EXCLUSIVE: “Out-Of-The-Box Thinking” – Andrew Muir, Daragh Kirby and Olaf Grossler, Intercope in ‘The Paytech Magazine’
Despite years in the making, the migration of tens of thousands of participants in the world’s payments networks to ISO 20022 is proving infinitely complex. A recent discussion panel, mounted by Intercope, with Andrew Muir, Daragh Kirby and Olaf Grossler, explored some of the consequences and offered at least one solution.
Payment messaging standard ISO 20022 isn’t new; but its adoption, simultaneously, by many of the key financial networks from this year, is. The move in Europe, the US, and Asia is an acknowledgement that the world now needs a common language between financial institutions transferring funds cross-border – a task becoming increasingly fraught with regulatory and compliance pressures (as recent geo-political events testify) and under irresistible pressure from participants and their customers for better payments speed and transparency.
Already, more than 70 countries have adopted elements of ISO 20022, many for domestic, low-value and instant payment schemes. But, over the next five years, those that haven’t may well find themselves at odds with the correspondent banking networks, unable to receive or send messages in the required format.
How internal processes adapt to IS0 20022, which is predicated on using a common dictionary, a standard modelling methodology, and the use of extensible markup language (commonly known as XML) and abstract syntax notation (referred to as ASN.1) protocols, is mostly the concern of financial data teams and specialists in the high-end, interbank messaging market. That said, ISO 20022’s consequences will ripple through organisations, impact multiple business units and open doors on potential new revenue.
By 2025, it’s forecast that it will support 80 per cent of global transaction volumes and 87 per cent of their value. But between now and then is, arguably, the most testing stage of the migration to this new data-rich format: its co-existence with those that went before. A particular concern is how companies plugged into the dominant network, SWIFT, will support SWIFT’s legacy non-XML proprietary message format, known as MT, alongside the new MX messages. It’s important because more than 11,000 global SWIFT member institutions sent an average of 42 million messages per day through the network in 2021, using SWIFT’s core service for exchanging MT format financial messages, known as FIN.
Andrew Muir, a financial transactions and ISO 20022 consultant currently working with high-end messaging software specialist Intercope, the company’s head of sales and marketing, Daragh Kirby, and Olaf Grossler, head of implementation and client support, recently joined a panel discussion and Q&A to help organisations face this challenge.
Muir kicked off by acknowledging that SWIFT’s (and Europe’s) stop-start timetable for transition to ISO 20022 hasn’t helped businesses engaged in an already complex preparation, although, given that the new ‘international language of payments’ has been flagged for several years, it’s still, in his view, an ‘underestimated challenge’.
“Real-time gross settlement systems across the eurozone, in the UK, the US, Singapore, Hong Kong, the Philippines, Australia and elsewhere across the globe, will have migrated to ISO 20022 by the end of 2025,” said Muir. “Individual schemes already using ISO 20022 messages include SEPA Credit Transfers, SEPA Direct Debits and Instant Credit Transfers. Of course, correspondent banking starts from this November. And the picture keeps changing.”
Only in January, SWIFT published updated usage guidelines and translation rules for its CBPR+ (Cross-border Payments and Reporting plus) specification, which defines how ISO 20022 is to be used for cross-border payments and cash reporting on the SWIFT network from November. The Bank of England also announced a significant change to its own ISO 20022 rollout plan, effectively removing the like-for-like deployment for CHAPS originally planned for this summer.
“The complexity of handling scenarios that cross the boundaries between schemes is becoming clear, as is the challenge of how to reconcile all the new message exchanges internally,” Muir told the panel. And he stressed that it wasn’t just banks and payment service providers who would be impacted.
“The number of institutions now affected by ISO 20022 is in the tens of thousands, but the number of business relationships affected is much higher. The need for knowledge sharing and collaboration has never been more compelling,” he said. “At Intercope, we believe the optimal architecture includes one single technology for transformation and integration, to manage all ISO 20022 migrations, and keeping control of those transformations in-house, where possible, is key to managing the complexity of these migrations, and potentially harvesting this richer payments data exchange, which is what ISO 20022 is all about, in the future.
