ISO 20022 is a system for standardizing the messaging systems used for financial transactions. Essentially, it aims to align the ‘languages’ used by financial institutions across the world to transmit information, and ensure that everyone is using the same vocabulary for the same concepts.
ISO standards are developed and published by the International Organization for Standardization. ISO standards cover a wide range of fields from quality management to finance to information security and are recognized globally.
What could be better with the current system?
Currently, there are a number of standards in use internationally for the transmission of financial information; countries may use national messaging standards, and even within countries, different types of financial services may use different messaging standards.
A lot of this information is identical. The vast majority of transactions need similar basic information, such as who’s sending the instruction, where it’s going, what currency is involved, etc. However, different messaging standards in use at the moment will structure it differently, and use different terms to describe the information. This leads to challenges in processing between institutions, particularly as more and more aim to eliminate manual intervention and process exclusively via computer.
ISO 20022 is the successor standard to ISO 15022, which in turn replaced ISO 7775 between 1998 and 2003. All three of these standards target the processing of cross-border settlement, reconciliation, and corporate action.
Above and beyond the 15022 and 20022, there is also the ISO 8583, which is used for the majority of credit and debit card transactions; SWIFT’s proprietary MT message system; FIX, which is the main system in use for securities…the list goes on. To use an analogy, it’s rather like a session of the United Nations with no recourse to translation services.
How will ISO 20022 improve things?
ISO 20022 starts by defining how to talk about the information used in transactions (the business model). One of the places that the multiple standards tend to run into difficulties is because Bank Y will call the individual who is sending money the originator, whereas Credit Union X may call them the debtor.
The standard then builds on that common vocabulary to build message models. A message will include all the information required to perform a specific operation, such as a money transfer. Messages are composed of elements (information described by tags) organized into a logical structure.
ISO 20022 primarily uses eXtensible Mark-up Language (XML). XML is one of the most popular text-based formats for encoding documents. It uses tags to describe elements of the information, and is both machine- and human-legible. However, the ISO 20022 also has the capability to use other pre-agreed syntaxes, such as ASN.1, MX, or FIX, depending on the requirements of the domain it’s being used in.
ISO 20022 hopes to leverage this layered setup to present itself as a playbook for financial standards. The aim is to offer greater ease and better availability of data to facilitate financial transactions and minimize the need for human intervention, all of which supports developments like real-time payments.
What’s the implementation runway?
There is currently no plan to force-upgrade the entire financial industry. However, certain areas, such as retail payments in the E.U., are already well on their way to full ISO 20022 implementation, and a number of others are targeting 2022 as the year to switch over. Ultimately, when (or if) institutions upgrade will depend on the mathematics of cost versus benefit. The aim is to have as much of the correspondent banking system as possible using ISO 20022 by 2025, but other domains are likely to continue using legacy or domestic standards well past that date.
Some institutions may choose to use a totally different format internally and map it to other standards as required for interoperability – middleware solutions are becoming increasingly available, and in many cases are far cheaper than altering all the legacy applications in use to meet a new standard.
ISO 20022 is coming
Speed and accuracy are key factors in financial transactions. Clearer and more detailed information that conforms to a format that both ends of communication can process supports both.
“Already used by payment systems in over 70 countries, in the coming years it will be the de facto standard for high-value payment systems of all reserve currencies, supporting 80% of global volumes and 87% of value of transactions worldwide.” ISO
With the migration to ISO 20022 comes other benefits that may appeal to businesses:
- Lower costs
- Less risk of data manipulation
- More structured data
While it may not be a simple or short process, the previous migration from ISO 7775 to 15022 improved straight-through processing rates from around 65% to over 95%: ISO 20022 is billed as offering similar levels of improvement.
The value of a standard language to improve end-to-end processing is immense, with impacts on both efficiency and customer experience. Financial institutions all around the world will be well served to have ISO 20022 clarity in their roadmaps and push for adoption sooner rather than later.