By Rolf Hauge, CEO and founder of Commercial Banking Applications (CBA)
It’s clear that banks have different degrees of readiness for the implementation of the new ISO 20022 global payments messaging standard. Some banks are already quite advanced in their preparations to ensure they’re fully ISO 20022 compliant in good time for the transition. Others remain behind the curve with their adoption plans.
At the same time, banks must also prepare to switch to using ISO 20022 clearing messages for specific clearing houses, like Europe’s Target2 which is due to come into effect in November 2022, and Singapore’s MEPS which is due to transition even earlier in June 2022.
Banks should aim to be ready up to six months in advance of the ISO 20022 payment message cutover in November 2022, leaving themselves plenty of time for testing and fine tuning. Migration to ISO 20022 is a huge change, but also one that will bring significant competitive advantages, both for banks and the corporates they serve, assuming everything’s managed well.
Once implemented, banks can start making use of the rich data embedded in the ISO 20022 payment message format and can share this additional information with their customers to provide added insight on each transaction. The data can also be used to more easily automate KYC and AML activities – helping to reduce the risk of fraud. Certainly, corporates will expect their banks to be prepared and ready from day one – so it goes without saying that to remain competitive banks should aim to comply with ISO 20022 payment messages as quickly as possible.
Where to begin?
There are two main areas banks should focus on when transitioning to MX message types. The first is the ability to handle structured party information. The second is being able to make use of all the additional information shared through ISO 20022 payment messages including invoice details, tax data, supplier information and more.
Today most banks, and certainly those reliant on legacy systems for processing cross border payments, simply aren’t ready to support the new structured message formats and associated third-party information. Unless they modernise their infrastructure, they won’t be in a position to pass the benefits on to their customers.
Banks’ legacy systems were built to store information such as customer address data in an unstructured way. This can be very problematic to change. Going forward all parts of the address will need to be stored in separate fields. This means that banks need to extend all relevant IT systems that handle payments and create a more structured version in their Master Data Management system(s). Early on this was also one of the intended requirements of Target2, but the industry stepped back from this as many maintained it was too complicated to achieve.
If they haven’t done so already, it’s imperative that banks have a discussion with their corporate clients about the additional data that will potentially become available, what information is most valuable and how they would use it. This will help banks decide whether to use all the new fields and structured party information available within the new ISO 20022 message structure from the beginning, or whether to narrow the scope of what they make available when.
Of course, banks will also have the option to use the SWIFT translation service. This will effectively convert messages from the old format to an ISO 20022 compliant format so that the information can be passed on, but banks using this service that are unable to process the messages themselves, will remain very limited in their ability to create and deliver value added insights and services to customers. Access to the rich data available within ISO 20022 payment is fundamental for banks wanting to evolve and deliver innovative new services.
Cross border payments typically involve one bank sending a message to another bank, who in turn passes the message on to another bank in the chain – so all banks need to be equipped to receive, process and pass the full ISO 20022 payment data on from one counterparty to the next. Otherwise, the chain will be broken and vital information potentially lost. If one bank is seen as a weak link, they could be bypassed in favour of others that are better equipped to support the new message format.
Prepare early and allow ample time for testing
To help prepare it’s essential that all participants allow sufficient time for testing – using the relevant SWIFT tools to ensure all syntax and formatting information is correct and that the data is mapped correctly within all associated payment and clearing systems. Above all, be aware of timescales – you really need to be in a position to start testing not later than by the second quarter of 2022, which is less than 15 months away.
Opt to work with vendors that can support you and that can make the transition easier for you. For example, consider transitioning from legacy systems to a more modern component-based approach, and a structure that allows you to get your Master Data Management systems in order. This will allow you to move away from siloed data that’s difficult and time consuming to process to a future where you can access, process and link data sets together and use AI and advanced analytics to deliver timely insights to customers.
Of course, it’s always possible that the timescales will change again as some banks simply won’t be ready – but don’t rely on this as a fall-back option. We’re at a crucial moment where the industry simply has to move on. Big tech won’t wait around while the banks get their house in order. It’s not possible to prevaricate any longer. New competitors will come to cross-border payments. Standing still is not an option.