In my 2-part blog, I am evaluating the progress of this once-in-a-generation transformation that migration to ISO 20022 promises to be. In the first part, I focused on program management and harmonisation of customer data, both of which are largely internal to a bank and under its own control. Here in part 2, the lens is more external, focusing on areas that require concerted effort from not just the banks but all parties in the eco-system, not least the corporates, the regulators and the market infrastructures.
Who’ll call on corporates to make the changes?
Let’s delve into some of the non-compliance related use cases touted as the harbinger of operational efficiency and cost savings for business customers; for instance, automated reconciliations and accounts receivable/payable management for merchants, SMEs and other corporates by leveraging the richer structured remittance information in the ISO 20022 payment initiation messages. The same richer data also presents new opportunities for enhanced treasury management and reporting, efficient exceptions management, deeper analysis on vendors and improved vendor relationships. However, most banks feel that ISO 20022 is a gift that most of their customers aren’t ready for, as it would require them to upgrade their own ERP and reconciliation systems so as to accept and use ISO 20022. Enforcing them to do so is a risk that the banks don’t have, yet, an appetite for.
The way forward here is partnerships between banks, corporates and independent consulting service providers, as well as industry bodies like SWIFT, so as to have a common voice that could take ISO 20022 messaging standardisation beyond the banks. For the aforementioned use case, for instance, the approach for banks should be to a) select a few corporates and merchants for whom the likelihood of benefits would be higher, b) partner with an independent business and technology advisory service provider to assess the change required, and conduct an in-depth cost benefit analysis, followed by an implementation roadmap/ pilot. With benefits vetting the business case followed by open and wide communication via the same common voice, more corporates would look to follow suit.
The open banking conundrum
Lastly, given the time it is taking for some of the market infrastructures, regulators and operators to implement the requisite infrastructure modernisation, I think, ISO 20022 standards and the payment formats based on it, face an existential risk. In the UK, for instance, the migration for FPS has been long delayed by the New Payment Architecture (NPA) implementation. At the same time FPS volumes and open banking led overlay services, powered primarily by FPS, are witnessing significant growth. The earliest date for ISO 20022 Nirvana for FPS is still a good few years away. By then could a more efficient standard with a non-xml payment messaging format emerge and threaten ISO 20022 based messaging? While I don’t have any concrete answers, and would appreciate your thoughts, I do believe the regulators, Pay.UK and OBIE have a critical role to play here - to be more aggressive on the NPA timelines, minimise divergence in standards, and provide clarity and assurance to all participants. As the open banking eco-system grows further, it is crucial to align the standards used within these services so that the end to end transfer of data through the payment initiation journey is efficient and future proof.
To summarise, while migration to ISO 20022 has already cost the banks significant investment, and some of the benefits like better tracking and higher STP rates are being realised, there are still multiple risks around achieving the benefits, both regulatory and business, it was supposed to bring. Unless the regulators and the industry work together with greater clarity, purpose and timeliness, it risks becoming an expensive pipe dream. An expressway that led to nowhere.
We have been working with multiple banks across the globe to help them not only meet the regulatory deadlines, but also unlock as many of the benefits of ISO 20022 as possible, as soon as possible. We are interested in continuing these conversations and share experiences, and if you’d like to find out more regarding our products and services in this space then feel free to reach out to me for a chat.