By Marcus Sehr And Isabel Schmidt
The migration to ISO 20022, the new payment messaging standard, is set to have a profound effect on payments. Challenges lie in wait for many banks and their clients, who will have to invest significant resources to cope with the upcoming change. Yet crucially, these efforts will not go unrewarded. Marcus Sehr, Head of BNY Mellon Treasury Services, Europe, and Isabel Schmidt, Global Head of Direct Clearing and Asset Account Services, BNY Mellon Treasury Services, explain.
During the next five years, ISO 20022 is set to transform the payments industry. The migration will touch the payment lifecycle end-to-end and, as the implementation deadlines draw near, the implications and considerations are set to be far-reaching – requiring significant efforts and resources from banks and their clients. But, while many within the industry might be familiar with the term ISO, many remain unaware of the changes that await them.
So what exactly is happening? ISO 20022 will gradually replace SWIFT MT messages as the standard messaging format for the transfer of cross-border and high-value payments – bringing with it more structured, robust and comprehensive data. The migration is taking place in various stages, beginning first with the euro clearing system in November 2021, including TARGET2 and EBA Clearing. By that time, any bank that pays or receives euro transactions through the European clearing system will therefore need to be able to both send and receive ISO payments. The original November 2021 timeline for the migration of the SWIFT network to ISO was recently pushed out by a year to the fall of 2022.
While other jurisdictions are yet to fully confirm their timelines, industry experts expect the Bank of England’s deadline, for example,will follow in early 2022, with the US Market Infrastructures expected by late 2023.
The upcoming changes should not be underestimated. In the lead-up to and aftermath of the transition, banks will face a myriad of challenges. If they can overcome these hurdles – by establishing a clear, comprehensive strategy, educating and supporting their staff and clients, and preparing their systems – they have an opportunity to deliver a truly improved end-to-end payments experience for clients.
Used by legacy clearing systems established as far back as 40 years ago, MT messages and their equivalents– the incumbent payment messaging standard – lack the depth of information required to meet today’s cross-border payment needs. Therefore, to keep pace with evolving client requirements and technological advancements, the standard is changing to enable transactions to be optimised, with ISO setting the foundation for the future of payments.
ISO messages (otherwise known as MX messages) are based on XML (Extensible Mark-up Language), a text-based format that, when compared to MT messages, contains many more data fields. For example, under ISO, the comparable equivalent to a half-page MT103 message will take up multiple pages. ISO also fundamentally changes the language associated with cross-border payments. Those referred to as “originators” or “ordering parties” today will be called “debtors”; “beneficiaries” will be called “creditors”; and the parties along the chain will also have different terminologies.
As a result, the size, amount and type of data transferred across the payment chain will be vastly different. While this will unlock a host of benefits for banks in the long-term, ensuring their staff can understand the additional complexities and that their systems can handle the more granular data will prove a significant challenge.
What’s more, receiving and transmitting the additional information means that any system within a bank that touches a payment could be affected. As a result, they will need to engage in an in-depth review of each of their systems. As part of ongoing digitalisation efforts, many banks may have already incorporated systems that can cope with the richer data. The incoming challenge, however, will be most acute for banks that continue to operate on legacy systems that have little to no provision for ISO messages. To ensure their existing products and services continue to perform effectively, these banks will need to decide between fully upgrading their legacy platforms or building transitional models or insulation layers.
The coexistence conundrum
Another challenge that banks will need to navigate results from the fact that the fragmented migration approach necessitates a coexistence phase, during which some banks will begin to use ISO while others will continue to use legacy messaging formats.
This creates a number of complexities. This is because some European banks are likely to use the November 2022 deadline to migrate cross-border payments for all their currencies – not just euros – as many banks use a single platform for all high-value payments and will at that point be able to eliminate the complexity of handling multiple formats. As such, a payment might be originated in ISO but cleared through a market infrastructure that is not yet ISO-ready. This will impact not just those in Europe, but all parties in a payment chain who will have to deal with receiving differing amounts and types of information through a variety of channels and, in some cases, with excess data forwarded separately from the main payment information.
