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How to unlock the power of enhanced data post ISO 20022

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Providers need to act quickly as the new standard offers better services for customers and the opportunity to monetize data.


In brief

  • ISO 20022 will allow banks to offer better-quality reconciliations, real-time and/or automated payments, as they compete with FinTech and large tech rivals.
  • The new standard should make a significant difference in the fight against financial crime, including how financial institutions enforce sanctions.
  • Providers must have the right implementation and technology approach to succeed, including testing, talent and use of data and analytics.

We are at the starting line of ISO 20022 testing and operational readiness. Are you ready? The imminent implementation of ISO 20022 accelerates the journey toward a single cross border messaging standard for high value payments, unlocking numerous potential benefits. Yet time to act is short - ISO 20022 testing and implementation begins this year.

Many global financial institutions are looking for comprehensive solutions that meet compliance requirements and enable strategic data consolidation across platforms, and ultimately monetization of data. Much of that has been driven by increased competition and changing customer expectations - often led by what big technology and FinTechs have been able to do.


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Chapter 1

The clock is ticking

The new standard can be a catalyst for transformation, both of strategy and underlying technology.

ISO 20022 is an open global payments messaging standard that provides significantly richer and better structured data during the payments’ process. It means more data (around 10 times more) about each payment can be sent. This could include information about the purpose of the payment, the original source and ultimate beneficiary. This enhanced data system will also create a common language and model for payments data across the globe.

Banks need to approach this regulatory requirement as a catalyst to transform. That transformation can help banks provide more value and services to customers. Customers will receive faster and more data rich services, such as better-quality reconciliations, more real-time payments and automated payments around invoices. That richness of data will also be critical as payment providers look to monetize their payments businesses.

ISO 20022 brings change that cuts across multiple systems for banks, including, liquidity, trade finance, financial crime. This presents an opportunity to reimagine the use of payment data in a way that better supports business processes. Simply trying to comply by using translation services would be a lost opportunity to use ISO 20022 as a driver for wider change needed in payments.

Once firms imagine what is possible, key to the change will be how to transform their architecture and technology state. This will include looking at using APIs more and possibly moving away from point-to-point interactions and connectivity to more open and responsive architecture. Firms will also need to consider how they use the public cloud to meet the change.

For banks, the clock is ticking. While we have seen some delay to the original deadlines, we are less than 12 months away from the Target 2, EURO 1, and Cross-border Payments and Reporting Plus (CBPR+) planned go-live date of November 2022 for the standard (See figure 1). Banks must make this change a key priority in the upcoming months.

Figure 1: ISO 20022 upcoming deadlines

ISO 20022 online article - 1680
2

Chapter 2

Getting ahead - how banks can get ready for success

Six steps to help ensure readiness and compliance.

The complexity and scale of the change, coupled with the long implementation period, makes this a challenging task for banks.

ISO 20022 implementation considerations and opportunities

Key strategic implications of ISO 20022

Standardization of payment messaging internationally

Enriched payment messaging data and supporting analytics

Industry-wide interoperability across borders

Improved straight-through processing driving compliance and efficiencies

Opportunity

Description

Examples

Simplify existing operating models

Modernization of payments systems enables cost savings from straight-through processing; payments application portfolio rationalization and operational cost release

  • Streamlined invoice and payment processing
  • AI enabled repair automation
  • Greater automation in regulatory and management reporting

Monetize enriched payments data

Enriched messaging data and shrinking data extraction costs to support product or segment-specific analysis allows banks to capitalize on realized efficiencies

  • Standard syntax minimizes matching errors and automates the reconciliation process
  • Improved risk management and net settlement workflow
  • Real-time dispute resolution

Introduce new products, services and capabilities

Using ISO 20022 payment data and progression to straight-through processing to introduce new services. Implemented within a refreshed business or corporate banking value proposition

  • Consolidated payments dashboard
  • Automated reconciliation reporting
  • Real-time cash flow forecasting
  • Counterparty risk management
  • End of day settlements

Drive connectivity and synergies with broader programs

Potential to explore synergies with broader payment, data and technology related programs

  • Opportunities to combine ISO 20022 or Open Banking data-sets
  • Exposing capabilities as part of an application programming interface commercialization program
  • Enablement of payment initiatives (e.g., real-time gross settlement, instant payments etc.)

