The financial industry is beginning the long-awaited transition to a more advanced payments messaging standard, known as ISO 20022, that will offer firms richer data and a common language for communications. While the entire financial world is transitioning to the new standard, market participants face special challenges and need to begin planning how they can most efficiently accomplish the migration.

The ISO 20022 standard has been agreed on by a wide range of high-value payments systems, including the Financial Information Exchange, the International Swaps and Derivatives Association, Ripple, and Visa. But for market participants, the adoption of ISO 20022 by global payments messaging provider SWIFT may have the most significance, because SWIFT is where many market participants handle messaging of their transactions.

SWIFT has set November 2022 as the start date for using the ISO 20022 standard for cash and payments messages replacing MT message categories 1xx, 2xx, and 9xx. There will be a three-year overlap period in which firms can continue to use either the existing MTs or the new messaging standard. The MTs for cash and payments will be decommissioned in November 2025.

The new ISO 20022 standard, which is required to be adopted by all users for cash and payments messaging over the SWIFT network, is expected to provide significant benefits to market participants by allowing them to include more transactional information, such as FX data or proprietary business information, in each financial transaction message. And by using Extensible Markup Language (XML) instead of proprietary formats (or MTs), the ISO 20022 standard produces messages that are both human readable and machine readable.

Benefits of ISO 20022

The SWIFT MT and ISO 15022 formats suffers from the limitations on message length and data size. While many data points could be included in the old format, the information was not human readable (56X for strike price, for example), causing confusion and forcing employees to spend extra time looking up the meaning of tags. In addition, when a SWIFT transaction goes through many parties, the receiving party may receive limited information of where the message came from.

With the new standard, the ISO 20022 adds a rich data set that provides much more information on each transaction and makes it easier to understand exactly what every data point means (see Figure 1). This should create a much richer set of payments data within firms and unlock the potential for deep insights and analytics.

Figure 1: Structured data in an ISO 20022 format

Source: SWIFT¹

One area where the ISO 20022 standard will help managers is with compliance. Fields added to the 20022 format such as Legal Entity Identifiers, the unique codes for firms participating in a financial transaction, and receiving party definitions will provide more information. The format will more clearly identify the parties involved in transactions and more precisely define the transactions themselves, which can lead to improved risk management and fraud prevention.

Managers will get clearer information about the parties involved in a transaction, the countries involved (which can be important for legal and compliance reasons) as well as the currency involved in each transaction. The amount the transaction actually yielded can now also be specified, as well as transaction details such as exercise price, conversion price, strike price, market price, and indicative price.

Another benefit of the new format is much greater information about cancelled transactions — a major headache under the old system — and whether they are credits or debits for the manager's accounting system.

Investment in an emerging global ISO 20022 standard will help alleviate the problem of supporting different standards and protocols, while achieving greater efficiency and risk management.

Key migration considerations

While the benefits of the ISO 20022 standard stem from the additional richness of the data, availing of them requires significant business analysis and technology investment. First, the 20022 formats are completely different, and the amount of data being sent is much larger. So, managers will either have to translate all that information themselves, decide to store it, or decide to throw it away.

Second, users will almost certainly need to support both formats during the conversion period. While SWIFT itself is providing translation services, they are not applying backward compatibility uniformly across all message types. Counterparties will switch to the new formats at different points over the three year cycle resulting in the complexity of accommodating counterparties sending the new and old formats.

To reduce some of that complexity and enable firms to upgrade their infrastructure to support ISO 20022 at their own pace, SWIFT will ‘centralize’ messaging on its network with the introduction of its Cash Transactions Management platform in November 2022.² Instead of sending message data directly to the next party in the chain of a cross-border payment, firms will exchange the transaction data with the central platform, which will use the ISO 20022 Data Model to support MX (or XML) messaging, API calls and backwards translation to MT messages during the adoption period. The migration of the ISO 20022 MX cash instruction messages onto the platform will be gradually rolled out over the first 6-9 months, while cash reporting messages do not yet have a defined timeline.

The upgrade to ISO 20022 in many cases may require substantial conversion of a multitude of legacy systems, including technology platforms, messaging platforms, and the institutions' own operating platforms. These conversion costs have been a substantial burden in previous migrations, so opting to use a third-party messaging provider to focus on messaging and migration complexities is a good way to preserve resources. This approach will allow the market participants to invest and focus on making the required updates to their core systems to ingest and process the additional information contained in an ISO 20022 message.

While the conversion deadlines may seem far in the future, it's important to get an early start. Counterparties may decide to stop using the ISO 15022 standard, with minimal notice in some cases, at any time during the transition period. The absence of the ability to accommodate ISO 20022 formats in these cases, would force messages to be processed manually.

Working with a messaging specialist

If market participants decide to embark on the conversion process to ISO 20022 on their own, the transition process is not only challenging work, but also can be extremely costly. As a result, many managers have opted to use third-party messaging providers that have extensive experience from making earlier messaging transitions. Using messaging providers can help translate existing formats into the new standards, reduce the expense, and lower the risk of errors.

Some messaging providers have already managed the transition to ISO 20022 for dozens of other market participants and have automated the translation process. For companies trying to manage the process on their own, there could be a steep learning curve moving proprietary messaging formats to the standardized XML format required by ISO 20022.

As indicated, taking advantage of the new ISO 20022 formats and navigating the three-year period of co-existence is a complex and intensive undertaking and one which has the potential to distract from more core technology projects. A messaging specialist can help you unlock the potential of rich data sets in ISO 20022 formats as soon as your counterparties are able to exchange them with you while also shielding you from having to support both formats during the three-year conversion period.

BBH has a long history in the financial messaging space dating back to the launch of our original Infomediary messaging and connectivity engine more than 20 years ago. By combining our technology with deep subject matter expertise in SWIFT messaging, we have helped clients move from the original ISO 7775 standards to ISO 15022 and have also migrated clients to ISO 20022 messages for fund distribution.

Infomediary is the one of the largest SWIFT service bureaus and BBH is the only global bank registered as Shared Infrastructure Provider³ meeting SWIFT’s highest standards for security. Infomediary exchanges over 2 million messages per day with over 5,000 end points on behalf of ~115 clients.⁴