Crucially, stakeholders will likely not be able to ignore the additional information contained in ISO messages – even if they themselves are not yet migrated. Intermediary institutions are expected to uphold the integrity of the information they receive, while each individual bank will also need to assess whether the information needs to be sent to the client, as well as what needs to be done from a regulatory perspective. The upcoming migration should, therefore, not be underestimated.
Scale and scope
The scale of the task at hand for the payments industry is enormous. The areas of the business affected goes much further than just payments operations and cash management – potentially extending to all business lines that make payments. Depending on the structure of individual banks, this could make the move to ISO enterprise-wide.
For the affected business lines that sit outside of payments, performing the necessary impact assessments, obtaining stakeholder support and securing funding can be challenging. In such cases, knowing which stakeholders to involve in the migration strategy, be they product managers, customer services or enterprise risk teams, can prove difficult and could demand a more collaborative, multi-disciplinary approach.
Furthermore, while much of the migration’s focus is on the transformation of payment messages, ISO is also being extended to advice and statements. This means that demand deposit accounts (DDA) and reporting systems, as well as nostro reconciliation platforms, could be affected. Banks will also need to consider ancillary data translation services for the current MT FIN equivalents, as well as global client access functions that transmit statements and reporting.
What’s more, it is not just banks that will feel the effects – end clients will also have to prepare for ISO messages. Banks will be required to educate and support their clients in this endeavour, ensuring that they have the required information in the correct format and structure. As part of their ISO strategy, banks will need to decide what work they will undertake in this respect and what work needs to be done by the client, and find the right balance during the transition process: creating an enhanced ISO user experience, and making the preparation manageable for clients.
Banks should not underestimate the time it will take to prepare for ISO and should work to implement a transition roadmap accordingly.
It is important that all take note of the scale of the task ahead, from a technology, client support, compliance, operational risk and business strategy perspective. Equally, everyone who plays a role in the payment chain – be it those in operations, customer service, payments compliance or cash management sales – needs to understand the complexities of the new transformation.
But education is just the beginning. Banks should then look to establish a dedicated, cross-discipline team to capture the front-to-back impact of the transition. From here, strategic decisions will need to be made for clients, striking the right balance between adding value and making the transition as seamless as possible. In tandem, banks should be in a constant dialogue with their market infrastructures and should work alongside SWIFT. SWIFT is working to provide banks with the training and tools necessary for the migration, such as the Readiness Portal and MyStandards tool that have been launched to make it easier to carry out testing and validate messages.
Of course, there is no catch-all blueprint for banks to follow. The upcoming changes must be assessed on an individual basis and the preparations chosen will depend on a bank’s technical capability, their role, their business scenarios and priorities, as well as local regulatory requirements.
A new era
Though ISO undoubtably brings a host of challenges, it will also herald a new era for payments – and one that will deliver considerable benefits to banks and their clients. The richer, more structured data will improve straight-through-processing (STP), enhance speed and drive efficiency – all while reducing manual intervention and cost. Eventually, ISO, in combination with other industry initiatives, could potentially even clear a path to end-to-end 100% STP rates.
For beneficiaries, the richer data contained in ISO messages will allow them to undertake automatic reconciliation, which will benefit cash flow, counterparty risk management and even help deliver against their own client experience goals.
For banks themselves, the enriched data provision will bring greater automation – reducing friction in the payment processing flow. Over time, this will result in fewer false positives in risk management systems, allowing for more focused, effective risk management and the optimisation of resources. Payment risk modelling and scoring will also see benefits – with the ISO format allowing banks to offer enhanced data analytics to their clients.
The full extent of ISO benefits will, however, only be fully unlocked when critical mass has been achieved. The developments that follow could then be even more transformational. A key priority for cross-border payments is to make them real-time. If the combined powers of ISO and SWIFT gpi, which is already enhancing the efficiency and client experience in cross-border payments, can be realised, this long desired goal could be achieved.
The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.
The impact and implications of Covid-19 on financial reporting
By Mark Billington, Regional Director, Greater China & South-East Asia, ICAEW
The economic consequences of Covid-19 have been unprecedented, affecting activity in nearly every country in the world. Indeed, the latest forecast from the Institute of Chartered Accountants in England and Wales (ICAEW) projects that most economies in South-East Asia (SEA) would fall into recession in the first half of 2020 and Gross Domestic Product will contract by 1.9 percent over the whole year. Across the region, governments have had to bring in various fiscal stimulus measures to protect the economy.
