ISO20022 - The "cure all"?

Welcome back dear listeners to Bitesize Payments, today we are going to discuss ISO20022.  It’s the lingua franca of financial services.  We started this journey when we discussed Standards, but ISO deserves a podcast on its own. 

But here’s the thing ISO touches the entire ecosystem and so the issue is a timing one.  The stakeholders need to not just adopt but get ready.  So, a central bank, a commercial bank the new rails, the corporates, merchant etc etc all need to move.

It’s a x-industry change which makes it effectively the biggest opportunity and also the biggest issue. 

But moving from an analogue world to a digital one is tough…. 

So here we go ISO20022…..  What is its history, how it works and who does what… or perhaps in this case who is not doing what…… 

The "cure-all"?  Well we will see..

Buckle up…

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_00: 0:00

Welcome back dear listeners to Bite Size Payments. Today we're going to discuss ISO 20022. It's the lingua franca of financial services. We kind of started this journey when we discussed standards, but ISO, well, it's the big one, so it deserves a podcast all on its own. So here we go, ISO 20022. What's its history? How does it work? And who does what? And specifically in this case, perhaps who's not doing what? Buckle up, here we go. Before I get jumped on from non-payments folk, ISO 20022 is not just about payments. It's used across the whole plethora of the financial services industry. But when it comes to payments, it is in fact the go-to standard for all new payment rails. So let's discuss where we are and how did we get here. Well, once upon a time, every country built their own systems for themselves. By that, I mean the file structures, their meaning, how to process them. In fact, the whole system end-to-end. which means that every country built their own systems for their own rails for their banks to use. In so doing, they used the best technology that they then had. And as I mentioned before, I can remember taking an eight inch floppy diskette with payroll data up to backs here in the UK. In its time, an amazing step forward. The format of the data was predefined, account numbers, sort codes, et cetera, et cetera. But basically, It was a file of data to be read by backs and processed. At the time, telecoms were both expensive and, frankly, not very fast. Each country had their own specific formats for account codes, addresses, etc. Each had implied meanings, but effectively were unique to that system. Ditto for checks, ditto for cards, high-value systems, etc., etc. We then had messages. Again, each best of breed with knowledge effectively built into them. And inside of a bank, they literally hard-coded their systems to integrate with them into their own banking system. There were no APIs, there were no rules, just codes and very early coding methodologies such as COBOL. As we move forward, each of these systems frankly grew independently of each other. Each country for each new rail had their own very detailed rule books that explained the data content and its expected format, what the messages were for, how they worked, etc. These clearings or rails are the last mile data formats and as such are very specific to the system sending and receiving them. And therein the devil lies. So now we literally have hundreds of ACH rails, hundreds of high value rails, et cetera, et cetera, and card rails specific for the country. All of these independently doing effectively very similar things, moving money from A to B. But not only that, as we've just mentioned, each and every bank had their own banking systems that they all needed to be integrated with. This is a huge, huge undertaking. So literally, we have hundreds and hundreds of ACH rails, hundreds and hundreds of high-value rails, ditto for cards, very specific rules per country, etc., all acting independently, all having to be integrated into a bank's system in every country. And if you were working in many countries, you had to do the same thing over and over again. But literally, they're all doing the The same thing, moving money from A to B. But not only that, it's this integration thing that's really the kicker. The fact that each of them have to be independently integrated and hard-coded, as I mentioned before. But every six to 12 months, there is a maintenance release that updates the clearings and testing and so the rules that go beyond them. So each bank... each central bank, each merchant, each operator, each corporate, et cetera, has to go through and do the whole testing regime over and over again through the whole of the ecosystem. So the key thing here is that effectively every bank has a unique set of systems for the way that they process each specific payment rail in each country that they operate. The sheer amount of work just to test this and keep them operationally function is absolutely staggering. It's literally like painting the fourth bridge. It takes so long that when you get to the end of the bridge, you have to go back and start painting it all over again. Except that in fact, there are five, six of these types of rails in every country. And if you're an international bank, Well, you just multiply it up and up and up by every country that you operate in. Something had to be done. But how? Every country has its own clearing and processing run by their own administrative groups. Sounds a bit like Christmas and turkeys, if you see what I mean. Each have their own rulebook. And of course, each rulebook that they created was the best one. Around the 2000s, the