March 20 marked the go-live date for the new ISO 20022 standard for financial messaging, which creates a single format for transactions across different systems, platforms and geographies.
Developed by the International Organization for Standardization (ISO), ISO 20022 provides a common language and structure for financial messages, and will replace the legacy MT messages, which have been in use by the financial industry for several decades, but have limitations when it comes to providing rich, structured data, and are not always compatible with newer systems and technologies.
The migration to ISO 20022 is a significant undertaking, as it involves replacing existing legacy systems and ensuring that all stakeholders are able to use the new standard effectively. As such, a coexistence period is currently in place until November 2025.
To understand what the new standard means for the trade finance industry, GTR speaks to Shirish Wadivkar, global head of wholesale payments and trade strategy at secure financial messaging services provider Swift.
GTR: What benefits will migrating to ISO 20022 formats bring, and will the Swift messages – such as the MT760, MT798 and MT799 – that have underpinned trade finance products such as letters of credit and guarantees for decades be affected?
Wadvikar: The current Swift MT cross-border payments standard was conceived in the 1970s, when bandwidth and storage were high-priced commodities, payments volumes were much lower and systematic screening requirements non-existent. Messages were optimised to be small in size, carrying minimal datasets for ease of processing by the mainframe computers of the time.
The three core reasons for moving to ISO 20022 are open standards, structured data and richer data with greater transaction context.
A large majority of cross-border payment traffic is driven by open account trade. The move to ISO 20022 for payments will therefore bring about the benefits of the ISO standard to trade, indirectly. While banks and corporates are on their way to generate and process ISO 20022 messages for payments for now, this change also has an impact on the trade finance ecosystem, immediately affecting the payment and reconciliation legs of different trade ecosystems that come together to reconcile a trade and confirm that it has been completed between an importer and exporter.
For trade messages, the industry is not considering a wholesale migration to ISO 20022 yet. Our community is focused firstly on bringing the new standard to payments, since moving to ISO is a significant undertaking and requires a phased-in adoption. However, opportunities to adopt ISO across the trade industry are being unlocked and are already in motion, such as our current work with the International Chamber of Commerce (ICC) in developing industry standard APIs for guarantees, which will include ISO components. More details on this will be available later in the year.
GTR: What practical benefits will the greater depth and structure of information provided by ISO 20022 bring to today’s trade finance use cases?
Wadvikar: ISO 20022 creates a common language for payments, worldwide. ISO 20022 messages and their adoption will facilitate automation of better end-to-end payments and trade finance flows, reduce costs and streamline the letter of credit and guarantee process, and moving to paperless transaction processing will accelerate the handling of document discrepancies.
ISO messages for trade payments could carry bulk information on invoices for financing, with specific information sets required for banks to process as straight through processing, linked to the movement of goods being traded. We also see this as an enabler to drive greater digitisation of trade transactions going forward, via structured information that can carry multiple data elements from an invoice. We envisage that the next generation of ERP platforms will process transactions using the ISO 20022 standard and drive higher automation by automatically analysing ISO 20022 messages and status updates.
As we improve the data on the messages flowing across our network, we can drive efficiencies in faster credit processing. Richer and structured data will also help improve regulatory screening and compliance, as well as the costs for those processes.
GTR: The current coexistence period runs until November 2025. How confident are you that banks across the ecosystem will have managed to complete the migration by then, and how much work do the changes entail?
Wadvikar: Momentum towards adoption of ISO 20022 is increasing around the world, as is strong co-operation on specifications, and end-to-end alignment of those specifications. This is very important because without this alignment, even if we all move to ISO 20022, there is still a risk that data gets lost or truncated in end-to-end flows.
Swift has worked with major payments market infrastructures and participants through several industry groups to create a set of aligned standard baseline specifications for cross-border payments and reporting, high-value payment systems and instant payment schemes. These efforts will need to continue, to ensure that implementations don’t diverge over time.
Moving to ISO 20022 is a significant undertaking, entailing more than a simple change in messaging syntax. It represents a real foundation for the future of payments, and it impacts the entire end-to-end chain. As a result, preparation and training are crucial in order to align operational processes and ensure preparedness.
The three-year coexistence period will be an opportunity to prepare fully. Since many adoption benefits rest on better data, the community can also take this time to look together at how to improve the quality of data in the financial ecosystem.
Fundamentally, the risk for financial institutions lies in treating the move to ISO as nothing more than a mandatory exercise or a mere IT project. We encourage a strategic approach to adoption rather than going with a ‘like-for-like’ minimum value proposition. One of our guiding principles is to ensure that nobody is left behind, and that institutions can make the move in a way that suits them and their customers, enabling them to unlock the business benefits.
GTR: What do corporates and financial institutions need to know about ISO 20022? How will it affect their day-to-day trade and trade finance operations, and what do they need to do in order to be ready as well as ensure their counterparties and other stakeholders within their ecosystems are ready?
Wadvikar: Reconciliation has always been a challenge in trade finance. The ecosystem consists of many counterparties transacting with one another, often using manual and legacy processes. The importance of correspondent banking partnerships and trust is more important than ever in trade finance and the rich, structured data that ISO 20022 guarantees can provide the assurances that information shared is accurate.
We see two key benefits for financial institutions adopting ISO. First, operational efficiency. Thanks to better quality data, the number of transactions blocked by screening engines as false positive will significantly reduce. The industry is also developing new market practices for exceptions and investigations using ISO 20022 that will improve automation. Secondly, end customers will benefit from the new standard, considering that about 5% of cross-border payments are rejected or returned due to incomplete or inaccurate data. The outcome will be that richer content enabled by ISO will speed up payment flows.