Banks and their clients will profit greatly from the migration to the ISO 20022 message standard and its fuller, greater data structures to allow high-value payments. However, getting there will be difficult for banks this year and in the years to come.
The biggest American banks with a wide geographic presence have been planning to switch to ISO 20022 for many years. Outside of the US, several payment systems are in operation, albeit maybe in earlier, fewer developed forms. The new communications format is structured logically and coordinated with associated business operations sent between payment providers and recipients.
Commercial clients of banks should be able to send payments significantly more quickly and efficiently thanks to the added detail compared to current payment messages. This is particularly correct for cross-border, high-value payments, which often employ the SWIFT network and a number of intermediaries, a complicated structure that increases the risk of breaking anti-money laundering laws.
It is said that U.S. banks should have begun planning for the relocation of the SWIFT network long ago. In order to accept cross-border payments utilizing SWIFT technology, banks’ financial products must be prepared to share SWIFT’s new ISO 20022-based MX messages by November of this year. They must transmit MX messages by November 2025.
By November 2023, banks that are participating in the Clearing House’s elevated CHIPS network must be able to exchange ISO 20022-based XML messages. However, the Federal Reserve has recently suggested delaying the execution of ISO 20022 XML messages for its Fedwire Funds Service until the first quarter of 2025, without specifying a specific date.
“We see the flexibility of the file as well as the extended data potential as the biggest benefits for both banks and customers. Having more information around the payment in a universally accepted format could help to reduce sometimes challenging investigations [related to potential sanctions violations or money laundering]and improve funds-availability timing.”Amy Sahm, manager for the international group at Lancaster, Pennsylvania’s Fulton Bank, with $25 billion in assets.
To benefit from advantages such as more straight-through processing, several U.S. institutions will probably try to create payment systems by November that can send and receive ISO 2022-based payments. Since SWIFT’s present MT messages, which have been utilized for more than 20 years, lack organization and information, businesses frequently find themselves having to actively intervene in order to ascertain the purpose of payments they receive.
Nonetheless, switching to a new payment messaging type is expensive and could be difficult. The institution’s systems must be modified for the fundamental bank service of payments. Some internal systems call for resources that have to be budgeted and prepared for. Additionally, some payment-related tasks may be delegated to outside organizations, although banks will still be held liable in the event of errors. SWIFT’s FINplus service, which has been in beta testing since November, converts MX communications to the legacy MT format to give banks additional time to modify their payment operations.
According to Stephen Lindsay, head of standards at SWIFT, “the availability of the translated MT can allow banks to retain existing operational processes to limit the impact” during the time when domestic payment systems have not converted to ISO 20022, but cross-border payments have.
Fulton Bank is collaborating with its SWIFT service bureau to deliver the translation service before November, according to SAHM, who also serves as secretary and treasurer of the board of the ABA’s transaction banking subsidiary BAFT. She continues by saying that the service bureau will check MX messages for improper transactions before converting them to the MT format, which is likely to shorten the contents.
Banks must ensure that the data is available since they will be held accountable for any shortened information if regulators inquire.
“We are seeing institutions either storing the MX data payload or building ISO 20022 data stores for the data, to satisfy travel rules and other compliance requirements.”Syed Ali, senior manager at Accenture.
According to Sahm, Fulton Bank has been in touch with its major global financial institutions to request their ISO plans and will evaluate its MX messages before November. It started evaluating MX message reception this spring.
The MX messages can be translated to provide temporary respite, but by the first quarter of 2025, U.S. banks’ fintech companies must be capable of processing the entire ISO 20022 message. According to Robert Pepitone, senior CHIPS product manager at the Clearing House, which is in charge of clearing and settling USD cross-border high-value payments, the CHIPS messaging structure was specifically created to be comprehended by the SWIFT and Fedwire systems. As a result, the configurations are similar.
He adds that “the current CHIPS format pales in comparison” to ISO 20022 in terms of structure and data.
Therefore, most U.S. banks, if not all of them, will have a busy 2023. Along with the technological and operational improvements, they will also need to educate senior management, the staff, and customers because the richer data is anticipated to lead to the development of new payment-related goods and more intelligent analysis of consumer payment trends.
Getting ready to receive SWIFT payments will give you a big advantage. According to Lindsay, SWIFT advises customers to prepare themselves for testing properly, including updating and setting the message gateway they utilize for the FINplus test service, as well as self-testing or testing with SWIFT to confirm their preparedness. Customers must next confirm that the message interface they are using is set up correctly for the FINplus live service.
“Allocating resources and time to effectively plan and execute this transition will be a challenge and one that banks should be planning to address now.”Lindsay
In its response to a request for a statement concerning the Fedwire migration on January 3, ABA stressed the significance of Fedwire and CHIPS migrating to ISO 20022 simultaneously because the two systems are interdependent. The Fed should publish a “technology roadmap” outlining important dates and milestones connected to the banks’ system needs and testing, according to the ABA, which highlighted concerns about the lack of information in regard to Fedwire’s testing strategy and requirements.
“The main benefit will be the ability to turn payment data into information. Enabling this data to be turned into information will drive faster and more accurate decisions, streamline reconciliation and help with dynamic liquidity functions.”Foulds
Information from ABA Banking Journal