By Keith Berry, General Manager, Know Your Customer Solutions at Moody’s Analytics
By 2025, ISO 20022, a financial industry message scheme, is set to be incorporated into the majority of global payment systems. Beginning in March 2023, businesses started transmitting ISO 20022 messages, reaping the benefits of expedited and more transparent cross-border payments.
The initiative provides a universal common language between global financial institutions for exchanging payment data and is already being integrated into payment infrastructures, such as the Bank of England’s CHAPs system. Any period of change can present opportunity, with ISO 20022 also presenting the potential for more efficient and effective compliances processes. In addition, its tailored data sets could lead to better sanctions screening and improved detection of fraudulent activity.
For organizations integrating ISO 20022, there are potential benefits for their compliance teams, but there are also challenges to overcome, making sure infrastructure is upgraded and cross-party collaboration is bought into by every party involved.
Payment standards need to keep up with a highly interconnected world. With ISO 20022 set to replace legacy payments standards across more than 50 countries, cross-border payments will dramatically change.
It will enable banks’ interoperability by providing a common language and structure for financial messages. This enables communication between financial systems, reducing the need for manual intervention and increasing the speed of financial transactions. Moreover, by standardizing messaging formats and workflows, ISO 20022 reduces the complexity and costs of managing multiple messaging formats and systems.
ISO 20022 also allows for richer, structured data, enabling more precise and comprehensive information sharing, reducing the risk of errors, and providing a clearer understanding of financial transactions. This can be facilitated using pre-formatted, 20022 compliant, data structures suitable for direct insertion into the message body, populated with up-to-date information from the official registers that compliance teams are familiar with.
This greater interaction with accurate data and the consequent transparency empowers financial institutes to make better and more informed decisions, particularly relating to Know Your Customer (KYC) processes. Having insight into operations in real-time could assist companies in gaining a better understanding of the businesses and customers they interact with, leading to more effective KYC processes.
ISO 20022 has the capacity to reduce the time involved with an organization’s sanction screening. Its sanctions screening systems conduct a comprehensive analysis of each field in a message format to ascertain the relevant country information and cross-reference it with sanctions rules. By extracting this information from the designated “Country” field, the system minimizes processing requirements and significantly reduces the time involved for compliance professionals to identify sanctioned entities.
Enhanced fraud data
There are also five data points within ISO 20022 messages designed to help identify fraudulent transactions, further supporting compliance processes. Known as enhanced fraud data (EFD), these individual data points are “Purpose Code”, “Age of Account Holder”, “Tenure of Account”, “Turnover of Account”, and “Type of Account”, all of which are aimed at providing greater clarity over potentially fraudulent activity.
Successfully implementing ISO 20022
Even though ISO 20022 could create a more efficient cross-border payment process, recent research has found only 72% of global banks will transition to the new standard by the deadline in 2025. This equates to around 5,000 banks who won’t have adopted it.
Furthermore, failing to meet the deadline could lead to the risk of existing products and services becoming inoperable for customers.
An initial task for organizations would be to ensure legacy systems can handle higher data volumes and interoperability by updating network infrastructure before the deadline. For example, financial institutions can achieve this by running tests across all required systems, including third-party supplier infrastructure that supports payment operations – updating where necessary.
By assessing existing systems and infrastructure to determine their ability to handle ISO 20022 messaging, financial institutions can identify gaps and pivot towards a renewed plan to upgrade or replace systems.
To ensure the successful implementation of ISO 20022, banks and financial organizations must collaborate with internal teams and third-party providers. They must work together to establish effective communication channels between workstreams and ensure banks test every stage of the payment transformation, including KYC, for validation.
To meet the 2025 deadline, early preparation in the form of mobilizing people and updating infrastructure is key. Even though there may be some hurdles during the shift from legacy systems to ISO 20022, acting sooner means financial institutions can remedy problems before the deadline. This way, banks, financial organizations and their customers can reap the benefits of increased efficiency, reduced costs, improved transparency in financial transactions, and real-time insights that the latest standards will bring.