Isabel Schmidt, global head of direct clearing and asset account services, BNY Mellon Treasury Services explains that while a lot of industry discussions currently focus on payment messages and core cash management messages, “overall thinking has also evolved to embrace the concept that a more robust payment message also provides the basis for major efficiency potential in the pre- and post-payment exception and investigations space.”

Schmidt explains that SWIFT’s first attempts to help banks improve this space dates back over 10 years when the E&I initiative was launched and that unfortunately the initiative lacked a sufficiently robust standard to really enable comprehensive automation of exception workflows.

“This space is now being revisited, based on more structured and more robust payment data which the ISO 20022 standard will provide. This is a considerable incremental efficiency opportunity for banks and a further step towards a much-enhanced client experience end-to-end.”

Published in 2010, SWIFT’s guidebook ‘ISO 20022 for Dummies’ presents a useful tool to gauge the changes in thinking toward ISO 20022 over the last decade. We presented Schmidt with a selection of excerpts from the guide to appraise their accuracy or relevance in the current ISO 20022 migration climate.

Why not force ISO20022 migration? Why doesn’t the French or German government force their population to abandon their native language and only speak English? Because apart from the fact that their voters would throw them out of office in a blink, it would cost too much and cause far too much hassle to be worth doing, that’s why. Already today the financial community is a dominant user of ISO financial services standards. But for the majority of its members the cost of migrating their legacy applications to ISO 20022 outweighs the costs of having several standards coexisting.

Schmidt says that while certainly true that the conversion cost for the industry will be material, over the last 10 there have been significant shifts across the industry. First and foremost, many of the new payment systems which have emerged since 2010 are already ISO 20022 based.

“In 2010 SEPA was an outlier, now not so much anymore. Traditional RTGS systems in Europe and Asia have adopted the standard and the instant or real-time payment systems that have been launched around the globe were built on ISO 20022 from day one. Many vendor payment platforms have been upgraded to be fully ISO capable which makes adoption a bit simpler especially for smaller institutions than would have been the case 10 years ago.”

The integration of payments in the business processes these institutions support has also seen material change Schmidt adds, noting that today’s technology enables the execution or receipt of a payment to be fully embedded in a broader business workflow. “This however doesn’t work well with legacy formats. 10 years ago it was difficult if not impossible to imagine the possibilities and the benefits that can be derived from such an integrated operated model.”

Schmidt continues that the industry has also made progress on their assessment and understanding of how ISO 20022 as a richer, more structured standard, can increase the efficiency, accuracy and effectiveness of anti-financial-crime processes.

“The importance of the financial industry’s role in fighting financial crime is ever increasing and focusing resources adequately in this space is critical to success.”

Will ISO 20022 messages ever replace the MT 103? Not in the near term. The MT 103 and other related messages, such as the MT 202 General Financial Institution Transfer and MT 950 Statement Message, are deeply embedded in the legacy systems of financial institutions, making a rapid migration very costly. More than this, an MT 103 or MT 202 are often the result of an underlying transaction and until these underlying transactions are communicated using ISO 20022, migration of the payment messages is perceived as premature.

Schmidt believes that pacs.008 will replace MT103 - but it will take time: “While 2025 seems still far away it is the sunset date for the legacy SWIFT MT payment messages and at that point within the interbank space the messages will cease to exist.”

The migration strategy adopted by institutions will also play a part in determining whether they will still be using the MT message format for communication between various bank-internal applications.
That said, Schmidt adds that pursuing this type of migration strategy will limit a bank’s ability to take advantage of the efficiency and innovation potential of the robust ISO 20022 standard.

“In the customer-to-bank space outside of the SWIFT network ISO 20022 is already widely used for both payment initiation (pain) as well as cash management (camt), and switching to ISO 20022 in the payment clearing and settlement space eliminates restrictions that banks may have to place on full utilisation of those message capabilities today.”

Small player in a single business area with mature standards? “If you are a small player in a single business area, then generally you should be able to continue to use the communications infrastructure you use today. Most large counterparties and service providers are equipped to continue to support existing formats, for example, by using the interoperability tools described in the earlier chapters.

Schmidt argues that coexistence over an extended period of time will be challenging and is therefore increasingly unlikely.

“Since 2010 the industry has pivoted to embracing the adoption of an “enhanced” ISO 20022 format as opposed to following a like-for-like approach. The latter represents an implementation approach leveraging usage guidelines that largely align content and format of the ISO messages supported by the market infrastructure to the legacy SWIFT MT messages.

While technically simpler, Schmidt says the approach does not lead to the benefits expected from a major transformation. “The target state for the major market infrastructures is an enhanced, more robust version of the standard. With that, mapping and truncation issues become inevitable as more and more banks and their clients leverage the possibilities of the enhanced format.”

When asked to elaborate on any underlying difficulties which have emerged as part of the migration, Schmidt notes that aside from the technical challenges regarding interoperability and coexistence, a fundamental challenge in the industry is in fact lack of talent and effort related to education on the topic.

“SWIFT MT messages are well known to not just the technical and operations staff of banks but also compliance and risk teams, as well as client facing staff. ISO messages are more complex than their MT equivalents and the level of understanding of this “new language” is merely emerging in many non-tech/ops teams.”