Payment system evolution – ISO20022
The ISO20022 payment messaging standard migration is well underway in many jurisdictions after a short hiatus. Central Banks and Monetary Authorities are beginning to mandate its adoption. This is partly driven by SWIFT who will stop supporting the co-existence of NT and ISO20022 by November 2025, (dropping NT).
There is no criticism of this direction. Standards must be continuously reviewed to ensure they remain ‘fit for purpose’. Further, in the time continuum revisions of a standard will result in its structural decay. Add to this, the payment domains have evolved with technological advances, extending the capability to develop payment methods that meet real-life challenges.
Simply payment messaging standards were overdue for redevelopment.
Visa Economic Empowerment Institute:
Demystifying ISO 20022: Evaluating the Benefits and Ilimitations of New Messaging Standards by Mike Gallaher and Chad Harper / Jan 2022 define ISO20022 as…In many ways, ISO 20022 is more a collection of messaging standards for financial services than it is a single standard. It outlines the methodology and metadata for defining messages for the financial services sector, and its current application goes well beyond payments (e.g., securities clearing and settlement, foreign exchange trading and international trade initiation and management services (SWIFT, 2020).
There are two critical connecting factors the payment community must consider when looking at reengineering global payment methods.
- Payments as an enabler of commerce must deliver sufficient scope for new commercial practices to evolve while contributing to the efficiency of the value transfer process between buyer (payer) and seller (payee). Alternatively, payments will simply inhibit commercial activity through not recognizing the dependency and the need for appropriate accommodation.
- In contrast with any changes to payment methods, system infra-structure changes are likely to be extremely disruptive so the pain must be counter balanced by the delivery of real benefits in terms of commercial profitability, cost savings plus convenience gains for individual actors.
The Reserve Bank of Australia; Modernising Payments Messaging: The ISO20022 Standard by Tarnia Major and Joseph Mangano – 17 September 2020
“The ISO20022 message standard delivers benefits to all users throughout the payments chain. In the HVCS, the benefits are realised by the financial institutions and their corporate clients who send and receive these messages. Over time, customers are expected to benefit from data-rich payments, more efficient and lower cost payment processing, and enhanced customer services such as improved remittance services.”
Although this RBA publication is focused on the High Value Clearing System (HVS) it does mention the Australian New Payment Platform (NPP) utilizes the ISO20022 messaging standard. NPP is a Near Real-Time payment platform.
The ISO20022 standard is broad based covering the full scope of payment domains. Therefore it is inclusive of 731 messages, within 32 sub-classifications. Refer here.
A primary benefit of ISO20022 relates to the enabling interoperability across multiple payment domains both domestically and internationally. Imagine a card transaction where the merchant credit is sent by the card domain to NRT domain. The merchant’s account is then credited, (less fees) in real-time.
The question is will this be achieved considering the cost/benefit balance of switching from an existing standard such as the card standard, ISO8583. ISO8583 has been universally adopted to support interoperability within the card domain.
A further benefit of ISO20022 which may be the primary benefit for many is the additional data that can be carried within the payment messages. This data may not be directly related to the payment process but more related to the attributes of a commercial transaction.
One question is should the payment system be used as a delivery channel for third parties who have an extended commercial interest in the non-payment data? This possibly delivers a revenue generation opportunity for the payment processors and financial institutions cooperating with the FinTech sector.
A benefit being promoted to financial institutions is the extended payment related data will enable improved fraud and money laundering detection, making the transfer process especially for cross border payments more secure and efficient.
Conversely, the data can be used by merchants and product producers to understand more accurately their customers’ requirements and purchasing behaviour. The customer (payer) will therefore benefit but at what cost, especially relating to privacy?
Cost of ISO20022 Migration
The cost of migration, especially for smaller providers may never see a positive ROI. To quote Visa Economic Empowerment Institute: Demystifying ISO 20022;
ISO 20022 adoption will also be expensive, especially for financial infrastructure already operating with other international standards. Estimating costs is quite difficult, as adoption costs are often combined with other infrastructure-related investments. However, it is clear that given the limited commercial case for adoption for payment systems already operating on ISO 8583, cost recovery could take decades (European Cards Stakeholders Group, 2016).
A considerable challenge for participants is to connect into a payment hub/switch, especially if this involves using a new messaging standard, unlikely to be supported by their existing internal payment gateways. In addition, their payment delivery channels will need to be reengineered.
The Australian Reserve Bank paper; ISO 20022 Migration for the Australian Payments System – Issues Paper A consultation paper issued by the Reserve Bank of Australia and the Australian Payments Council April 2019 lists 11 clearing and settlement system that would potentially require migration to ISO2022.
Australia possibly needs to rationalize its national payment system prior to the migration of their payment domains. In regard to the high value, clearing system there is a time constraint because of the SWIFT mandate.
Point of Acceptance Platforms
The payment originating platforms (points of acceptance) will likely need to be enhanced to support the capability of encapsulating the extended data in the payment message. This task is diverse and wide ranging in both terms of device types and the broad base of vendors, further complicated by an unmeasurable number of service providers.
The Expected Benefits
There is a claim that ISO20022 will deliver efficiency and promote innovation. The point is these claims are coming from those with an interest in payment technology, as the lack of specific use cases suggests that the pressure is not coming from commercial interests. If the view is commerce drives the development of payments, is the payment community over reaching, again being captive to the technologists? Is there an immediate account holder need for the older payment domains to support the ISO20022 standard? Especially as there, usage is declining.
If new services are addressing the growing social expectation for immediacy, will they not switch to using NRT payment services that are supporting ISO20022? Why upgrade the older domains that might have a short life expectancy.
It must be understood that in most cases, the seller’s point of acceptance or ECR systems are capturing all the sales data they require to update their businesses’ internal sales and stock control systems. They are the data source but have a single issue; they have difficulty identifying their customer. This has been addressed by loyalty programs. These could potentially be dispensed if ISO20022 was adopted.
The purchaser is however, in a different situation if they are not receiving details of the products and services that have been delivered for which they have made payment, unless in the form of a paper receipt.
Businesses especially are unlikely to be able to match the payment and delivery with the purchase order held by their procurement system seamlessly, unless it is delivered in a readable digital form. Is there a need or is e-invoicing addressing the business need? Should e-invoicing be integrated with the payment system for the exchange of relevant data?
An issue for business exists with the card payment methods not delivering line item details, (there are exceptions in the travel space). ISO20022 has been developed to support card payments, assuming merchants especially in the travel, office supplies and entertainment sector are able to capture and send the data.
The existing card networks could benefit by migrating their messaging to ISO20022 but such an upgrade would require an extensive redevelopment. ISO8583 does have significant limitations in terms of what data can be encapsulated in the messages. The messaging data has been manipulated to an extent where decay has set in. Migration to ISO20022 may be inevitable.
The Financial Institution Challenge
The challenge for financial institutions is what to do with the additional data that is not being used for fraud detection and AML purposes that are being delivered by ISO20022. Should such data not be captured at source?
Following quote is from J P Morgan: What does ISO 20022 mean for the payments industry? (jpmorgan.com)
“ISO migration is more than a technical project for tactical execution, unlocking potential for FIs to shift from passive to active payment processing. In other words, this is not just a standard which banks must comply with. It’s a unique opportunity to capture rich data benefits and embrace data-driven innovation. The highly structured messaging format means machines can read messages better for faster automation and resolution.”
Author: Peter Goldfinch, Research Director, Australia, Payments Consulting Network
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