Global payment stakeholders may get lost without a common 'language'
In the age of global business, clear communication is essential. Companies and banks need to share information about who’s paying who, and, for what, in a way everyone can understand.
This can be challenging when, historically, every payment type, clearing system and geography has had their own file format or “language” to facilitate that exchange. ISO 20022 was developed to bridge these language gaps and provide a single common reference for anyone, anywhere to use.
The first way ISO 20022 makes communication clearer is by linking the type of message used for a task to the purpose of that task. For example, if you want to initiate a payment, you use a PAyment INitiation, “pain” message type. For cash management information and receivables reporting, you’ll receive a “camt”, CAsh ManagemenT message.
When banks clear in ISO, they use “pacs” messages – PAyments, Clearing and Settlement messages. There are many business tasks with message types defined by ISO 20022. But, for companies who wish to begin interacting with their banks in ISO, pain and camt messages are the ones designed by The International Organization for Standardization (ISO) for A/P and A/R Treasury Operations.
Second, ISO 20022 offers tools to ensure that messages make sense. One tool is an online dictionary of message types and how to use them. Another tool is syntax, the grammar of our ISO language. XML is the most commonly used syntax today, but it’s not the only one. ISO has also sanctioned the use of ASN.1 syntax, and ISO 20022 is flexible enough to be usable with other syntaxes, as the industry and usage evolves.
These tools help companies because the XML structures or schemas enable robust format validation of the ISO-defined content. All parties then know where to expect each data element within a file for all payment types, reducing the number of surprises between senders and receivers. This format normalization also allows for the same process to be used globally.
Companies undertake an ISO implementation due to one or more of three main change-drivers: people-driven changes, system technology changes or banking industry changes.
Canadian Pacific’s (CP) ISO 20022 project was driven by all three. This company’s people driver was a change in finance leadership. As part of the company’s transformation, there was a desire to consolidate the number of banking partners and connectivity touchpoints, automate payment and reporting file delivery, and maximize visibility and efficiency of treasury operations.
The company’s system technology driver was an ERP upgrade. As anyone who has undertaken an ERP upgrade knows, this is a major technology investment in and of itself. It is also a great time to review status-quo processes and determine if best-in-class methods are being used. If not, it serves as an impetus for change to make things better, more efficient and more secure.
Finally, the company is based in Canada, a location where ISO is the soon-to-be new national financial messaging standard. While the U.S. has been a relatively slow adopter of ISO due to a non-mandated approach, Canada is moving ahead with the ISO-focused Payments Canada Modernization initiative. As Canada moves to ISO-based clearing and settlement using ISO pacs messages, within the next few years, many companies are getting themselves ready for this banking industry change, by moving to ISO on their own terms. While it is unlikely that banks will force companies to originate payments or receive reporting in ISO pain or camt formats right away, if Canada follows in the path of other clearing systems, a time will come when banks stop converting to and from legacy formats and require ISO usage.
This company decided to take a big bang approach to ISO, that moved all payment and reporting flows to ISO in conjunction with the ERP upgrade. The project milestone dates were hard and fast, with accountability for meeting those dates at the board of directors level. This can be a double-edged sword, as executive sponsorship is extremely important but stringent dates can give less flexibility to deal with scope changes or customization requirements that can come along with a new file format.
The end result of this company’s ISO implementation was: The upgraded ERP system leverages the natively produced ISO format; streamlined banking relationships with fewer providers, which increased automation while reducing fees and improving oversight and control through centralization; and cost savings through account and process optimization and a physical site consolidation of treasury staff.
With the right focus and a little bit of pre-work, many companies can leverage ISO 20022 as the new global standard. It’s a way to move toward the goal of using a single process to access payment systems anywhere. Now, that’s speaking in a language we can all understand.