Remove barriers to partnerships with FinTechs

Ability to in-source innovative capabilities from ISO 20022 compliant third parties or FinTechs to be embedded into a refreshed partnership and ecosystem strategy

  • Cross-border or multi-currency payments
  • Blockchain technology and digital ledger technology
  • Quick response based payment solutions
  • Peer-to-peer payment solutions

With key milestone deadlines coming up, below we explore what steps banks should have taken to ensure they are ready in time, and their response goes beyond minimal compliance.

1. Ensure connection with payments infrastructure is ready

The immediate task for banks is to have a roadmap and robust project management in place. This will ensure systems work with the updated central market infrastructure. This will involve network, messaging and business readiness. Such programs will need high levels of testing to ensure interconnectivity between in-house systems and systems like SWIFT and the Eurosystem single market infrastructure gateway (ESMIG).

2. Update and align numerous internal applications

Payment systems are the source of many internal applications within a bank, often running to the low hundreds. Banks will have to act quickly to change these to the new standard, in an orderly and safe way. This will involve mapping legacy systems to the new standard as well as effective internal communications.

3. Embed straight through processing

Currently, banks have numerous manual touch points when handling payments data. For example, trying to reconcile missing or incorrect data. The enriched data that ISO 20022 brings should allow a much more seamless, automated process. Setting up the right technology and infrastructure to benefit from this will be a key measure of success, as it is likely to bring notable cost savings. We expect banks to be increasingly focusing on this throughout 2022.

4. Use ISO 20022 to improve financial crime operations
  • Sanctions: As firms transition to ISO 20022, they will need to carefully map across any current sanction restrictions. The new data rich messaging system should make enforcing sanctions easier. For example, the extensive sanctions imposed on Russia and Belarus as a response to the war in Ukraine are relatively complex to map out and enforce under the current SWIFT system. SWIFT has released guidelines around how the industry can make best use of ISO 20022 regarding sanctions.

  • More efficient checks: The new standard should also help avoid delays for customers resulting from poor quality data, as banks carry out AML/KYC checks. SWIFT estimates that some 10% of international payments (pdf) are held up somewhere along their journey for compliance checks, most of which are false-positives and wasted investigations. This reduced friction will save time, reduce costs and speed up services for customers.
5. Monetization

Banks are investing significant amounts and few will want to write that off as the cost of compliance. Instead, we expect banks to look at how they can monetize the opportunities the new standard offers. Banks should be planning ahead as competition will be fierce for how fast and useful such services will be.

We expect most banks are looking at the differing needs of the business customers they serve, when designing new services. For example, for a large insurance client, could a bank create bespoke applications and features that utilizes claims information into their payments functionality?

ISO 20022 is a rare opportunity for banks to redefine their proposition. Failing to do so not only risks losing ground to other banks, but also to specialist payment providers and FinTechs. The new standard effectively means all players are competing on the same playing field, which may erode some of the historical advantages banks have had in retaining payment customers.

6. Channels

Banks involved in the facilitation of payments processing with third parties, (such as merchants, acquirers, issuers and schemes) will need to impact assess their payment gateway services and portals. This is to ensure that any additional ISO 20022 data continues to be captured and remains compatible with existing systems to support omnichannel capabilities.

Having the right implementation playbook

 

There are some core aspects of the implementation process that impact all banks. Below are some of the key pressure points that we see clients currently face:

 

Program support
 

Given the complexity and wide use of payments messaging, banks need to ensure they have a fully established program that goes live on time. That means scoping, reviewing and updating their payments architecture, both from a technological but also a business perspective. For banks with cross-border footprints that becomes even more complex, given the differing deadlines across the main markets. Adding to the complexity, there are different implementation guidelines for different payment schemes.