conversation started to try and address these issues. And in 2004, we had the first version of ISO 20022. ISO stands for International Organization for Standardization. And as you've probably already seen, inside of payments, TLAs, they live long and proud. The 20022, by the way, has no significance. It's just a unique identifier, which is a shame because I was kind of hoping it would be something more interesting. But in fact, no. At its core, ISO 20022 serves as a universal language, enabling banks and financial institutions worldwide to seamlessly exchange payment information. This standardization ensures that payment messages are not only accurate and complete, but also comprehensible to all involved parties. Probably the best way to think about it is it's a framework for constructing structured payment messages, similar in many ways to the way that Microsoft Excel works. However, simply put, it's an internationally accepted tool set to build messages that inherently self-explain what's inside them. Excellent for building payment clearings, but also, of course, surpassing data between financial service systems. So let's have a look at it in a little bit more detail. Now, I don't want to get too deeply techie here because that's not the point. However, there are some core components of ISO 20022 that we probably need to talk about. I guess, first of all, we have to say that there's a data dictionary that provides contains a comprehensive catalog of all the data elements that financial institutions might need. It's also extensible and flexible so that, hey, if we haven't thought of everything and we need something in the future, we can do that too. It also has message schemas, and these are detailed frameworks for different types of financial messages, such as payments. Each schema provides a standardized structure for a particular type of message, ensuring that all the necessary information is included and clearly understood by all parties. We also have a methodology for defining and capturing financial business processes and transactions. This approach ensures that the message created using the standards are aligned with the real world business practices. It's also fair to say that it's network agnostic, it's XML based, so that it's very much the digital era. So let's go back to the beginning again. What are the benefits of ISO 20022? Well, If you use ISO 20022, then you have a lingua franca or a babel fish, if you will, for those who, like me, are keen advocates of the Hitchhiker's Guide to the Galaxy. But they basically have a tool set, a framework that allows the financial services industry to both talk to itself, to the other stakeholders, and of course, its consumers. It's globally recognized, making international dealings much, much smoother and compliant with the various regulations, which, frankly, all pretty much mandate ISO 20022 right now. All the data quality issues that we've been seeking for are there. It's a structured way of getting it done. They are uniformly done. There are going to be less mistakes. There's more dependable transactions. It's an orderly, structured way of talking transactions. across the whole of the industry. The messages can take more data and clarity than they've ever had before, and they're self-explanatory. It's also the case that there is a huge following. There's a huge amount of people that are advocates, and there really are a lot of these guys. There is a huge and very active community of ISO 20022 users, as you might expect with all the regulatory industry changes going on. This community helps to make sure that ISO 20022 is right at the forefront. It's well maintained and it's up to date. And I kind of want to say it's a way of future-proofing it. But if there's one thing that I've learned in payments is that, well, frankly, nothing is future-proofed. It's a huge step forward into the digital age. And that's the big takeaway from ISO 20022. We want to move from the analog world. Well, frankly, this is the bridge and the framework and the toolkit that's gonna make it happen. Wow, it's fantastic. Very rarely does this happen. We have all the issues that are articulated at the beginning of the podcast how ISO 20022 has come to the fore. It's industry-led. It's by the industry, for the industry. The regulators are on board. What could possibly go wrong? We have new payment methods now coming in. We have 76 payment rails already using it. We have the huge ones like SWIFT, FedNow, Separinst, etc. They're all using ISO 20022. As I say, what could possibly go wrong? Well, turns out we better call Houston because I think we have a few problems we need to discuss now. So imagine you're one of the stakeholders for a second. And in this case, let's assume that you're a bank. And you're going, absolutely fantastic. ISO 2822, by the industry, for the industry. I buy the Kool-Aid. I'm going to do I'm going to integrate all my systems inside of the bank, wrapper them all in ISO 20022. Then I can talk to my clients. I can talk to the central infrastructures. Great. I'm going to move into the digital age. I'm going to deeply integrate ISO 20022 in everything we do. And I'm going to become this digital new bank that everyone wants to be. So let's go. But just hold on a second, Paul. This deep integration of ISO 20022 and all to the bank systems, that sounds like an awful lot of work. What else could we do? Well, hold on. I want to get all the benefits of ISO 20022. Why would I not? Well, turns out it really is a lot of work. So the question kind of goes around and around. Yeah, I want all those benefits, but