“Maintaining one solution for this across real-time gross settlement (RTGS) schemes like CHAPS and TARGET2 is relatively straightforward, because those market infrastructure programmes, typically, do not provide additional transformation or amendments to messages. The challenge we face is in the new SWIFT CBPR+ setup, which does introduce new elements, like the SWIFT Transaction Management platform, and in-flow translation of messages between ISO 20022 and MT. This introduces additional functionality and therefore risk, with some transformations done on the network, through SWIFT, and others not. It also adds overall solution complexity, with potential gaps and overlaps from the use of multiple technologies, and different business and technology entities, to provide message handling and translation from different schemes, even within a single bank.
“We also face challenges like truncation and ‘glue back’ – removing, accessing and adding back in stripped-off fields for return messages. In short, there are grey areas around where some functions go.”
Daragh Kirby agreed that scheme interoperability issues will challenge institutions over the next four years , given the multiple ISO 20022 timelines, their adoption strategy, in terms of like-for-like full data mapping, the changing role of CBPR+ and changes to SWIFT’s Relationship Management Application (RMA).
“The RMA is a mandated filter that was created to enable banks/financial institutions to define which counterparties can send FIN messages back and forth.It allows a more granular view of what can be sent and what can’t, the timelines, whether a signature is involved, etc. SWIFT has introduced a new application on its network in 2022, which will change how these authorisations work. You can still use your RMA database as you do today and check the data store, but records maintenance will be handled by SWIFT in future, and all validations, etc, will happen from that point.
“In the context of a cross-border payments journey, where you have an old MT message, and a new MX version, SWIFT will hold new RMA authorisations for FIN until the corresponding new ISO authorisation is sent out. But, if both authorisations don’t occur within 10 minutes, the RMA request may be discarded. Banks need to understand how they will manage these RMA authorisations.”
Many technology providers have sought to insulate customers from the pain and expense of ISO 20022 transformation by offering message hubs with built-in relationship management apps. Intercope’s is called BOX, an infrastructure-agnostic platform than can support multiple financial networks with a single window for customers’ financial messaging and gateway requirements. As well as connectivity, BOX, which stands for back office exchange, promises comprehensive functionality for back-office integration, manual message processing, warehousing, and archiving.
“The largest challenge around ISO 20022 is message transformation, as it’s often needed twice, once to the scheme, and once to the in-house system,” said Kirby. ”It’s all well and good upgrading the bank to do ISO 20022 at the edges, but what about back-office systems? Somebody put it well the other day: there’s no point in a hotel having an Amazon or Netflix streaming service in the lobby, if rooms only use VHS videotapes. People will want to see the message taken through the whole bank. That means transformation.
“With four years of the coexistence, no matter how ready you are – with the MTs, and the ISOs, the RTGSes and the CBPR+s – at some point, you will receive FIN messages that have to be transformed to ISO. So ,controlling the transformation through one central solution, and having a payments message warehouse, are key.”
Grossler added: “Transformation scenarios are different, for different banks; not all have the same back-office systems, or are upgrading their payment system and processes to be ISO 20022 native at the same time.
“SWIFT’s Transaction Manager is handling the MT/MX transformation only for a handful of cross-border payment messages, in the beginning. The remainder will stay as FIN, or be transformed by the In Flow Translation of the SWIFT network. So, banks processing transaction payments have to work with messages from the Transaction Manager, with the In-Flow Translation from SWIFT, or with legacy FIN messages. Then we need glue-back and reconciliation scenarios, for example, in the creation of pacs.004 (payment return) messages. Our BOX payment messages warehouse is playing a key role in this.”
Individual institutions are finding their own workarounds. One major UK bank, for instance, whose back office doesn’t natively process ISO 20022 messages, separates MT and MX formats as they pass through BOX and, on the return journey, truncated fields are ‘glued’ back on to an MX message before it’s sent back out to the SWIFT network.
“The bank reconciles the payment, on the back-office side, and BOX works on the transformation,” explained Grossler. “If we have to truncate data, the information is stored with the original message, which is available for the back-office application. If needed, it’s returned back to BOX, but the bank stays in control of the data that BOX is working on,”
The big unknown is banks’ appetite to invest in transforming in-house systems further once the uncertainty is over.
“Most are moving that way, but not all,” he added. “The business case is still unclear.”