Exceptional times bring tremendous challenges for businesses and requires leaders to have a clear view on the short- and long-term effects of Covid-19 on their businesses, and to respond accordingly. This starts with taking extra care to recognise the impact of Covid-19 in financial reports, especially of events which have occurred between the balance sheet date and the date when the accounts are authorised for issue.
Distinguishing between adjusting or non-adjusting events
As the coronavirus outbreak continues to evolve and more information comes to light about the nature of the virus and its impact, companies with 2020 year-ends need to consider how it has affected their business and how the effects should be reflected in the accounts at the end of their reporting period. This boils down to distinguishing whether Covid-19 should be accounted as an adjusting or non-adjusting event.
In December last year, China alerted the World Health Organisation (WHO) to several cases of an unusual form of pneumonia in Wuhan, central China’s Hubei Province. But it was only early this year when substantive information on what has now been identified as coronavirus (Covid19) came to light. As a result, for companies with a 31 December 2019 year-end, Covid-19 is generally considered to be a non-adjusting event.
This changes for companies which have early 2020 year-ends, who will need to consider the timelines more carefully to assess the conditions at the end of their relevant reporting period. For companies with 31 March 2020 year-ends, Covid-19 is likely to be considered a current-period event, which means that companies need to assess and record all events and conditions that existed at or before the reporting date. When it is determined to be an adjusting event, a business will need to review all areas of the accounts that might be adversely affected by the COVID-19 virus.
There may be a greater degree of judgement required when identifying the conditions at the end of the reporting period, and a closer assessment needed of whether developments are adjusting or non-adjusting.
Exercising judgement about conditions at the balance sheet date
Companies have to exercise significant judgement to determine the conditions that existed at the balance sheet date. This is heavily dependent on the reporting year end in question, the company’s own individual circumstances and the events which are under consideration.
A number of factors should be considered when making judgements about conditions at the balance sheet date. This includes the timing and impact on stakeholders such as staff, customers, and suppliers, of travel restrictions, quarantines and lockdowns, closure of businesses and schools; and government support initiatives. With each of these events, companies have to determine whether an event shines a brighter light on conditions at the balance sheet date or if conditions changed after the reporting date.
This evaluation in financial reporting is important because it affects the forecasting of future income and cash flows, which are based on conditions that existed at the balance sheet date. Estimating recoverable amounts might be very different for the same asset if the calculation was performed for a 2019- or 2020-year end.
Upholding values of corporate transparency and trust
In these times of uncertainty and crisis, it is even more important to be transparent about risks and assumptions used in financial reports, and to make disclosures as specific to the business as possible, to avoid the risk of financial reporting being downplayed. In fact, market regulator Singapore Exchange (SGX) and rating agency Fitch Ratings have recently cautioned companies against using alternative performance measures such as Ebitdac (earnings before interest, taxes, depreciation, amortisation and coronavirus) in their interim financial reports to flatter results, and stressed that “disclosures must be balanced and fair and avoid omission of important unfavourable facts”.
More than ever, businesses must continue to diligently uphold values of corporate transparency and trust and continue to disclose transparent and quality information to investors and other stakeholders. In order to do this, directors are tasked with the important responsibility to comply with various reporting standards and understand the circumstances of particular disclosures to provide a fair and balanced assessment of the company’s financial position and performance.
Covid-19 also has significant implications for audit reports on company financial statements. Preparing and auditing financial statements poses tough calls in difficult and unclear circumstances for directors and auditors. It is vital that these uncertainties are interpreted appropriately and in the context of the current unprecedented circumstances
As the business impact of COVID-19 continues to unfold and affect economies and the future of many organisations, businesses should continue to consider both their situation but also the wider economic landscape they operate in and reflect that in their financial reports.
 SGX warns against use of ‘earnings before coronavirus’ metric, The Business Times, 27 July 2020
Akerton Partners S.L. is a Spanish independent mid-market corporate finance advisor founded over a decade ago, in 2008, amid a global financial crisis.A group of professionals with extensive industrial and financial experience, decided to start providing clients with the value added necessary in situations where specialization, experience, commitment and know how make the difference. The firm specializes in providing financial advice to companies, their shareholders, investors, and lenders.
