How will ISO 20022 impact banking and payment transactions?

ISO 20022 is a new global standard that defines how financial messages should be structured and exchanged between financial institutions. It was developed by the International Organisation for Standardisation (ISO), in collaboration with industry experts through Technical Committee 68 (TC68) for Financial Services.

ISO 20022 requires messages to be structured using XML, a platform-agnostic format that ensures compatibility between a broad range of systems. This makes it easier for banks and other institutions to send, receive and process financial information, like payments, securely and efficiently.

Prior to ISO 20022, a German bank sending money to a bank in Japan would have likely used the SWIFT MT payment standard. Because SWIFT MT has a more limited range of message types, some useful payment details would have needed to be left out, such as invoice numbers or detailed transaction descriptions. The receiving bank in Japan would have needed to manually adjust or interpret the data to process the payment, leading to potential errors and delays.

It’s not just banks that will benefit from the new standard. Cryptocurrency platforms can also leverage ISO 20022’s structured data and standardized messaging to improve the efficiency, transparency, and compliance of their transactions. Digital currencies like XRP, XLM and HBAR, which are designed for fast and secure cross-border payments, can benefit too. By aligning with ISO 20022, crypto platforms can more easily integrate with traditional banking systems, supporting the adoption of cryptocurrency as a legitimate digital asset.

By providing a global common language for financial transactions, ISO 20022 reduces complexity and costs, improves data quality and speeds up transactions.

ISO 20022 has already become the standard in over 70 countries, including China, India and Japan. It’s in the process of being adopted by payment market infrastructures in all major currencies, with a completion target of November 2025.

Before ISO 20022, financial institutions relied on a variety of proprietary and region-specific messaging standards for their transactions. This led to compatibility issues, increased operational costs and inefficiencies in processing international payments. The lack of a unified standard also made it difficult to innovate and adapt to new financial technologies and practices in various regions, hampering the adoption of cryptocurrencies, for example.

ISO 20022 brings many benefits for financial institutions and the broader financial ecosystem, including:

• Faster processing times: ISO 20022 uses a more detailed and organised format compared to older standards such as SWIFT MT. With more structured data, a much larger number of validations and checks can be automated during the payment process.
• Better compliance and risk management: The richer data allows for more effective screening against sanctions lists and Know Your Customer (KYC) checks. This helps financial institutions comply with regulations and mitigate fraud risks - including for digital currency transactions, where fraud is a significant risk.
• Greater transparency: Since ISO 20022 provides a more granular picture of the transaction details, it improves transparency for all parties involved. Tracing the payment path also becomes easier thanks to the improved data.
• Facilitates innovation: ISO 20022 opens doors for developing innovative financial services, due to its ability to include more detailed and structured information. Financial institutions can leverage this data to offer improved finance, cash management and other tailored financial products and services.
   

The new standard also leads to valuable new use cases for financial institutions:

• Streamlining financial crime compliance: ISO 20022 offers structured data that reduces false positives in sanctions screening by an estimated 25-30%. This enhances operational efficiency and data quality.
• Improving payments exceptions and investigations: The new standard provides detailed, structured data that can reduce the 2-5% of payments leading to inquiries.This should cut down investigation times and operational costs, resulting in significant efficiency gains.
• Simplifying regulatory reporting: The new standard structures transaction data to easily meet diverse global regulatory requirements. This should reduce operational costs and improve customer experience by streamlining compliance processes and eliminating the need for further enquiries.
• Enhancing customer insights: The new ISO standard enables financial institutions to identify trends in payment activities, link transactions to specific customers and tailor products and services effectively.
• Building vertical value propositions: The new standard will enable financial institutions to innovate and enhance their offerings, such as offering automated reconciliation for high-volume transactions, enhanced straight-through processing, support for new payment instruments, cryptocurrency-based products  and more.
• Strengthening corporate treasury activities: The new standard provides structured data for better reconciliation and working capital management. This should reduce payment friction, make cash flow forecasting more accurate and enable support of On Behalf Of (OBO) payments.

You can read more details about each of these use cases on the SWIFT website.

Embarking on a global project such as moving every financial institution to a new payment standard was always going to present significant challenges.

Here are some of the key challenges that financial institutions could face:

• Funding the transition: Transitioning to ISO 20022 requires financial institutions to invest significant sums. Reviewing, mapping and translating their existing legacy systems to comply with the new standard can require a lot of resource investment.
• Meeting deadlines: While the global deadline to shift to ISO 20022 has been set to coincide with the retirement of SWIFT’s MT messaging standard in November 2025, many countries have set their own, more ambitious timelines. For example, legacy UK standards were replaced by ISO 20022 in June 2023. But meeting externally agreed deadlines for an organisation that already has ongoing transformational projects in motion can be a significant challenge.
• Upgrading existing infrastructure: To cope with the longer and wider-ranging messages used by ISO 20022, many financial institutions will need to make major changes to their existing infrastructure.
• Adapting compliance processes: Financial institutions will need to adapt their existing compliance processes (such as Anti-Money Laundering and Know Your Customer) to match the richer data format offered by ISO 20022. This may involve updating internal processes and system configurations to make sure compliance checks can be effectively performed on the richer data set.

At Netcetera, we’re dedicated to supporting financial institutions during the transition to ISO 20022. For more guidance, explore our array of digital banking solutions, dive deeper into our knowledge hub, or consult with our experts who are ready to assist you with any queries. Stay informed and ahead of industry trends by subscribing to our newsletter. Let's make this transition smooth and successful together. Reach out to us today and take a step towards optimizing your financial operations.