As technology advances for business-to-business or cross-border transactions, the accompanying messaging standard must evolve at the same rapid pace.
Thus, the call for common standards continues to pick up steam and remains a top priority for The Society for Worldwide Interbank Financial Telecommunication. Swift has made its position clear — it considers the ISO 20022 messaging standard the key to getting banks across the globe handling payments to communicate in the same financial language, share stronger fraud protection, lower costs and drive even more innovation.
To that end, Swift is working with various international banking groups and market infrastructures to continue the dialogue needed to advance ISO 20022 beyond the talking stage and into the higher-value payments and financial frameworks of entire countries.
The standard, as originally established 14 years ago, was designed to evolve with current technology and business needs. And banks adopting the standard are seeing many of those changes in just the past few years.
"One advancement is the content of the standard, or the data exchanged in the payment," said Stephen Lindsay, head of standards at Swift. "We have a process in which that data changes annually as business requirements arise, such as addition of a new purpose for payment codes or new identifiers."
The key driver for ISO 20022 remains its ability to allow remittance documents with cash, card, securities, trade or FX international payments; and handle them in coding and language that all domestic and global financial institutions would share for the majority of their payments. This year, the data in ISO 20022 will also allow payment parties to be identified in the language of the message. That change comes through a process using legal entity identifiers.
And a change in the standard introduces the ability to reuse certain business aspects through an application identifier.
"We refer to ISO 20022 as a messaging standard, and indeed it is, but it's based on a common set of business definitions that can be deployed in messages," Lindsay said. "And now what we are working on is to deploy those same business definitions in APIs."
That change is important because it would help speed up changes as more open banking standards unfold, such as PSD2 in Europe and similar movements that call for third-party technology development and APIs to operate in synch with network rails, Lindsay added.
"It means we can lengthen the value chains," he said. "With more intermediaries between buyers and sellers, it means they are using messaging between the banks and clearing mechanisms. But some can use APIs to link between payment service providers and the banks."
It's a significant risk if the data put in the pipe at the start looks very different at the end, Lindsay said. Swift is pushing full end-to-end payment processing using ISO 20022 at every point in order to establish data consistency and integrity, even if intermediaries are involved.
It's a push that is resonating globally, specifically in that ISO 20022 is the basis for Single Euro Payments Area standards for clearing house and wire transactions, and it is rapidly becoming the standard for fast-developing real-time payments and cross-border payments schemes, said Ron van Wezel, and Aite Group analyst based in Amsterdam.
"Adoption of ISO 20022 standards in the card payment market is just beginning," van Wezel said. "Still, the message standards have already been defined for the merchant-to-acquirer and acquirer-to-issuer domains."
The fintech developer community may not be entirely keen on the XML syntax used to publish messaging standards, and until the plans for ISO 20022 to establish API standards fully arrive, the mapping of middleware to facilitate a conversion from ISO 20022 to simpler formats would be helpful, van Wezel said.
Most importantly, banks and other financial institutions that serve clients in the payments space need to prepare to support ISO 20022, he added. "They should consider looking beyond treating ISO 20022 as an additional format to be mapped into legacy formats, and use it instead as the basis for their payment applications."
While not considering it a silver bullet against fraud, Swift is also promoting ISO 20022 as a safeguard against fraud in that the common messaging language would make it easier for banks to spot abnormalities.
"The data definitions are much more precise and granular," Swift's Lindsay said. "If you are looking for specific data elements to detect fraud, then you are looking at much higher quality data and you are more likely to spot differences in it."
To improve on legacy systems, ISO 20022 includes more data elements that make it clear what the payment is for, who it is for and who is sending it.
"That's missing in existing message formats," Lindsay said. "They were designed at a time when bandwidth and storage was very expensive, so they tried to compress a lot of message into a small space."
Those older formats never made space for the credit source, the beneficiary or other parties and the data would end up being pushed into other format fields or would become part of data elements where they didn't belong.
"It's a long process to do this," Lindsay said, in noting that Canada's push to support ISO 20022 is moving toward its third year already. Canada favors ISO 20022, in part, to save what it estimated at $4.5 billion over five years through the elimination of paper checks.
"But the momentum for it is kind of snowballing because the banks in these countries know they are going to have to do it for the various payments initiatives taking place," Lindsay added.