Migrating to ISO 20022: Key learnings and considerations for financial institutions

Adopting ISO 20022 presents an opportunity to unify various established Swift and related market infrastructures. The objective is to streamline financial communication and foster interoperability, enabling comprehensive data exchange among all participants. However, financial institutions persisting with outdated payment systems may find themselves ill-equipped for this transition. Furthermore, the absence of requisite expertise and governance needed for a transformation of this magnitude introduces additional challenges to a successful transition to ISO 20022.

Every financial institution worldwide is on its unique journey towards adopting ISO 20022. While the business benefits of the migration are evident, the implementation process has posed unique complexities. As banks embark on their ISO 20022 migration journeys, they face intricate and time-consuming technological upgrades, risks of data truncation, the need for effective management of inward and outward mapping of payment messages and missed opportunities for innovation and collaboration.

Identifying the right technology partner

The future of payments is not a fixed destination, but a constantly evolving journey. A new report on payments modernization by Celent states that 83% of banks believe the pace of change will increase.

As such, it becomes increasingly crucial for banks and financial institutions to collaborate with a trusted technology partner. This approach offers two significant advantages. First, it allows banks to continue focusing on growing their business i.e., meeting evolving customer needs, without having to worry about the potential issues arising from a large-scale transformation of this nature. Second, a reliable, battle-hardened technology partner, having demonstrated success in a competitive environment, not only ensures a smooth transition during migration but is also capable of anticipating and addressing future issues that could otherwise delay the return on investment. For example, having a data model that is adaptable to the unique national or regional nuances in the application of the ISO 20022 standard. Such a partner can share best practices, apply domain expertise, and harness modern payments technology that ensures successful payment operations in the new ISO 20022 environment.

Supporting incremental migration of channels from MT to MX

While banks may understandably aspire to lead the ISO 20022 adoption journey, it’s important to recognize that not all channels, product processors (internal systems like cash management used for sending payment instructions to payment engine for clearing side processing), and customers may be prepared to align with the industry timelines. With Finastra Global PAYplus, banks can prioritize the incremental migration of source channels. This means that some source systems can continue sending MT message types in accordance with the existing processing, while others can start sending MX message types based on their business readiness and urgency. Gradually, banks can transition the remaining source systems to the MX environment, thereby enabling them to process payment messages within a comprehensive ISO messaging framework.

Achieving interoperability across schemes

Several RTGS schemes have adopted a like-for-like migration approach, which has added complexity to the implementation of a standardized ISO business model. For example, some clearings have chosen to use Pacs008 and Pacs009 messages with RETN (Return) code words, rather than adopting Pacs004 for return messages. The prevailing method employed by these clearings for managing settlement confirmations/cover messages is based on MT processing, which impacts the straight-through-processing (STP) of these messages.

Likewise, schemes currently operating on an MX version lower than CBPR+ necessitate the use of interim mapping rules. These rules can facilitate the mapping of additional CBPR+ data fields to pre-existing ones, thereby circumventing the risk of data truncation.

Global PAYplus’s canonical transformation facilitates the conversion of various message types into standard ISO message type. These can subsequently be transformed into either ISO standard or non-standard formats specific to the destination scheme using the interim mapping rules. This capability empowers banks to tackle the inconsistencies encountered in translating different message types.

Interoperability between MX-MX, MT-MX, and MX-MT schemes has emerged as an area where regulatory guidance has progressively matured. During implementation, banks often encounter numerous issues. For example, the processing of original payments may take place in the MX format, while exceptions, such as returns and cancelations, are handled on the MT format, or vice versa. Global PAYplus can accommodate these exceptional scenarios by utilizing its ISO-based payment data object implementation of legacy MT messages. This approach ensures a high degree of interoperability, providing banks with the much-needed flexibility to switch between MT-MX based on their specific business requirements.

Additionally, Global PAYplus can support other proprietary message migrations to ISO 20022 through a similar canonical design approach, an example is the transition of Fedwire from FAIM message formats to ISO 20022 scheduled for 2025.

Overcoming data truncation challenges

Forwarding MX messages to an MT destination that isn’t aligned with the MX format presents a risk of data truncation. This could result in banks losing substantial customer data, leading to inconsistencies in the reconciliation of payment messages. Also, it restricts the level of automation that financial institutions can achieve. However, the STP design principle of Global PAYplus, in conjunction with scheme-compliant processing, ensures that no business or sanction-critical data is lost.

The business rule engine of Global PAYplus supports access to the original incoming MX message data throughout the payment flow, allowing for the configuration of business validations without any data loss due to destination-specific formatting.

Using the Swift/Clearing message stack to enhance payments processing

Banks can extend their correspondent services by adopting the out-of-the-box CBPR+ message types. These were not previously employed due to the rarity of corresponding business cases, such as the Pain.001 relay from Swift and the processing of Pacs.009 advice messages. Financial institutions can use these messages to ensure better liquidity management and provide additional services to their corporate customers.

Why Finastra

For over 30 years, we have delivered complex, mission-critical solutions to financial institutions of all sizes, including providing ISO-based clearings in the US such as FedNow and The Clearing House Real Time Payments, for instant payments. We have also helped our clients transition from proprietary high-value payment message formats to ISO-based standards in various regions, including Europe and South Africa.

• Watch this video to learn how Lloyds Bank harness the power of ISO 20022 with Finastra Global PAYplus
• Check out the press release to learn more about our collaboration with the National Bank of Greece for its ISO 20022 migration
• Download this brochure to learn how financial institutions can adopt ISO 20022 with our payment solution and gain insights into ISO 20022-driven business use cases