Akerton´s team has an extensive business background, which allows them to understand client´s needs as well as put itself in their shoes to reach the most appropriate solution under all available options in the market. Since one size does not fit all, Akerton tries not only try to find a good solution but ensure that it is the best one by performing a deep analysis of the company and its financial situation. Each case needs to be considered independently and from a variety of angles in order to identify and execute original and feasible solutions.A simple or single solution is not Akerton’s aim.Their independence and motivation for establishing long-term relationships with clients, allow them to always place their interests before their own, something that eliminates barriers and creates lasting relationships.
Currently, Akerton offers its services through the below business units:
Financing services to borrowers, investors, and creditors, on the design, structuring, negotiation, follow up, and control of long and short-term financing, including raising, refinancing, and renegotiating debt:
- Debt refinancing and restructuring.
- Finding and obtaining financing via debt or equity
(corporate, leveraged, subordinated, mezzanine, direct lending, sale and lease back option, amongst others).Public incentives.
- IBR’s and NPL’s portfolios analysis
- Debt acquisition.
Financing department represents 170 closed deals, 6 transactions under management and more than 2.272 M€ of debt amount.
Corporate finance,to corporates, private equity, family offices, and family businesses on all aspects of buy-side and sell-side , as well as the rendering of services related to financial strategy, business plan elaboration, business valuation and interim management in connection with budget and business plan compliance:
- Mergers and acquisitions (M&A): acquisition of company or asset, partners search, divestments of company, strategic alliances…
- Valuation: assessment of businesses or companies, earn outs and deferred payments schemes under a traditional process, valuation of companies in the framework of a debt portfolio acquisition process.
- Strategy: management continuity plans, strategic and business plans, management support to reach goals.
Corporate finance line represents 38 closed deals, 11 transactions under management and more than 570 M€ value.
Expert Advice and Due Diligence on processes and transactions requiring the verification and ratification of economic, financial, and accounting information including Financial Due Diligence in sale or purchase transactions (provided Akerton Partners is not the advisor of one of the parties to avoid a conflict of interest); as well as the elaboration of expert and economic reports in order to support law-suits and disputes:
- Financial due diligence for M&A transactions.
- Counselling for the defense and analysis of opposing expert reports, and elaboration of adversary expert reports.
- Economic reports for disputes and arbitrations and their ratification.
- Reports: validate CAPEX, economic ratios, PPA process, Impairment Test.
This line represents 196 closed deals and 9 transactions under management.
Real Estate and Infrastructures, for companies, investment funds, SOCIMIs and Family Offices to evaluate Real Estate assets by analyzing their portfolios and investment alternatives, granting differential and extra elements that add extra values:
- Analysis of Real Estate portfolios, projects and its development.
- Demand due diligence
- Market studies
- Operating and strategic planning and feasibility analysis
This business line represents 49 close deals, 4 transactions under management, 0,6M certified parking spaces and more than 1.2B€ revenue amount.
Public incentives, in the form of non-refundable grants, reduced or zero interest rate loans, as well as the application of deductions and exemptions in the Corporate Income Tax for R&D&I activities, transference of know-how or investments in assets, including those with an environmental improvement component.
- Grants/ subsidies
- Fiscal deductions
- Transfer of know-how: identification and quantification of R&D&I costs and design and implementation of transfer processes.
Team values are applied in every job, taking the best expertise of each individual to obtain a final global output. Counting on a multidisciplinary team enables to provide a global solution throughout the entire operation. Akerton’s professionals have developed a strong reputation based on experience, dedication and integrity, and its in-depth knowledge and longstanding experience in the industrial field allows them to have a rapid understanding of any client’s issues.
One of the main values Akerton owns is that its independence allows the company to put its clients’ interests first, above all other considerations, which let them remove any barrier and create continuous relationships with them. There are no restrictions, conflict of interest or other constraints to identify the best opportunityduring the process in a closely and congruent way, in accordance with client’s objectives and until achievement of financial close (turnkey contract).
