from multiple markets and formats. They provide a more comprehensive set of data types and sizes. Making a change in XML-based data exchange formats is comparatively easier with XML also lowering the cost of IT changes and risks of regression.
The case I had mentioned earlier in this article is a good example of enhancing STP. The structure and organization of data is greatly improved in ISO20022. Remittance information in structured and unstructured formats traverse without loss, from originating customer (Creditor or a Debtor) to their banks and over interbank clearing over to the bank of the beneficiary and, finally, to the beneficiary – enabling a true end-to-end reconciliation of information and closure of an open payable or receivable without manual intervention in major percentage of the payment volumes.
For corporates, even bigger efficiency gains can be expected in the form of improved liquidity controls and reconciliations based on enhanced information and intra-day frequency in Payment Status and Cash Reporting based on ISO20022 messages. As the adoption of ISO20022 gains momentum across financial institutions in multiple countries, corporates will also have an added advantage of better flexibility in changing banking relationships as per the business priorities and needs. Today, it is extremely difficult to move out of locked-in proprietary formats.
ISO20022 has included additional information about parties – including actual and on-behalf initiation, intermediate and receiving roles – which participate in payments clearing and settlement. This makes the task of extracting and sharing information with regulatory and compliance authorities easier compared to traditional payment data and process models.
As an upcoming area of higher levels of automation, ‘Exceptions and Investigation’ are heavily leveraging a set of 16 ISO20022 XML messages to deliver superior efficiencies. These new standards are in the phase of implementation by banking institutions and the number of adopters is increasing slowly but steadily.
Adoption of ISO20022
Common Global Implementation (CGI) Working Group, which was established in 2009 by major global banks, corporates, ERP vendors and S.W.I.F.T has been a determined step towards providing implementation guidelines for the adoption of the new standards by banks and financial institutions, as well as corporates. CGI has published implementation guidelines for Customer to Bank Instructions and Bank to Customer reports like Payment Status and Account Statement reports.
Existing EDI formats are seriously challenged in providing better reporting and reconciliation, and this is being recognized by industry participants, leading to continuous adoption of new standards. While SEPA implementation has been the flagship example, ISO2002 has seen adoption in Nordic countries in Customer to Bank and Interbank Clearing. CBI in Italy has adopted the standards for transformation of customer to bank space; the National Payment Infrastructure in India has moved firmly with the new RTGS and ACH being implemented on ISO20022 standards; Switzerland has adopted ISO20022 in transformation of domestic Swiss Franc payments in Interbank and Postal payments; Singapore is doing the same for G3 real time clearing; among others. There are many more cases showing a continuously expanding base of users of ISO20022 payments standards.
Recently, the Federal Reserve Bank of USA has initiated a dialogue on the transformation of Payment Infrastructure and Landscape of USA for the future. This can be another opportunity for the adoption of ISO20022 standards, which can provide a boost to global payment processing.
It be gross ignorance to give an impression that the velocity of adoption of the new standards has reached desirable levels. There are still challenges in the path of full adoption of ISO2002. One of the most critical issues is the viability of the business case to undertake such a massive transformation.
For retail customers, ISO2002 standards will benefit in a cross-channel experience on initiation and follow-up of their payment instructions. Infrastructures such as of real-time clearing are expected to be beneficial to retail customers. Such infrastructures are being built on ISO20022 standards and are appearing on national economic agendas across the globe.
Much needed acceleration of the adoption of ISO20022 needs to be triggered by the originators and recipients of payments and government and corporate institutions have a big role to play here.
For corporates, rather than looking only at processing of Payment instructions, the business case needs to include improved yield in liquidity and cash reserves. Upcoming evolutions and trends such as e-Invoicing and electronic Bank Account Management (eBAM), which will bring tangible returns on investment in short periods of time can also form the premise for the business case.
Central Banks or National Payment Authorities can take best practices and lessons learnt from the European payments Council, which have led the implementation of SEPA in difficult market conditions. It is not possible to conclude without mentioning S.W.I.F.T. in this context. S.W.I.F.T. has been playing the role of an anchor in the promotion and adoption of ISO2002 standards. The roadmap of the roll out of MX is underway, and S.W.I.F.T. is driving the migration of the National payments Infrastructure on to ISO20022 in multiple countries.
Myths and confusion exist about ISO2002 standards, which need to be clarified or resolved. As mentioned earlier, ISO20022 payments standards should not be seen as only a payment message format change, which in turn completely undermines its value proposition. XML being performance unfriendly is another misunderstanding. Innovation and evolution of technology has proven that the cost of storage, network bandwidth and processing power are non-issues as far as the adoption of XML-based solutions are concerned.
The Way Forward
Institutions with payments at the core of their business strategy need to build urgency in developing competence on ISO2002 standards by leveraging internal resource pools or engaging with consulting partners. New standards need to form the fulcrum of the IT application and integration strategy in the payments and Cash Management domain. This may need specific awareness and training programs to be conducted inside the organization. Software solution providers need to adopt ISO2002 standards at the level of the business process and data models to deliver true value for the investments their customers make in procuring IT solutions.
National Governments and Central banks would have to holistically review and promote ISO2002 standards and, wherever possible, incentivize the adoption, with an understanding that the new standards will provide the required assurance to the overall regulatory, statutory and economic wellbeing of the commercial ecosystem.
With market practice groups and communities engaging with multiple stakeholders in defining and refining ISO20022 standards, the industry is making a serious effort to make ISO20022 as the standard for future of payments Processing and Clearing and Cash Management. Now, whether it makes business sense to delay adoption is anybody’s guess, indeed.