Written by Dan Melville, Head of UKI & MENA Tricentis
In 2018, Swift’s broad community encompassing over 11,000 financial institutions collectively announced its adoption of ISO 20022. It described the standard as a global and open platform that not only established a universal language for worldwide payments but also leveraged high-quality data to deliver ‘better payments for all’.
Fast forward to 2023, and the migration to ISO 20022 for cross-border payments and reporting (CBPR+) is underway. Cross-border payments traditionally tend to be sluggish, incur high transaction charges, and lack the transparency of domestic payments. Therefore, the standard aims to enhance payment services and banks by facilitating interoperability, improved risk management, and efficiencies for financial institutions.
Nonetheless, despite an extended grace period, several financial institutions face challenges in reaching the final stages of the ISO 20022 migration. This struggle stems from the fact that ISO 20022 signifies the most significant change to international payments in half a century, influencing an institution’s technology, infrastructure, and ultimate success. Successful migration is critical for financial institutions; therefore, financial organisations must understand and overcome common roadblocks to safeguard their migration to ISO 20022.
Understanding ISO 20022
The global and open standard serves as a unified language for worldwide payments. Its capacity for leveraging high-quality data results in enhanced payments for all involved parties. The adoption of ISO 20022 also presents an opportunity to bolster customer experiences by providing richer information that facilitates invoice reconciliation. This reduces manual interventions required for correcting or investigating payments due to structured data and supports customer profiling through improved data analysis on payment processing patterns.
Throughout the ISO 20022 migration timeline, banking systems must upgrade their infrastructure and messaging services, develop new data models to receive, process, and create MX messages, align with PMI guidelines on converting from MT to MX, and ensure compatibility. Different migration timelines for other ISO 20022 initiatives are also determined according to payment type and market, each featuring a period of overlap and an ultimate deadline.
Additionally, Payment Schemes globally are moving towards adopting the ISO 20022 Schema to widen interoperability and enhance Straight Through Processing. The New Payments Architecture (NPA) seeks to unify all UK Retail Payments (including FPS, BACS, Cheque & Credit Clearing) under ISO 20022 standards by 2025.
The importance of a successful ISO 20022 migration
A migration journey like this is no mean feat for financial institutions. They are expected to implement all these changes to comply with ISO 20022 while also juggling the demands of their banks to accelerate delivery time, minimise risk associated with changes, and reduce quality assurance (QA) costs.
The potential negative outcomes of failing to upgrade appropriately to ISO 20022 outweigh any advantages gained from neglecting this path. Those that do ‘deviate’ risk facing regulatory compliance issues, elevated implementation costs and reputational jeopardy by missing the wave of global payment modernisation. In addition, one of the core value drivers of ISO 20022 is its capacity to capture rich structured data that can be of use for any kind of financial business transaction. This feature can help financial institutions control fraud more efficiently, deliver value-added services, and enhance customer experiences. Failing to do so can lead to potential attrition of customer base and revenue shortfall.
With this in mind, key players in the industry, such as the Bank of England, have already announced the upgrade to ISO 20022 for its Clearing House Automated Payment System (CHAPS). However, other financial institutions might not be able to move fast enough. In fact, only 8% of banks globally are confident that the entire industry will be fully prepared by the ultimate deadline. Though ISO 20022 is not a compulsory standard, financial institutions that fail to meet the requirements will fail to receive and process ISO 20022 payments and, as a result, be left behind.
Overcoming ISO 20022 migration challenges
The migration of financial institutions to ISO 20022 is a complex journey requiring strategic planning and meticulous execution. Success in the migration hinges on comprehensive testing, interoperability confirmation, risk assessment, and proficient resource management.
Banking and financial institutions often overlook the importance of quality in their projects. This is a missed opportunity, and the importance is only realized when it’s too late. To avoid this common roadblock, it is encouraged to define a Quality Assurance (QA) strategy from Day 1. This should not be singular focused but really across the whole value stream (areas directly and indirectly) that are impacted by the ISO 20022 migration. Incorporated in your QA strategy is a framework that includes comprehensive unit testing, SIT, UAT, NFT, and business process testing. The emphasis should also be on confirming the interoperability of old and new payment standards before Swift discontinues categories 1, 2, and 9 of MT messages in November 2025.
In addition, reducing dependence on Subject Matter Experts (SMEs) having exposure to Swift standards and equipping in-house staff with the necessary skills and training for ISO 20022 is beneficial. For those with limited knowledge, collaborating with industry relevant partners can help guide the intersection between the financial industry, its vital business processes, and the adjustments institutions must implement to comply with the new standard.
A successful migration (with a quality first mindset) can assist banks in maintaining regulatory compliance, seizing new market opportunities, and competing efficiently in the changing global payment landscape.