Routine is not an option at Akerton. Commitment is other of its main values that is important to highlight. The firm builds a differential relationship of closeness and trust with its clients, able to maximize process achievement. And success as advisors is closely linked to client success.
As previously stated, Akerton was born during a financial crisis and it is important to mention that the company is living a second one, despite its short life, as a consequence of Covid-19. Nonetheless, the firm has rapidly adapted to this new environment, implementing all necessary measures to avoid business interruption such as working remotely and supporting its clients through different alternatives such as measuring financial impact of Covid, analyzing short term liquidity , providing mitigating factors or identifying all available financing tools such as managing and requesting “ICO loans”.
Once more, and additionally to the above features of the firm, Akerton shows its strong spirit as a corporate finance company, able to successfully overcome financial crises and add value to clients.
In order to find out further details of Akerton Partners, the following website can be visited: www.akerton.com.
SCA Deadline is Nearing: is the Market Prepared?
Strong Customer Authentication (SCA) – the latest security standard in the EU’s payments regulation – has been keeping market players on their toes. Business readiness to support it is becoming an increasingly pressing matter due to the rapidly approaching enforcement deadline, as well as rising levels in e-commerce fraud.
August 5th, 2020. Strong Customer Authentication, or SCA, has officially gone into effect on the 14th of September, 2019. However, with the market being unprepared to roll out the necessary changes till the priorly set date, the European Banking Authority has pushed the final deadline to 31st of December, 2020, with a few exceptions for an even later time in 2021. As the cut-off time approaches, so is the moment of truth: has the extended period enabled market players to adapt to the new regulation?
For those out of the loop, the SCA law states mandatory two-factor authentication for all online transactions and contactless payments made within the EU. Given the fact that, globally, e-commerce scams have been rising – the pandemic has played its part in the matter – the new reform is expected to provide an extra layer of security for customers.
In April 2020, the fraud attempt rate based on transaction value rose by 13%, compared to the same timeframe in 2019, emphasizing the favorable timeliness of the regulation. However, without proper preparation on both ends of the transaction, the enforced requirements are likely to result in increased friction, rather than weeding out scammers.
Marius Galdikas, CTO at ConnectPay, notes that there are still many questioning why and how exactly will this affect them. “Businesses and PSPs were not ready to handle the high volume traffic alongside setting up the new safeguards, hence the EBA’s permitted delay. A number of them, mostly SMBs, are still unaware of the SCA’s true impact on their activities,” he stated.
To reduce the number of confused shoppers, declined payments, and abandoned shopping carts, Mr. Galdikas advised getting on the path of SCA compliance should be the north star of every vendor’s current roadmap to prevent losing a great deal of sales. “What should not be overlooked is that SCA encompasses not just 2FA, but much more, including dynamic linking and proper messaging to the customer about operations being authorized.”
Although SCA compliance should be at the top of everyone’s mind, it is overshadowed by the current global landscape. Vendors are still wrestling with the consequences of the pandemic, trying to raise profits after months of imposed lockdown, and, with the deadline closing in, some described this European Commission’s law as “kicking retailers while they’re down”.
That said, in April the global e-commerce retail sales reached 209 percent year-over-year revenue growth. According to Mr. Galdikas, despite the adverse circumstances, implementing SCA-related changes is imperative in terms of avoiding the precipitous levels of fraud, rising alongside increasing profits.
And yet, there are a few moments the policy failed to observe, for example, making bulk payments – transactions to multiple beneficiaries from a single bank account – and the intricacies concerning their approval. “Each payment order has a unique ID and requires distinct PIN codes to verify them. However, generating many PINs – and fast – becomes tricky, especially for banks still running on legacy systems, which are not up to speed to SCA requirements.”
Mr. Galdikas noted the urge to move SCA up the list of priorities for merchants and PSPs to prevent transactional errors, mentioning ConnectPay has already done so in early May. It released an App, which covers multi-factor authentication and one-tap approvals for payments, and is also the basis for numerous innovations to come.
The new SCA requirements may still be a head-scratcher for businesses, banks and consumers alike, hence the importance to give it the necessary attention – to avoid vital steps being lost in translation.
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Akerton Partners S.L. is a Spanish independent mid-market corporate finance advisor founded over a decade ago, in 2008, amid a...