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

6 7 The Importance of Data Structure: ISO 20022 and the Future of Payments Treasury and Trade Solutions ISO 20022: A Better Data Model The ISO 20022 open and global standard is based on the concept of hierarchy where the top layer provides the key business processes and concepts; the middle layer provides logical messages or message models; and the bottom layer deals with syntax. The ISO 20022 data standard is based on an extensible markup language (XML) format that is descriptive and understandable. The MX message type is an XML-based replacement for the MT message type. It is significantly longer than existing MT messages and captures more data, while the hierarchical structure (with nested elements) allows for logical grouping of data. For example, in the MX message type, the creditor field includes name and address, while there are additional structured elements for street name and zip code in the address field. These additional elements directly support straight through processing of data, increasing the potential for automation and resulting in faster speeds and a more efficient operating model. The dedicated element structure of the ISO 20022 message format allows instructions for specific business data elements, creating a dynamic and enhanced data model. 3 These structured elements facilitate interoperability and make it easier to exchange messages between regions. In addition to dedicated elements, the ISO 20022 message format also has new elements with fields such as extended remittance information. Such information is mostly free format in the current MT format; it has to be forced into applications or blocks, which makes it a challenge to determine the exact tag. ISO 20022 has the potential to create a consistent data model across the entire payments chain, which will help reduce obscure data and support more efficient and effective compliance monitoring. 3 Dedicated elements provide specific fields such as reference fields, service levels, currency, charge information, etc. Complying with the Travel Rule Inter-governmental bodies such as the Financial Action Taskforce (FATF) and Financial Crimes Enforcement Network (FinCEN) set international standards to promote financial transparency and combat financial crimes. Their Travel Rule provides standards within the current MT data structure to combat money laundering, terrorist financing and other threats to the integrity of the financial system. According to the Travel Rule, certain information should be included and carried forward in transmittals of funds involving wires. Specifically, an originating bank must include certain customer and transaction information such as the beneficiary in the originating wire. Although intermediary banks should pass on information received from the originating financial institutions as good practice, there are no standard requirements regarding which data fields must be retained. This is because there are no truly dedicated fields within the current MT structure. The limitation on field length also increases the risk of truncation of information and reduces institutions’ ability to monitor data within the payments message. The ISO 20022 standard would automatically include elements consistent with the ISO 20022 messaging format. In addition, consistent and standardized implementation would reduce friction points and compliance issues relating to local market practices on data fields (many jurisdictions have differing practices relating to address fields, for example). Focus Area 1: Compliance Monitoring and Sanctions Screening ISO 20022 messages offer discrete and specific data on the relationships between parties, including actual and on-behalf-of information, intermediate and receiving roles, as well as the geographies of the participants. The ISO 20022 message format allows banks and payment participants to include more contextually relevant data related to the individual payment. It offers rich structured party data, extended remittance information, and allows for special characters and expanded character sets. The structure and granularity of ISO 20022 enables a more targeted approach to screening financial transactions, potentially reducing false positives and addressing the friction associated with sanctions. Sanctions screening using current MT standards is problematic because of inconsistent formats, omissions, and poor data quality. The MT format contains limited counterparty information, making it difficult to validate that a client name matches a sanctioned entity. For example, if Laura is a sanctioned client name, all payments with those details in unstructured fields could be placed in a sanction queue, as it would be unclear whether such details related to the debtor or creditor. With structured data, such hits can be ignored, ensuring that payments are not unnecessarily placed in a sanctions queue (eliminating the need to manually check such payments subsequently). MT ISO 20022 (MX) (1: F01OELBATWWAXXX09750000073 (2: I103ABNANL2AXXXU3003) (3: (113:URGT)(108:1NTLPMTS)) (4: (CrLf) :20:494932/DEV (CrLf) :32A:0307031EUR19658, 47 (CrLf) :33B:EUR1958, 47 (CrLf) :50K: Franz Holzappfel GMBH (CrLf) Vienna (CrLf) :59:H.F. JANSSEN (CrLf) AMSTERDAM (CrLf) :70:/INV 19042 910412 (CrLf) :71A: SHA (CrLf) -) (5: (CHK: 123456789AVC)) Basic header block Application header block User header block Text block Trailer block SWIFTNet Headers Envelope — container for the business message The business message comprises the application header and “business” document The “business” document contains the MX message instance (or ISO 20022 message instance) ISO 20022 Business Application Header ISO 20022 Message Business Message Application Header Request Payload Request Header Request Exchange Request Document MX Message Instance Crypto <AppHdr> … </AppHdr> <Document> … </Document> Source: SWIFT. For more information, visit myStandards. XML Elements An XML instance or document contains data in elements and nested elements (elements which contain other elements) corresponding to the hierarchy imposed by the XML schema. Syntax ISO 20022 uses an XML syntax. The XML data is marked up clearly with opening and closing tags that indicate the meaning and structure of the information. XML tags that are more descriptive and understandable than the MT alternative. MT — free format option :50K:/ CITIUS33XXX JANE DOE GREENWICH 388 NEW YORK CITY 10013 United States ID: 1234567890 Issues • Limited Data fields: Most firms have been forced to customize the MT messages — at least to some degree — to cover their needs. • Unstructured Data: Leads to a loss of data and Data Truncation Street Name Postal Adddress Name Creditor Town Name Post Code Source: Citi material