An industry imperative: Swift FIN to ISO 20022 migration
Why do Swift MT payment formats need to move to ISO 20022? As international regulators demand more detail from banks on payments to individuals and companies, the first order of business is to ensure compliance with mandates, writes Matt Loos. For example, the Financial Action Task Force Special Recommendation VII, which has been around for years, requires the inclusion of payer information throughout the payment chain.
Historically, financial institutions were under no obligation to provide complete information on all parties in a payment. Now, they must understand the payment’s initiator and receiver and are responsible for reporting account numbers, names and addresses of remitters. In the future, regulators may prevent banks from processing transactions when beneficiary information cannot be validated.
The ever-increasing need for information in payments to combat Anti Money Laundering and Sanctions risks also puts additional pressure on straight-through processing in payments. A move to a more structured format, where details such as date of birth or passport number are coded, would allow for increased straight-through processing where today it is purely manual.
Built into this regulatory payment formatting responsibility is an expectation that messages be properly formatted for validating information. Swift MT payment messaging standards are not flexible enough to address increasing regulatory expectations, while formatting limitations make it challenging to ensure compliance and maintain straight-through processing. In the near term, this situation could require the introduction of a manual element into transaction processing to enable validation. Longer term, regulators could impose their own standards. The industry needs a more flexible structure that allows information to pass end-to-end in a way that is easy to validate, and ISO 20022 offers the solution.
The industry’s choice is clear. We can shape the transformation of payment messaging standards or have others shape this for us, so there is some urgency to proceed as a cohesive industry as we migrate from Swift FIN to ISO 20022 payment formats.
Beyond the regulatory imperative, are there other reasons behind the urgency to adopt ISO 20022? To a large extent, we are facing a problem typical of standards. Swift went live in 1977 and Swift FIN remains a de facto, if old, standard more than 35 years later. This opens banks to competition from non-banks, which could introduce lower-cost technology that effectively excises the industry with better, faster and cheaper payment methods.
Part of the impetus for industry migration to ISO 20022 is increased efficiency in payments infrastructures. The adoption of ISO 20022 standards by market infrastructures around the world is a good start, with the Single Euro Payments Area’s European Payments Council (EPC) mandating the use of ISO 20022. SEPA has migrated to ISO 20022 and Target2 is now doing so. Other payment systems that require ISO 20022 standards include Japan’s Zengin system, China’s CNAPS2, and Singapore’s giro system. The Swiss Interbank Clearing payment system and others, such as Finland and Greece which are leveraging ISO for Card and Securities systems and communications, are going live in 2015. Canada, Australia and other countries are planning to follow.
The long-term goal of interoperability across payment systems is another consideration. For example, the new Payment Systems Regulator (PSR) in the UK seeks open, direct access to payment systems for “challenger” – or smaller, new competitor – banks. Interoperability across payments systems built on ISO 20022 eliminates a cost barrier and allows challenger banks to more easily plug into payments systems. More broadly, consistent payment formats and technology infrastructure supports resiliency across payment utilities.
There is also a tie-in to the convergence of high-value and low-value payments systems and the realm of cross-border payments in terms of interoperability. Conceivably, ACH systems could leverage an ISO 20022 standard for exchanging payment instructions globally while minimising settlement times. Ultimately, interoperability will require a common set of capabilities around extended remittance across high- and low-value payments.
Why does the industry need to start talking about this now? Inaction usually results in ceding control to others, who may impose unreasonable timeframes for implementation and compliance. Since a shift to ISO 20022 will take years for industry adoption, we need Swift to initiate meaningful industry discussion. This migration will apply to banks of every size as they and their clients become increasingly globalised.
More immediately, industry inaction has negative consequences for small- to medium-sized banks that continue to invest in current market infrastructure despite a dramatically changing landscape. The Swift community is discussing an initiative that would allow banks of all sizes to decide how to best invest today to meet future demands, including rising compliance costs. The investment can better position banks to support the evolving payments needs of corporate clients. Corporations were early adopters of ISO 20022 as an enabler of interoperability. The corporate community is well on the path despite hurdles such as multiple technology platforms and complex legal entity structures.
For many, the business case is creating a barrier to ISO 20022 adoption. Financial institutions must rethink the business case with a long-term view that balances short-term cost with the broader regulatory context and the opportunity for efficiencies.
In the view of JP Morgan’s Treasury Services business, it’s critical to set industry dates and timelines now because the migration will take years to implement; we think this can be feasibly achieved by 2020. Otherwise, we’ll look back in 24 months and realise that we were at a tipping point and failed to take advantage of it.
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