- Case Studies
valantic and the ISO 20022 Migration
We are facing interesting times: cash money is already considered obsolete as the most important means of payment in the German retail sector. Even the traditional three-day model for transactions has been replaced by a “one-day model” or meanwhile by instant payments. With Apple Pay and Google Pay, the smartphone also begins to play a leading role in payments. What may get lost are the technical resources which are required for cross-national processes. ISO 20022 has the mission to create a standardised universal language for financial transactions. First versions of the ISO standard have already been published in 2003; but now, the norm is finally close to a global breakthrough in payments. For better assessing the relevance: from the banks’ perspective, it is a reform having an extent which is even greater than the former SEPA introduction.
Managing Director JP Morgan London
”Open Banking and ISO 20022 are transformational levers.“
The ISO 20022 standard is a modern, XML-based standard for exchanging financial transaction data of different business segments in banking institutions. The standard has already been developed at the beginning of the 21st century and has first found practical application in the processing of investment fund shares (SWIFTNet Funds) in 2003. The ISO standards are characterised by granular data structures transmitting business information in great detail. The standard for payment transactions primarily refers to the processes in the Payment Initiation section (pain messages between customer and bank) as well as in Payments Clearing & Settlement (pacs messages between banks).
Digitalization is promoted in many industries – always leading to the same result: processes become easier and more automated. In addition, there is the pressure from regulatory requirements as well as an increasing cost pressure due to decreasing margins and the markets’ globalisation. Thus, a further digitalization of the processes is required aiming to achieve a proper end-to-end processing within the process chain. The simplification of the upstream processes in payments leads to a simplification of downstream steps.
CEO, valantic Trading Solutions AG
”For software solutions, a central gateway architecture is vitally important to guarantee the integration of all future microservices.“
The full potential of the advantages of the new standards can only be realised if all stakeholders within the processes can make full use of them. The “conversion solutions” for legacy formats, i.e. necessary repeated translations between old and new and vice versa, are often hailed as a means to an end but are explicitly omitted. Data quality would dilute and the error rate would rather increase than decrease.
However, the high level of data granularity presupposes significantly increased requirements for the processing and the systems used. This not only affects data validation and control of the required workflows but also data presentation and data enrichment for the user and the customer.
The processes have to be monitored and controlled. The former process management has often been left to the professional user, whereas ISO-based processes require the compliance with the rulebooks which go far beyond the filling of the ISO instruments and prescribe the applicable process steps.
In addition, the existing bank systems are often older and not designed for real-time data exchange gateways. For an end-to-end digitalization, high-performance applications and a central gateway architecture, e.g. via APIs and the provision of microservices, are crucial.
Clearing houses and SWIFT define in their own rulebooks how transactions have to be exchanged, e.g. in which order which versions of the individual ISO instruments are to be used or they provide information on the field assignment. The rulebooks also describe a possible aggregation of several messages to so-called “bulks”. Usually, the rulebooks are updated every year and the banks are obligated to implement the changes.
The realisation of ISO 20022 has not taken place as self-regulating process within the banking and financial industry. There has always been a regulator setting the decisive impulses. This is also proved by the comprehensive SEPA introduction in 2014 which has not been launched widely until the European Commission made a specification. In 2012, the large-value payment system Target2 of the European Central Bank and one year later, in November 2022, also SWIFT for payments (message categories 1, 2 and 9) will be converted to the instruments under ISO 20022. Target2 migrates to ISO 20022 with a big bang, whereas SWIFT provides a migration phase of three years within which legacy formats can still be used.
Additionally, SWIFT provides a migration service between ISO and the earlier MT formats. However, the banks bare sole responsibility for the conversion results. An argument for not overstraining the fee-based service by SWIFT. The banking industry expects major banks and banks acting as intermediaries to process all SWIFT-based payment processes according to ISO 20022 already as of 2021. It is also possible that banks already refuse to accept MT messages or charge fees for the acceptance during the transition phase.
VP, Product Management valantic
”I recommend institutions to be well-prepared for the ISO migration – not only in external but also in internal processes.“
Currently, the actual exploitation of the opportunities ISO 20022 might bring, is still limited. However, future chances regarding interoperability, real-time processing and error prevention as well as better services for lower costs, are significantly greater. The global guidelines in the financial industry are setting limits, whereas the usage of IBAN is already an obligation in SEPA environments, it cannot be presupposed in international payment transactions. Then again it can be assumed that e.g. the usage of unstructured data which is intended in the ISO rulebook will over time give way for equivalent structured data (example: reference in bank transfers). In a timely manner, this might be pushed by regulations from institutions, such as the European Central Bank, the Euro Banking Association or SWIFT. The process coverage with ISO standards will broaden significantly and lead to an even increased efficiency of the processes.
RTPE as central payment hub with integration in bank applications
FinCASE for Investigations with integration in bank applications
FinCASE for Bank2Bank with integration in bank applications
X-Gen as gateway architecture with conversion possibility
X-Gen as gateway architecture providing these services and/or consuming others