 

Testing
 

As migration will now take place in Europe first, providers will need significantly more testing, as unlike the Bank of England, there is no regulatory sandbox in Europe. Banks will effectively be left to their own devices as they undertake testing.

 

Data and analytics
 

Data models within banks will change significantly with the move to the new standard. The opportunity for banks to enrich their analytics around this new data set is huge. However, this will need to be aligned with the bank’s existing global data strategy. Legacy systems typically can’t support the new standard, so banks will need to update or replace these, an expensive and complex process.

 

Talent
 

A significant shortage of talent will become a much greater problem as the market prepares for the same timelines. Retaining and recruiting people with the right skills will likely make a material difference to how successful a bank’s adaption to the new standard will be.

 

Corporate customers
 

The change to ISO 20022 impacts the whole payment system, including large corporates whose financial reporting system will be impacted. Banks will need to consider how best to communicate and align systems with customers. Corporates may use this opportunity to streamline and automate reconciliations currently requiring manual intervention. They may also consider strategic opportunities, such as going multi-banked, to reduce cost and improve resiliency.

 

A divergent picture

 

We are seeing some divergence in approach from banks, mainly linked to their market position within payments:

 

Global banks
 

Most accept this is a sea change in payments and they need to invest in changing their systems, but also use the new standard to provide better and more useful services for corporate customers.

 

Mid-tier banks
 

Those that are direct participants in the payments system are likely to be wary of the cost and lean toward a minimum compliance approach. They may potentially partner with FinTechs.

 

Regional and local banks
 

They are typically not direct participants in any of the market infrastructures. They are likely to be fast followers – they will not look to offer new products but will adapt once the standard is established. This is largely driven by the customer base and their expectations from those banks, as well as the cost that goes along with compliance.

 

Each bank will have its own challenges. We are already seeing different approaches in the market. Some are looking at a brand-new infrastructure to take advantage of the benefits of the new standard. Others are considering short-term fixes, like using translation to interpret messages sent and received in the new standard.

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Chapter 3

Some banks will be pioneers – and winners

Happier customers and more payments business for smart providers, but the path ahead won’t be easy.

The benefits of ISO 20022 are clear – a better payments customer experience, as well as improved efficiency, compliance, and harmonization with international payments systems.

Banks will particularly welcome the potential for a much more frictionless process around financial crime and payments. The million-dollar question is how banks can use the extra data available in payments messaging to produce compelling, sticky and useful new services for customers to help them win in the marketplace.

In the same way the internet grew in ways unimagined at its birth, innovation will likely drive payments into new, exciting avenues. Given the growing importance of Environmental Social and Governance (ESG), could the smart bank of tomorrow offer clients payments information that includes key sustainability information? Banks have a chance to be pioneers and not followers.

For banks, the shift is ultimately a double-edged sword. There will be natural concern that a significant and reliable source of revenue is being disrupted, especially as it gives disruptors a level playing field. Many will also worry about the cost and complexity of the transition and look at short-term options, like translation.

Yet for banks who plan the transition well and use the new system to develop relevant and useful payment services, the change will only boost revenues and create happier customers. With a deadline for implementation of November 2022 for EMEA and SWIFT, and April 2023 in the UK for the CHAPS migration, banks must hurry to turn implementation into part of their broader payments’ transformation. They must ensure their architecture and technology matches that vision. The path to change will not be easy, but ISO 20022 could be the catalyst for the biggest change in payments for a generation.

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    Summary

    ISO 200022 will have a genuinely transformative impact on payments. By allowing significantly more data with a payment, it should unlock much improved value and services for customers. It also allows banks to finally leverage and monetize the vast data their payments business offers. Reaching this promised land relies on providers having a clear strategic vision on their future payments proposition. It also needs a comprehensive implementation plan, and carefully calibrated IT change that delivers on that vision. The window to achieve this is getting smaller. The next few months may shape who wins payments in the years ahead.

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