After years of decision-making, discussion, and delays, ISO 20022 is finally happening. The wide variety of legacy message and data formats that all institutional and corporate entities use to make or receive payments will converge into this common standard by next year. In a survey conducted at the tail end of last year, why did 52% of corporate finance teams report that they had made no preparations at all for the switch to the new standard?

In this blog, we will go over some of the possible reasons for – and implications of – this lack of groundwork from a corporate and financial institution’s (FI’s) perspective and what firms need to focus on now to be ready.

Pre-empting further postponement?

As ISO 20022 was originally agreed upon in 2018 and multiple postponements have stalled implementation, some may speculate further delays. All signs suggest that is not the case, with payment schemes worldwide already starting work and demonstrating the inevitability of the transition next year.

In the UK, the Bank of England (BoE) migrated its real-time gross settlement system (RTGS) and high-value payment system CHAPS to the standard in June 2023. SWIFT also began transitioning cross-border payments and several domestic high-value and real-time payment systems to the new format in 2023 and is currently in a two-year co-existence period with MT messages until November 2025.

Underestimating impact?

It could be argued that the transition for SWIFT and the BoE is significant, and so of course they need plenty of time to get ready. But it will be no mean feat for many corporates, with potentially large-scale enterprise projects involving numerous parties, including finance, IT, risk and governance, sales, and customer service on the horizon.

This is certainly the case for the BoE’s new information requirements, which mean that corporates and any other organisation making or receiving payments must update their finance systems and processes to process this new information so they can send and receive payment instructions.

To make matters even more complex, mandated information requirements all run to different timelines, starting with the inclusion of purpose codes and Legal Entity Identifiers (LEIs) for certain transactions from November 2024.

Cost concerns?

Delaying ISO 20022 migration for cost reasons will inevitably turn out to be a false economy in the long term. For FIs, the lack of corporate preparation will lead to costly migration issues when ISO 20022 commences. An example of this is if banks do not receive the correct information to make forward payments, there will be an increased proportion of failed payments, as well as a rise in the number of payments that require fixing, which in turn will increase costs.

A word of warning for FIs

So far in this blog, focus has mainly been on corporates’ approach to the new standard.  However, this change is of course going to significantly impact FIs. So, how are they faring when it comes to ISO20022 preparedness? Anecdotally, we have noticed some less-than-ideal approaches.

FIs making property-related transactions have until November 2024 to migrate CHAPS payments to the new ISO20022 XML format — which includes the addition of ‘Purpose of Payment’ codes to payment instructions (see figure 1 for full timeline). However, several leading banks have shared that they do not intend to add functionality to include ISO20022 codes within their online banking portals — at least in the short-term.

Therefore, to comply with new ISO requirements, these FIs will have no alternative than to:

1. Develop their own core banking systems to include scheme-specific codes such as 'Purpose of payment' by November 2024.
2. Or, from November 24', have each CHAPS transaction fail, until it is confirmed via phone call with the bank the 'purpose of payment'.

We have also seen a trend for FIs to use Faster Payments or change payment rails away from CHAPS to avoid running into issues with ISO. However this workaround is purely a way of kicking the ISO20022 can down the road, as Faster Payments will also need to be compatible with the new format soon too.

Figure 1- source: ISO 20022 for banks and non-bank PSPs | Barclays Corporate

Once again we are left guessing why firms make decisions like this – a belief that they will have more time? Budget restrictions? An underestimation of what is coming? Either way, ignoring critical requirements, or implementing quick fixes or ‘band-aid’ solutions will be a fast route to a slew of unintended consequences.

Necessary next steps

The same survey mentioned at the start of this blog also showed that just 14% of corporates had spoken to their bank to understand what preparations were needed or conducted an internal data review to understand missing gaps. That is the first port of call for corporates who are yet to start their ISO 20022 preparation.

Establishing a timetable with their banks as soon as possible has the added benefit of providing some much-needed latitude for corporates to create a migration strategy, as most major FIs are running old and new formats in parallel – for some time at least.

Another time saver for corporates and financial services providers is to work with ISO 20022-compliant bank integration technology, which can play a crucial role in translating the new standards between corporations and FIs and remove the need for expensive, large-scale Enterprise Resource Planning (ERP) projects. They can also reduce the reliance on already stretched IT resources, enabling finance teams to take the lead on ISO 20022 migration.

The time is now

Whatever the reason for the lack of preparedness, there is no denying corporates and institutions must take steps now to change how they send and receive payment instructions and become ISO 20022 compliant. By taking immediate proactive measures, firms can navigate this transition effectively, minimising disruptions and maximising the benefits of the new standard.

Bank integration solutions are key to a smooth and efficient transition. They can provide finance and operations leaders with a great business case for eliminating a manual approach to payment operations and can play a key role in helping corporates realise the benefits of ISO 20022.