• ISO 20022: What’s in a Number?  
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ISO 20022: What’s in a Number?

Once upon a time, Shakespeare’s Juliet asked “What’s in a name?” as she pondered the possibility of courtship with a forbidden love. Today, in the undeniably less romantic sphere of real-time payments, one of the burning questions on everyone’s lips is, “What’s in a number?”

That number is 20022—which is the five-digit reference for a data interchange standard issued by the International Organization for Standardization (ISO). Put simply, ISO 20022 is one of several messaging standards that enables financial institutions to communicate payment information with one another. In big-picture terms, the standard has been hailed as having the potential to “transform automation in the financial industry” and “bring us up to the next level in terms of global market practice.

Before exploring the reasons for such glowing endorsements and examining the potential impact of ISO 20022, it probably doesn’t hurt to take a quick look at how it actually works! The above claim that ISO 20022 is a “messaging standard” is perhaps too straightforward. In an ISO-backed publication on the subject, ISO 20022 is described rather as “a recipe for making financial messaging standards.”

When financial institutions execute payments between one another, they communicate details such as payees, monetary amounts, and transaction dates in coded language—abbreviations that computers must understand to act on. Messaging standards aim to make this coded speak easily intelligible, ideally allowing for smooth automation of the payment process. ISO 20022 For Dummies (sincere apologies if you don’t fall into the target audience!), offers examples of how these coded messages might look. Each of the three codes below convey the same information—to execute a payment on the 29th of October, 2009—but are formatted using different messaging standards:

Message 1: <IntrBkSttlmDt>2009-10-29</IntrBkSttlmDt>

Message 2: :32A:091029USD12500,

Message 3: {1520}20091029xxxxxxxxyyyyyy {2000}000001250000

If you’ve ever been served up an unpleasant surprise while ordering food abroad, you may already have worked out the problem with these language variations!

Multiple messaging standards means more room for error when executing payments. As our reliable source puts it by way of example, “…what some players in the payments industry call an Ordering Customer, others refer to as a Payer or Payor, while still others talk about a Payment Originator or Initiator. These different names create difficulties when you are looking at end-to-end integration. You need (expensive) expert knowledge to understand what the specialists mean and how to reconcile the information.”

With the costly and time-consuming problems caused by these varying messaging standards, it’s understandable that the financial services industry craves one unified approach to enable faster, more seamless real-time payments across the globe. Step forward, ISO 20022.

Earlier this year, representatives of over 40 global financial institutions got together in the UK and agreed that real-time payments should adhere to the ISO 20022 standard. Meanwhile in the United States, The Federal Reserve issued a report that emphasized the risks of not adopting ISO 20022, stating: “…as more jurisdictions around the world adopt ISO 20022, U.S. financial institutions and corporations will continue to experience the friction that exists today from supporting multiple domestic formats… Over time, the inefficiencies of U.S. entities maintaining multiple legacy formats may cause the global financial community to develop a negative perception of the United States as an outlier, resistant to change. Taken to an extreme, this could impact the attractiveness of the U.S. dollar as a global currency.”

This straight-to-the-point analysis is perhaps all the explanation needed for other locales making the use of ISO 20022 a priority. Europe implemented ISO 20022 as the definitive messaging standard in 2014, while Japan, Australia, Canada, and others are all moving towards it.

The benefits of ISO 20022 in enabling global real-time payments are plentiful, but chief among them is the degree of interoperability it enables. As a “recipe” for messaging standards, ISO 20022 allows other messaging standards to be mapped to it—a key factor in helping financial institutions to ensure their expensive-to-change legacy systems maintain compatibility with other ISO 20022 users. “Multiple standards will not go away any time soon,” say the SWIFT Standards Team, making this high level of interoperability essential. Moreover, ISO 20022’s adaptability means third-party software providers can create tailored payment solutions that still work in harmony with the standard while focusing on specific customer requirements.

Of course, as with any popular solution there are some potential problems. And in some ways, ISO 20022’s greatest strength—it’s ability to be modified to users’ needs—also leads to one of its proponents’ chief concerns. Today, ISO’s Real-Time Payments Group is hard at work to address the “different implementations of ISO 20022” that have emerged, in a bid to “influence design and development to achieve commonality…” Deutsche Bank’s Marc Recker summarized the issue well in an interview with banking technology: “…as an industry, we must not fall into the trap of having numerous different subsets. ISO 20022 must act as an enabler and not a disruptor in the value chain. Having numerous variances only increases the work load for banks in terms of testing, IT resources and release cycles. That in turn leads to inefficiencies in the entire payments processes.”

Whatever the concerns, there certainly appears to be an almost universal consensus that ISO 20022 has a foundational part to play in enabling real-time global payments and moving the financial industry into a future that ensures the days of inharmonious communications between its institutions are numbered.

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