It's a lot of work, and frankly, it's a lot of risk to make all that change. Or you could just say, do you know what? I'm just going to do the bare minimum that I have to do. Effectively, I'm going to propose that I just put lipstick on a pig, get myself compliant, do the very bare minimum I need to do, and carry on. And I bet you're going, but hey, what, really? Yeah. The problem here is, like so many things in payments, and for that matter, financial services, we don't just have a clean slate. We have a lot of legacy systems, as we've talked about previously. And these old systems, they weren't designed for ISO 20022. And frankly, sometimes very few people know how they work at all. And frankly, people are afraid of touching them, let alone integrating them into ISO 20022. So it might be time to do a big replacement of all the core systems. Hmm, hold on. That's starting to sound like pretty heavy-duty work. And while ISO 20022 uses a data model that's really useful moving forward and all those good things we've talked about, maybe the old system's didn't understand or had no comprehension of what was needed for this future world. So maybe the only way out is to replace everything. So all of a sudden, this becomes a very complex problem. And of course, if you start to change a lot of financial systems all at the same time, it becomes risky. Not only that, But the testing and the validation process that can be 30 to 50% of the time, that's huge. Just imagine you change nearly every single bit of the way the bank operates just to get the benefits of ISO 20022. It's a lot of testing and a lot of work and frankly, a lot of risk. So this is the proverbial plate spinning or changing the engines on a 747 as it's going over the Atlantic. Whichever metaphor you really want to think through. The question now becomes not just about changing for ISO, but it's changing the entire bank. And that's a different kettle of fish altogether. So while payments people like ISO 20022, we have to understand that payments don't live in isolation. So in fact, some banks are effectively just saying, do you know what? Just give me the change of formats. I won't do the deep revamp. I'll just put this lipstick on the pig and I'll just make sure that I'm compliant. I can work with the future and I'll kick the problem some way down the line. Despite this, there are many financial institutions that are absolutely committed to to installing ISO 20022 as a deeply strategic change, because it does offer the opportunity to improve the efficiency, the security, the interoperability, all the things that we've discussed. So in fact, we're going to have two different types of players in the future, in my opinion. Those that deeply absorb ISO 20022 and genuinely do a revamp down the digital world with ISO 20022, And those that are going to wrap up what they have with ISO 20022, but not really reap the benefits. And we'll see how that works. Clearly, one will be relatively quick and the other one will be deep, but over time, extraordinarily rewarding. So you could argue that some are making a very strategic change and the others are saying, it's a cash cow. We'll just get on with stuff the way we always have. Okay, so... Who are the movers and shakers here? Well, honestly, it's an A-class team of the major players. All the central banks, the Fed, the ECB, Bank of England, major banking institution, household names, Citibank, HSBC, JP Morgan, the tech providers, FIS, ACI, consultants, all of them, for different reasons, are saying, yeah, this is a step we need to take. And they're all on board. The question really is, how much can we do? I think it's also fair to call out SWIFT here, because they've really been at the heart of this, given the very nature of what they do, the international cross-border payments, where if you want to do it, you're going to have to touch SWIFT. They've made this play very, very strong. And, you know, they've been the heart and soul of it, really. I can remember going to Cyboss, maybe it was 12 years ago, maybe it was even longer, and they had the ISO 20022 for Demi's book. And frankly, they were everywhere. Everyone read them and went, right, this was it. So I think you have to call out Swift for being a really good player here. But here's the thing. ISO does touch the entire ecosystem so that the issue is a timing one. Changing everything is a really hard thing to do. The stakeholders need not just to adopt, but actively get ready for it. So it really is a big cross-industry change. And it is by far and away the once-in-a-lifetime opportunity to move from the analog world into the digital world. And because it touches everyone in the ecosystem, that's its strength, and of course, it's also a weakness. But nobody said moving from an analog world to a digital one would be easy. Well, there you go. A bite-sized journey through ISO 20022. Its history, how it works, and of course, who does what. I think the reality of just how complex, how large, a move to ISO 20022 is really dawning now and people are quite rightly scared of the enormity of the projects. However, if we want to move from the analog world and really embrace the digital world, then it's a path we need to go down. The question is, who will be there at the end? Will it be the people who put the lipstick on the pig or the digital banks of the future? We'll see. Anyway, as ever, please do get in touch via bite-sizedpayments at gmail.com. Thanks again for all the email that I get with your excellent points and suggestions. And if I could ask one thing, tell a friend. That'd be great. Cheers now.