It is predicted that by 2025, ISO 20022 will handle 80% of transaction volumes and 87% of transaction value globally. In Europe, the adoption deadline was extended to November 2022. 

ISO stated that the new standard will provide improved efficiency in payment processing and enhanced data automation capabilities on an international scale. One significant improvement in technology is the integration of APIs and the use of cloud-based systems for processing data, which make it easier for transactions to happen across different borders. Nevertheless, as organisations transition to ISO 20022, they must consider the technical aspects and potential limitations of this solution. 

In this article, we'll explore the technical differences and improvements ISO 20022 offers over ISO 15022 and how it will affect financial organisations.

What is ISO 20022

When doing business, efficiency and speed often become crucial for all the stakeholders and the lack of standardised processes can slow down transaction processing and consequently postpone the business outcomes. This poses certain problems, especially when large sums of money are involved, as miscommunication between banks can occur. 

For instance, imagine a company in the U.S. paying $50,000 to a business partner abroad for services rendered. If the sender's bank formats the transaction message differently from the sender's bank's standards, some details may be missing or unclear. It will be necessary for the institution initiating the transaction to file a detailed message. If this requirement is not met, the transaction may fail to get processed. The standard's structured data format seamlessly integrates with both banks' systems and by that enables immediate reconciliation and real-time transaction tracking, reducing processing time from days to minutes.

In this case, standardisation ensures that diverse systems and institutions can communicate seamlessly. Currently, cross-border transactions are subject to fragmented standards and local practices, making communication between Financial Market Infrastructures (FMIs), Financial Institutions, and machines difficult. 

ISO 20022, as the latest standard in financial messaging, goes a step further and incorporates comprehensive definitions. These additions can help improve communication across various regions and geographical areas. Besides, they promote greater efficiency and interoperability in the global financial landscape.

How is the Adoption Going

The global shift to ISO 20022 is gaining traction among payment industry leaders due to impending deadlines set by various regions, including the UK, EU, and the US. Despite challenges in adoption, particularly with SWIFT's CBPR migration progress, ISO 20022 migration presents an opportunity for transformative change in financial services. 

SWIFT is taking proactive steps, such as launching its Transaction Manager and SWIFT Essentials suite, to facilitate adoption. By November 2025, all banks using SWIFT wires must comply with ISO standards. As said, ISO 20022 offers benefits like enhanced transparency and faster processing, impacting both B2B payments and cross-border transactions.

While ISO 20022 aims to enhance communication between financial entities, some institutions face challenges with migration due to resource constraints. Banks are adopting phased approaches for data transmission to improve processing and reconciliation. With less than two years remaining for completion, banks must prioritise leveraging richer data for enhanced accuracy, efficiency, and reporting. There's no time to delay, as ISO 20022's global rollout was initially planned two years ago.

ISO 20022 VS ISO 15022

Let us look at how ISO 20022 differs from its predecessor, ISO 15022.

1. Message Structure and Flexibility

ISO 15022 was developed in 1995 to provide the securities industry with an improved framework for message standards. Unlike its predecessor ISO 7775, which contained actual messages resembling those in SWIFT MT, ISO 15022 outlines rules and guidelines for constructing messages. Adherence to these guidelines ensures that messages conform to the ISO 15022 format. 

ISO 20022, the successor to ISO 15022 which adopts an XML-based data model, differs significantly in that messages are more adaptable and less constrained by specific formats. 

2. Data Richness and Quality

ISO 15022 messages have limitations in their structure, often resulting in cutting off crucial data or dividing information into several messages. This may cause inaccuracies and inefficiencies in handling and understanding data. 

In contrast, ISO 20022 greatly improves data accuracy since it allows more detailed information to be included in one message. This includes extensive payment details like complete legal entity identifiers, additional remittance information, and intricate multi-party transaction specifics.

3. Interoperability and Integration

ISO 15022 requires a lot of human intervention because it doesn't work well with modern automated systems. It doesn't fit with newer financial technology protocols like APIs or web services either. 

On the other hand, ISO 20022 is made for compatibility, providing a global language that works well with different financial systems and technologies. Its aforementioned XML format is designed to work seamlessly with web services, improving connectivity between different financial systems and enabling efficient processing.

4. Compliance and Future Proofing

ISO 15022 was adequate for its time but does not adequately address the contemporary needs for compliance with global regulatory frameworks, which demand detailed reporting and data analytics.

ISO 20022 helps banks stay compliant with changing financial rules by allowing them to create detailed reports that can be easily updated to meet new regulatory demands. Its flexibility means that financial institutions can prepare their messaging systems for future regulatory shifts.

5. Technological Adoption and Transition Challenges

As a common point, moving from ISO 15022 to ISO 20022 requires a big technical upgrade for numerous organizations. This encompasses modernizing old systems, training employees again, and incorporating new data management practices. Even though there are obstacles, transitioning to ISO 20022 is warranted by the considerable advantages in the long run like improved efficiency, reduced costs, and better adherence to regulations. Let us consider the adoption challenges further. 

Possible Adoption Challenges

Although celebrated previously, the advanced XML-based structures of ISO 20022 are hard to handle. Key challenges include integrating with legacy systems, which may require extensive updates or replacements to do so. The shift to a new system requires both money and time for updates and fixing bugs. Staff must also be trained to use the new format, which can strain resources. 

Moreover, moving data to the new system is tough, as it must be done accurately without interrupting current work. Handling the vast amount of data in ISO 20022 calls for strong data management to ensure accuracy and compliance. Despite these challenges, the long-term advantages of better data quality and compatibility usually make the effort and cost of moving worthwhile.

As I have highlighted, ISO 20022 is a massive change for companies to transition existing 15022 processes that have been set for almost three decades. In an industry also moving toward T+1 settlement, it can be difficult for companies to justify added costs, especially in an area that may not yield immediate benefits to revenue or income. 

Having said that, SWIFT has provided a 3-year window where financial intermediaries are given the option of leveraging either the MT 15022 standard or the MX 20022 standard. Following T+1 rollout, once firms have more available capital and resources, they should use this period of build-out and test the ISO 20022 functionality. Existing ISO 15022 examples and definitions should be leveraged wherever possible for the new standard and in such cases, 1:1 mapping should reduce some of the work. New tags related to cross-border payments will require time to understand, code, and test. 

I expect companies to accelerate the adoption and deployment of the new standard in the latter half of 2024 and companies can use the opportunity to do external testing with willing participants. If the costs involved are not justifiable, 3rd party middleware platforms can be an alternative solution to implement these standards/processes, although they come with outsourcing risks. Nevertheless, by the end of 2025, companies will need to choose one path or another to ensure a unified messaging format is used by all participants to communicate financial messages.