As part of our ongoing efforts to track ISO 20022 adoption across the international banking sector, Volante recently sat down with the head of consulting services at TradeHeader, Aleix Revilla, as well as the firm’s founder and managing partner, Marc Gratacos. With decades of experience in the industry and a wealth of expertise surrounding financial messaging and data validation, TradeHeader is a trusted advisor and software developer for a number of leading financial institutions around the world.
Here are a few takeaways from the conversation:
From MT to MX: The Current State of ISO 20022 Adoption
Beginning in March of next year, financial institutions around the world will be required to receive messages using the ISO 20022 standard. According to Revilla and Gratacos, banks are now rushing to implement the basic capability of converting transactions from SWIFT’s previous messaging format (MT) to the updated version (MX) to satisfy this requirement.
But at this moment, the bulk of institutions are not prepared to manage the additional payload associated with an influx of data and derive true value from ISO 20022 messages. Both Revilla and Gratacos expect it will be a few years before banks are prepared to use and integrate the new standard into backend systems.
While being able to convert from MT to MX is necessary for compliance, and a critical first step to implementing a new universal language for payments, Revilla and Gratacos were careful to note that this capability alone doesn’t solve for additional issues that arise when executing cross-border transactions.
For example, looking at the whole cycle of a transaction, there are various points along the chain that may be vulnerable to truncation issues. If a bank in Madrid is sending a payment to China, but must first go through an intermediary in Germany, there are obvious translation issues to contend with, and an increased possibility of errors in the truncation process. Generally, more complex payments inherently require more agents to process the transaction, and the possibility of data being lost increases exponentially when all agents are not prepared to handle the enriched messaging.
Apart from the truncation issue, there’s the larger problem of complex payment chains that combine domestic with cross-border legs with each potentially having different specifications for the same payment type. This means that for the more complex flows, the payment usually starts within a domestic payment system A. It then travels through intermediaries in the cross-border space and ends with potentially another domestic payment system B.
Using our above example consider PaymentSystemA-to-CBPR-to-PaymentSystemB. Each part of that chain could have different specifications for the same message. The pacs.008 specification for T2 is slightly different from the one in CBPR+ or in UK’s CHAPS, and that needs to be factored in when processing messages.
According to Revilla and Gratacos, solving this challenge will be an uphill battle if a bank’s back office doesn’t already support ISO 20022 messages. However, there may be a silver lining to be found in the viability of existing XML tools and real-time APIs. The availability of these solutions only continues to expand and, when used correctly, they should not only ease the transition, but help institutions unlock the true value of enriched ISO 20022 messages.
Ultimately, Revilla and Gratacos believe the real potential of ISO 20022 lies in the capacity for enriched data to create new value for customers, with one of the more obvious benefits being immediate or real-time payments. As more and more institutions begin transacting using a universal standard, delays related to manual intervention are expected to be considerably reduced.
But beyond merely speeding up transactions, they also anticipate an ongoing expansion in how banks derive value from payments data. For example, being able to query messages in real-time will help institutions gather actionable insights and gain industry-specific advantages. Additionally, banks will have the opportunity to leverage automation in increasingly transformative ways, from improving efficiency through enhanced payments surveillance to bolstering security through automated anti-fraud protections.
Looking further into the future, Revilla and Gratacos expect a gradual broadening of ISO 20022 applications, including the standard being utilized in the cross-border exchange of securities. More generally, they anticipate many of the same benefits associated with the transformation of domestic payments—via services like RTP and the emergent FedNow system—will become more readily available in the context of cross-border transactions.