ISO 20022 is an agreed methodology used to create a consistent “messaging standard” between financial institutions in the exchange of payment information, enabling a shared understanding and interpretation of the data.
SWIFT has announced it plans to stop supporting non-ISO 20022 messaging standards by November 2025. This will potentially require some Australian payments systems to migrate to ISO 20022.
The Reserve Bank of Australia (RBA) and the Australian Payments Council (APC) have issued a consultation paper seeking stakeholder views on the migration of messaging used in some parts of the Australian payments system to the ISO 20022 payments messaging standard.
POINT OF VIEW
Many of Australia’s payment systems utilise the Society for Worldwide Interbank Financial Telecommunication (SWIFT) Message Type (MT) messaging standards to communicate with each other. In April 2018 SWIFT undertook a migration study consultation on the International Organization for Standardisation (ISO) standard 20022, and subsequently announced a plan to cease ongoing support for MT messaging standards and migrate them to ISO 20022 from November 2025.
ISO 20022 refers to an ISO standard for electronic data interchange between financial institutions. It describes a metadata repository containing descriptions of messages and business processes, and a maintenance process for the repository content.
SWIFT’s decision has implications for the Australian payments system. Decisions and potentially action will need to be taken to ensure payments will continue to operate when the current underlying technology is no longer supported. To this end, the Payments System Board (PSB) identified that migration of relevant parts of the Australian payments system to ISO 20022, ahead of SWIFT’s own migration, was a key strategic issue.
There are many predicted benefits of the migration to ISO 20022, including:
Modernisation - ISO 20022 enables a greater volume of more complex information to accompany payments, and much greater consistency of message formats. This improves processing efficiency. It also has the built-in ability to adapt to new technologies as they emerge, future proofing the payments system;
Innovation and competition – ISO 20022 is open standard and flexible, meaning that the message definitions are publicly available and can be adapted for new requirements and technologies. These features enhance scope for innovation and competition;
Reducing fraud – ISO 20022 supports greater automation of some compliance and monitoring activities around anti-money laundering and counter-terrorism financing;
Resiliency - Increasing the consistency of message formats is one step towards enabling messages to be more easily directed through alternate networks and systems in contingency events.
Source: ISO 20022 Migration for the Australian Payments System – Issue Paper
The requirement for interoperability between, back office and treasury systems, fraud, reporting and reconciliation systems integrated in existing payment channels and business processes means that the migration process is complex.
SWIFT announced that the transition period will be followed by a four-year coexistence phase during which both current and new messaging will be supported. This will be maintained by a SWIFT translation service which will enable users to translate messages between ISO 20022 and their SWIFT equivalents. At the end of the coexistence phase in 2025, all users are expected to have migrated to ISO 20022 and translation services will be removed.
In the UK, the Bank of England, in conjunction with Pay.UK and the Payment Systems Regulator has stated that implementing ISO 20022 is an important foundation of both RTGS Renewal and delivery of the UKs New Payment Architecture (NPA). In the US, the Federal Reserve Banks announced the implementation timeline for ISO 20022 payment messages for the Fedwire Funds Service, beginning in November 2020 and ending in late 2023.
The potential for ISO 20022 to drive interoperability between payment systems is clear. In Australia, the New Payments Platform (NPP) has already been delivered utilising ISO 20022. Therefore, debate has focused on the implications for other payment systems such as the High Value Payment System (HVCS), the Bulk Electronic Clearing System (BECS) and RITS Low Value Settlement Service (LVSS).
High value payments are generally made between financial institutions and their corporate customers, including overseas banks. Payments made through the system are mainly for the Australian dollar leg of foreign exchange transactions. The mechanism for HVCS Framework Participants exchanging payments with each other is the SWIFT Payment Delivery System (PDS) and each payment is settled individually using the Reserve Bank Information and Transfer System (RITS).
As the joint PSB/APC consultation paper outlines, there are two schools of thought emerging in relation to upgrading HVCS to ISO 20022:
- One school of thought highlights the considerable similarities between the NPP and the existing High Value Payment System (HVPS), including their ability to process single payments settled on a gross basis in real time, and proposes that there may be potential to migrate high value payments to NPP.
- The other focuses on resilience requirements and proposes that maintaining two separate transfer systems will help meet rising resilience demands. In the event that one system becomes unavailable, banks can route payments through the other’s clearing system to maintain customer service availability.
Another factor is that the settlement system used for NPP payments is the Fast Settlement Service (FSS), which caters for fast, immediate settlement processing and has no queuing, transaction management functionality, or liquidity saving features. [VR1]Edits intended to soften and balance the commentary
As part of its recently announced strategic agenda, Payments in a Global, Digital World, the APC has indicated that it will develop a vision and roadmap for a resilient payments system. This may be an appropriate forum for further consideration of this question.
Concurrently, there is a debate around the Bulk Electronic Clearing System (BECS) and ISO 20022. BECS, also known as direct entry (DE) is operated by AusPayNet. It is used for internet banking, and also direct debit/credit instructions. DE is a common way to make and receive payments, with 34.6 billion DE transactions made in 2018. BECS payments are batched and operate on a same day settlement basis. Because of the volume and batched settlement, there is a comparatively low cost with making DE payments.
While BECS operates on same-day settlement, payments do not occur in real-time, nor does it operate on the ISO 20022 standard. Among other things, this limits the remittance description to 18 characters. The volume of payments going through the NPP has continued to increase since its launch in January 2018 and some FIs have migrated some DE payments to NPP.
The joint RBA-APC consultation paper outlined the potential benefits of migrating BECS to ISO 20022: improved alignment with other messaging types and enhanced information-carrying capacity. However, given that the NPP already operates on ISO 20022, upgrading BECS may prove redundant.
In Australia and around the world, over the next five years, high value real time gross settlement systems are migrating to ISO 20022, paving the way for increased automation, efficiency gains and end-to-end straight-through processing, both domestically and cross border.
These changes have significant implications for many financial institutions and their corporate customers, presenting innovation opportunities in areas such as invoicing, reconciliation and systems integration. Customer experience will change and improve with end-to-end rich data accompanying payment transactions.
Richer data has implications for compliance; AML CTF requirements and emerging sanctions regulations can both be better addressed more effectively using the additional data elements that ISO 20022 includes.
The deadline for submissions to the RBA/APC closed on the 13 May 2019. All submissions will be published on the RBA’s website, but for those expressly requested by the submitter to be kept confidential.
AusPayNet will continue to work closely with the RBA on this initiative and will continue to support members in the implementation of any decisions that may flow from the consultation.