ISO 20022 harmonization and the future of cross-border payments
On May 19, 2023, Payments Canada provided input to the Bank for International Settlements Committee on Payments and Market Infrastructures’ (CPMI) on ISO 20022 harmonization requirements for cross-border payments.
Frank Van Driessche is the Lead of CPMI-Payments Market Practice Group (PMPG) Joint Task Force (JTF) on ISO 20022 Harmonization and serves as AVP, Head of ISO 20022, FedNow Product Management at the Federal Reserve Bank of New York. He shared his thoughts with Payments Canada on the importance of ISO 20022 harmonization, the far reaching impacts it will have on the payment industry and his insight into the future of ISO 20022.
What are the main objectives of the ISO 20022 harmonization requirements and how will they improve cross-border payments?
The ambition with the harmonization requirements is to address the friction points with cross-border payments that are rooted in misaligned use of messaging standards. The global migration to ISO 20022 is a once-in-a-lifetime opportunity to streamline message flows, harmonize market practices and agree on minimum required data models to enhance global interoperability and seamless processing of cross-border payments end-to-end. Some of the requirements are broad and fundamental across all the above areas of improvement, while others focus specifically on increasing transparency or data quality. But each individual requirement has the potential to positively impact the efficiency of cross-border payments against at least one of the G20 roadmap targets, which are lower cost, higher speed, increased transparency, and broader access to affordable cross-border payment services.
What are the implications of adopting ISO 20022 standards for the regulatory landscape of cross-border payments? And what are some key regulatory considerations the ecosystem should keep in mind when implementing ISO 20022?
Compared to today’s proprietary standards, the richer data in ISO 20022 messages, for example, carry the potential to include more customers and financial institutions in end-to-end cross-border payments, which is likely to impact screening obligations and regulatory requirements. However, processes are likely to improve more broadly as data will be better structured, enabling further automation. Payment service providers will have to upgrade systems and solutions to screen and report more data, but I believe it will also be upon regulators to (re)define their requirements in light of the enhanced ISO 20022 messaging standard.
As some of the friction points with cross-border payments have been linked to issues in dealing with diverging jurisdictional requirements, the global adoption of ISO 20022 once again presents an opportunity for industry collaboration in pursuit of process improvements. While recognizing that regulatory requirements may be specific to a jurisdiction, presenting challenges in aligning obligations, authorities should try to streamline processes and reporting needs by leveraging the harmonized ISO 20022 data model. Furthermore, organizations that provide payment-related services, such as reference data solution providers, should align their data repositories with the CPMI data model.
How does the adoption of ISO 20022 standards fit into the broader landscape of innovation and technological change in the payment industry? What does that mean for the future of cross-border payments?
ISO 20022’s common language with rich and structured data will act as an innovation enabler. Its broad adoption across many payment systems – new instant and existing retail and wholesale payment systems – will provide the financial industry with access to a pool of high-quality, consolidated data.
This will allow payment practitioners to streamline their operations. But perhaps more importantly, the ability to mine that data pool may offer valuable insights into clients’ payment activity and inform a firm’s product innovation strategy. Furthermore, the combination of ISO 20022 and instant payments will allow the payment industry to meet the speed and data needs of the digital era we all live in. Like the revolution we are seeing in many domestic markets, a harmonized rollout of ISO 20022 will extend that experience into cross-border payments.
What are the next steps for implementing harmonization requirements and how are we ensuring everyone in the market is pulling in the same direction?
The ongoing adoption of ISO 20022 for cross-border payments by the Swift community is happening across an extended period. During this time, ISO 20022 and proprietary standards coexist as financial institutions and market infrastructures are migrating at different speeds. To protect global interoperability during this coexistence period, market practitioners have allowed some temporary sub-optimal implementation decisions to find their way into guidance, such as the global Payment Market Practice Group’s CBPR+ market practices. The ISO 20022 harmonization requirements and data model proposed by the CPMI are stricter as they are aimed at tapping the full potential of the standard once the migration ends in November 2025, which should further improve the efficiency of cross-border payments.
It is the CPMI’s expectation that individual market infrastructures and market practice setters document how and when they intend to upgrade their message specifications to adhere to the CPMI guidance. Following November 2025, the CPMI guidance will need to evolve, not only as further opportunities to improve cross-border payments are identified and the payment landscape changes, but also to keep up with evolving ISO 20022 standards.
Some of the requirements are aspirational. For example, the expectation is not that everyone will support all messages of the CPMI core set by November 2025. But markets and solution providers should aim at closing any gaps as they enhance solutions in the future – for instance, enabling those messages that deal with exception processes. The discussions around how and when to evolve and upgrade the guidance after initial release, including ownership of guidance and moving into a regular and globally synchronized maintenance release cycle, are ongoing. Those discussions will require further industry collaboration and consultation, and any approach will have to be both reasonable and realistic if we are going to get buy-in from the broad marketplace.
Do you have any final thoughts you’d like to share on the future of ISO 20022 harmonization?
For years, the story of ISO 20022 was one of hesitation, with isolated adoption initiatives that have struggled to reap the promised benefits of a rich and structured standard. Today, the situation is quite different as we witness a tsunami of adoption progress, where the rollout of ISO 20022 for cross-border payments is combined with numerous implementations by domestic market infrastructures. Harmonizing the ISO 20022 rollout is fundamental to connecting individual dots and enabling a frictionless, efficient end-to-end payment experience. However, we should not stop now. The industry’s joint efforts should look beyond the traditional silo of cross-border payments and apply a holistic approach across different payment spaces, systems, and solutions. A single, harmonized data model for all payments will be a catalyst for payments product innovation and lead to a more dynamic payment marketplace.