FX International Payments
By Bill Camarda
ISO 20022 is designed to enable organizations to communicate information across a wide spectrum of financial services applications: the standard’s creators envisioned applications in payments, securities, trade services, cards and foreign exchange.2 These areas, of course, have very different requirements. ISO 20022 doesn’t directly address the specific requirements of all of them; rather, it provides a consistent framework and tools to help others do so more quickly and efficiently. The European Payments Council (EPC) therefore describes ISO 20022 as a “standard to develop standards;”3 it has also been described as the “Lego” of financial industry messaging.4
The standard achieves this flexibility by defining financial messaging systems in three layers. The top layer is a business model that defines processes, actors (such as banks), and the business information required. Once a business model has been defined, ISO 20022 provides a middle layer that defines at a logical level the messages and the information they contain. The bottom layer contains the syntax of each message in languages such as XML or ASN.1.
The structured, rich message format makes it easier to automate processing of financial messages, which may deliver business benefits such as simpler reconciliation and improved STP rates. ISO 20022 also offers the potential for greater interoperability between payment systems, which could ultimately lead to faster international payments.
The strategic benefits of ISO 20022 — especially in cross-border payments — are gradually driving regional, national, and corporate adoption of the technology, despite concerns about the cost and effort of moving payment solutions to a new standard.5
For example, EPC used ISO 20022 to build the data formats used for payments within the Single Euro Payments Area (SEPA).6 These message formats now streamline direct debits and credit transfers throughout the eurozone, and help residents and businesses make international payments in euros even when they travel outside the zone.7
ISO 20022 also underpins global messaging provider SWIFT’s next-generation MX payment messaging standards, which enable the exchange of richer payments information. ISO 20022’s support for different character sets has also facilitated its use in other countries including China, Japan, Russia, and others.8 Australia’s national instant payments system, the New Payments Platform (NPP), will also use ISO 20022 message formats. It is due to launch in 2017.9
ISO 20022 is also making headway in the U.S. The two major wire transfer systems in the U.S., the Federal Reserve Banks’ Fedwire Funds Service and The Clearing House’s CHIPS system, have each indicated their readiness to adopt ISO 20022 payments clearing and settlement message formats, with a preliminary timeline for implementation beginning in 2020. The Fed cites several reasons for adopting the standard, including its global momentum, greater efficiency, and the potential for interoperability between different domestic and international payment solutions.10
Like EPC, the Fed also cites advantages arising from the increased payment detail that ISO 20022 messages permit.11 The National Automated Clearing House Association (NACHA), which operates the U.S.ACH payment solution, amplifies this point, saying that messages based on the older SWIFT MT formats combine names and addresses in a block of information that can be hard to scan automatically. So transactions sometimes fail, requiring manual investigation. A more-structured format for payer information such as account numbers, names, and addresses could allow optimized screening processes and enhance STP, NACHA adds.12
NACHA notes that global regulators may in the future prevent banks from processing international payments if all party information cannot be validated. The structured format of ISO 20022 could help avoid that problem.13 However, NACHA does not have a timeline for changing its current ACH formats to ISO 20022; instead it is focused on interoperability between ACH and ISO 20022 systems.14
As ISO 20022 adoption widens, its rich data may also simplify reconciliation, making it easier for businesses to link payments from customers to specific invoices.15
As observed in a detailed April 2016 Accenture blog post, the adoption of ISO 20022 does not guarantee interoperability; unless national real-time payment systems use common messages and rules, they may not be interoperable across borders.16 Several ISO groups are therefore working to “harmonize” implementation differences to maximize interoperability in areas such as corporate-to-bank payments and real-time payments. The proliferation of ISO 20022 could potentially enable linkages between different national real-time payments solutions, thus allowing businesses and consumers in one country to make instant payments to another country, according to a report by ACI Worldwide and Accenture.17
While most current ISO 20022 initiatives focus on payment solutions, a January 2016 assessment also noted several applications in securities, and the standard can also be used in other areas including “Trade Services” such as e-invoicing, purchase orders, and letters of credit.18
In securities, The Depository Trust & Clearing Corporation (DTCC) has pioneered the use of ISO 20022 in U.S. corporate action notifications, one of its core clearing and settlement service offerings. DTCC executive Dan Thieke says ISO 20022 has enabled “greater straight-through-processing rates, reduction of risk, and reduction of costs.”19
ISO 20022 is gradually spreading worldwide, with adoption in many domestic and international payment systems planned or underway. The potential benefits include faster international payments and increased business efficiency due to automated processing of payments information.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. "Standards ISO 20022", SibosTV (video); https://www.youtube.com/watch?v=qUcvX4jaW3Y
2. "Slaying seven myths about ISO 20022", NCR; https://www.ncr.com/company/blogs/financial/slaying-seven-myths-about-iso-20022
3. "ISO 20022 Message Standards", European Payments Council; http://www.europeanpaymentscouncil.eu/index.cfm/sepa-direct-debit/iso-20022-message-standards/
4. "ISO 20022 & Technology", ISO 20022 Newsletter, Fall/Winter 2016 Edition; https://www.iso20022.org/sites/default/files/Newsletters/ISO20022_Newsletter_Fall_Winter2016.pdf
5. "ISO 20022 Business Case Assessment", Federal Reserve Financial Services; https://fedpaymentsimprovement.org/wp-content/uploads/iso_20022_business_case.pdf
6. "ISO 20022 Message Standards", European Payments Council; http://www.europeanpaymentscouncil.eu/index.cfm/sepa-credit-transfer/iso-20022-message-standards/
7. "SEPA Vision and Goals", European Payments Council; http://www.europeanpaymentscouncil.eu/index.cfm/about-sepa/sepa-vision-and-goals/
8. "ISO 20022: an update", Treasury Today; http://treasurytoday.com/2015/09/iso-20022-an-update-ttpv
9. "New Payments Platform set to transform Australian business", National Australia Bank, Ltd.; http://business.nab.com.au/new-payments-platform-set-to-transform-australian-business-14169/
10. "The Federal Reserve is making strides to adopt ISO 20022 in the U.S.", FedFocus; https://www.frbservices.org/fedfocus/archive_perspective/perspective_0316_01.html
12. "Introduction to ISO 20022 for U.S. Financial Institutions", NACHA; https://www2.nacha.org/webform/introduction-iso-20022-us-financial-institutions
15. "What Industry Players Really Expect From 2017", PYMNTS; http://www.pymnts.com/news/b2b-payments/2016/b2b-payments-predictions-2017-payoneer-ftv-capital-ncr-ingo-money/
16. "ISO20022 is the Standard for Real-Time Payments – that’s settled?", Accenture; http://fsblog.accenture.com/banking/iso20022-is-the-standard-for-real-time-payments-thats-settled/
17. "Executive Guide to Immediate/Real-Time Payments", ACI Worldwide and Accenture; https://www.aciworldwide.com/-/media/files/collateral/executive-guide-to-immediate-payments-tl-us.pdf
18. "Slaying seven myths about ISO 20022", NCR; https://www.ncr.com/company/blogs/financial/slaying-seven-myths-about-iso-20022
19. "Standards ISO 20022", SibosTV (video); https://www.youtube.com/watch?v=qUcvX4jaW3Y