The Importance of Data Structure: ISO 20022 and the Future of Payments

4 5 The Importance of Data Structure: ISO 20022 and the Future of Payments Treasury and Trade Solutions There is a major opportunity for the industry to address these friction points through the global adoption and implementation of ISO 20022 as the data standard for the cross-border payment ecosystem. Migration to ISO 20022 is crucial to overcoming the challenges faced by the industry in a more demanding, globalized, and heavily regulated world. It also facilitates a critical shift in information flow by allowing institutions across the SWIFT network to take better advantage of new technologies and payments processes at lower costs. By the end of 2025, 87% of high value payments (HVP) systems will have migrated to the ISO 20022 format for financial messaging. 1 This is complemented by SWIFT’s own migration to ISO 20022 for payment messages starting in November 2022 and ending in November 2025. This migration has the potential to create major efficiencies in payments, leading to greater speed, automation, and digitization of both payments and post-payments processes. If this migration is successful, it could result in a vastly improved end user experience with faster processing and increased straight through processing (STP) rates, making payment delivery more efficient and lowering costs. 2 However, the success of this migration will require participants across the ecosystem to make significant investments: a like-for-like migration from the existing antiquated MT standards will be insufficient. In this paper, we explore some of the potential benefits of moving to this new data model as well as potential use cases. This information will hopefully prove valuable to ecosystem players as they consider their business case for investment. Our focus is on potential improvements in three specific areas: 1. Compliance monitoring and sanctions screening 2. Operations and investigations 3. Reconciliation and data exchange Background SWIFT created the current MT messaging standard in 1977 as a message exchange and common communication platform for cross-border payments; it replaced telex messages between banks. MT provided the industry with a globally consistent way of communicating across the network and made cross-border payments more efficient. MT was created at a time when computing power and data exchange were in their infancy. Movement of digitized information was expensive and therefore MT messages were as data-light as possible and designed for human consumption rather than machine readability. Over the years there has been some automation in message exchanges and adjustments to MT message types (MT100 was replaced by MT103 in the early 2000s, for instance) to allow for stricter data validation. However, there is now a need for a much broader payments message data structure in order to establish cross-border data harmonization. Introduction The cross-border payments ecosystem is in the midst of a major transformation. Legacy standards, infrastructure and operating models are being challenged as client’s expectations rise and vastly improved technologies undermine the status quo. At a global industry level, the Financial Stability Board (FSB) is working with a broad range of ecosystem players to fulfil its vision of faster, cheaper, more transparent and inclusive payments through the Enhancing Cross-Border Payments Roadmap FSB Roadmap Playbook . Many of the key friction points identified as part of this work relate to inconsistent standards, structural limitations and fragmentation of the current data model for cross- border payments. The current bank operational and service model for cross-border payments remains dependent on human interaction to interpret, repair and service payments. It can be inefficient and expensive; message limitations relating to data fields and lack of structure make it harder to meet regulatory requirements. Migration to ISO 20022 has the potential to address these challenges. A new, enriched structured data model for messages will not only promote end-to-end automation but will help unify many existing standards. Ultimately, it will enhance customer service by enabling faster processing, improved reconciliation and greater openness and interoperability. 1 Swift.com_ISO 20022 migration study consultation paper 2018 2 Straight through processing is an automated process for electronic funds transfer where there is no manual intervention from payment inception to payment delivery. What is ISO 20022? ISO 20022 is a global and open messaging standard for financial institutions set by the International Organization for Standardization, an independent, non-governmental standard-setting body. ISO is a language based on a business dictionary that unifies many existing fragmented standards and accommodates local practices and their variants. It is a digitally native message type. Designed for technology ingestion and readability across systems, ISO is widely used today by corporations. The adoption of ISO 20022 by the cross-border payments ecosystem presents an opportunity to leverage this standard as the data model for payments globally. However, implementing and maintaining the standard across both SWIFT and market infrastructures in a coordinated and harmonized way will be key to ensuring global interoperability. Industry working groups such as the Cross-Border Payments and Reporting group (CBPR)+, the Payments Market Practice Group (PMPG) and High Value Payments Systems (HVPS)+ are defining guidelines for consistent use of ISO 20022 in cross-border payments and will be critical in driving interoperability and a unified approach. While these initiatives are mainly focused on high value payments infrastructure, there is also opportunity to drive harmonization with domestic ACH and instant payments schemes for greater ecosystem-wide interoperability.