The era of financial messaging coexistence is here

Banks face serious challenges in processing payments if they fail to meet the deadline for the adoption of ISO 20022 messages for Swift cross-border payments and cash management messages, according to banking and financial IT sources.

The adoption of the ISO 20022 standard for Swift cross-border payments and reporting messages must be completed by November 2025, at which point category 1, 2 and 9 FIN messages will be retired from the many-to-many closed user group known as the FIN service.

Concerns about a worldwide failure to meet this deadline follow publication earlier this year of a report highlighting a significant lack of preparedness by banks and corporations, with just 72% of banks expecting to be fully prepared in time. 

The survey by software company Seeburger and financial advisory firm Celent revealed a significant disconnect between banks’ and corporations’ assumptions of the priority of the multi-part international standard, according to Gareth Lodge, senior payments analyst at Celent. “There are thousands of banks who are not going to be ready,” he says. “A good chunk of them say they do not see the benefits.”

Carl Slabicki, co-head of global payments at BNY Mellon, says lack of readiness by any market participants may lead to delays and move deadlines for the industry, which in turn will lead to increased expense in managing the transition over such an extended period. 

In addition or alternatively, he says, it may lead to data translation issues for the industry if the market has not fully adopted the required message set. “This may lead to data being held to the ‘weakest link’ standard and result in challenges when passing data between counterparties who remain backwards compatible,” he adds.

Worrying findings

Philip Flood, global business development director, regulatory and straight through processing services at Gresham Technologies warns: “These findings are worrying, given the deadlines that banks must work to for them to be fully prepared for the migration of messaging standards. 

“Although there is a co-existence period with the current MT [legacy] standards until 2025, due to the advanced timeline that the larger banks are generally running to, this will undoubtedly result in a ripple effect in the market, where counterparties are dragged along towards adopting MX [updated] messaging.”

The issue for many corporations lies with legacy technology layered throughout middle and back offices, says Mr Flood. “Because the MT message format is likely to be heavily embedded in many of these legacy systems, banks that are over-reliant on them will struggle to adapt.”

Chrisol Correia, chief strategy officer at financial crime risk management software company Facctum, warns that companies will need to evaluate their current control system so they not only meet the new technical standards, but are also able to exploit the new intelligence contained in ISO 20022 data. For example, he says, ISO 20022 carries many additional data fields, in an improved data structure, with an array of new metadata.

“Financial crime technology will need to have the capabilities to use all those fields in a way that results in improved detection, rather than new noise. If not, this could lead to real compliance risks as companies may end up with more false positives than they had before,” says Mr Correia. 

Complex compliance 

Preparing to comply with the new messaging format of ISO 20022 is complex and involves 750 new business components and more than 1900 message definitions, according to Saeed Patel, group director at compliance, payment and anti-fraud specialist Eastnets. Deployment planning is essential and must consider a range of factors, he says.

“Firstly, organisations need to build a strategic vision of the move to ISO 20022, mapping messaging formats to simplify and speed up compliance. Governance of the migration programme and continued governance of the implementation into full-production mode is critical,” explains Mr Patel.

“Secondly, migration planning should involve an impact assessment, as ISO 20022 compliance is complex and will impact operational and business risk. The move to ISO 20022 payment messages can be made easier using dedicated regtech solutions. These can offer a bank a way to meet the complex needs of ISO 20022 quickly.

“Thirdly, a bank wishing to meet ISO 20022 should look for a solution that works seamlessly with legacy MT and MX messages while retaining familiar user experiences and mitigating the issues of the transition from MT to MX.”

He adds: “The rich structure and standard format of ISO 20022 messages provide an ideal substrate for detecting potential fraud. In addition, fraud detection and prevention tools can use this standardisation to deep mine messages and detect fraud as it happens.” 

Aggressive education

According to Mr Slabicki, the industry needs to continue with aggressive education and socialisation on the commitment to meet the current timeline. It needs to show examples of prepared banks/providers to prove it will not be delayed further, to require certification/testing by participants with a lead time to launch and to have a solid plan for handling participants that are not ready, without holding up the entire market.

Charlie Caisley, UK product lead at ClearBank, says: “Without the remaining 28% of global banks falling into line around the shift from MT to MX messaging, then not only will the network not be ready for a full migration, closing the door to legacy systems, but a critical piece of global infrastructure designed to boost trade, drive efficiencies, improve access, and boost financial inclusion also won’t be fit for purpose.” 

He says that for global harmonisation to occur, the discussion between central banks will play a pivotal part. “There is room for better dialogue between them and [the] critical domiciled institutions they work with to better coordinate and align the transition, as well as avoid the ‘siloed thinking’ that has been observed in the industry to date,” says Mr Caisley.

Marouane Bakhtar, managing director and head of banking for Synpulse UK, says the main technical challenge in implementing ISO 20022 is ensuring interoperability between different systems and regions. 

“This new standard requires a common language and syntax for financial messages, and we know quite well that banks and financial institutions have different legacy systems and formats,” he says. 

“To ensure interoperability, financial institutions need to invest in new infrastructure and middleware to enable conversion of messages from legacy formats to the new standard, as well as data mapping and transformation. Additionally, ensuring proper data quality and consistency across systems is also a significant technical challenge,” explains Mr Bakhtar.

Australia is ready

Although the survey of preparedness raises concern at a global level, Australia is well positioned to migrate successfully within target timelines. Robert Magee, program director for ISO 20022 industry migration at industry association AusPayNet, says: “The Australian approach, similar to that of Swift for cross-border payments, allows for the coexistence of the old and new message formats. This diffuses the ‘big bang’ risk of needing all participants to move in unison.”

Australian financial institutions, including those that are international but active in Australia, went live with the ability to receive ISO 20022 messages in March this year.

“The Australian coexistence period runs to November 2024,” says Mr Magee. “AusPayNet is actively managing a number of coordinated implementation cycles. All banks will implement all required functionality between now and September 2024. Our coexistence period intentionally ends 12 months before Swift’s to avoid running up against a hard deadline.”

He adds that AusPayNet is managing a full industry programme to support the readiness of all Australian financial institutions. This includes detailed processes to track readiness, test it, and provide additional support as required. It also includes a year’s contingency compared to the international deadline mandated by Swift.

“The biggest challenge is for those needing to be compliant in multiple markets, which are all implementing similar changes over the next couple of years,” says Mr Magee. “This leads to competing priorities, in terms of investment and resource needs.”

He says financial institutions can and often do use translators to isolate their downstream systems from the change, allowing them to become fully ISO 20022 capable in their own time, and not driven by end of the Australian or Swift coexistence periods.

What’s to lose?

Jamil Ahmed, distinguished engineer at Solace, warns that banks that fail to prepare for ISO 20022 may face a variety of challenges in processing payments, such as increased operational costs, errors and delays in payment processing. “This could lead to a negative impact on customer experience, reduced efficiency and increased regulatory risk,” he says. 

“Additionally, non-compliance with ISO 20022 standards may result in a loss of competitiveness, as other banks that are compliant with the standard may offer better and more efficient payment processing services,” adds Mr Ahmed.

There is still time for unprepared banks and corporates to avoid significant disruptions, financial losses and regulatory fines, but time is of the essence, according to John Mitchell, CEO and co-founder of payments specialist Episode Six.

“That’s potentially good news for those willing to take the necessary steps for a smooth transition, like investing in new technology, upgrading systems, and working with industry partners and regulators,” he says.

Andrew Ducker, senior payments consultant at Icon Solutions, says he believes most banks in key countries for cross-border payments will be ready. “If they are not, they will lose a volume of cross-border payments business, which is a lucrative service for them,” he concludes.