How to seize an early advantage for SWIFT ISO 20022 migration

While the deadline for the ISO20022 migration has been delayed, the new requirements will have a further impact on a number of existing back-office systems. As such, it is imperative that firms get a headstart on this timeline to evaluate crucial upgrades and avoid unnecessary resource spending.

By Nick Noble, Product Manager

SWIFT is continually reviewing and upgrading the messaging infrastructure that underpins the world’s financial backbone.  The introduction of new ISO 20022 messaging standards and the subsequent phasing out of the MT messaging formats is a major change to the way in which institutions use the SWIFT network.

The adoption of ISO 20022 applies only to payment instructions and reporting messages exchanged bilaterally between financial institutions.  The migration to ISO 20022 for cross-border payments and cash reporting messages is now set to start in November 2022, having been delayed 12 months to allow institutions more time to prepare and implement the necessary changes.

There will be a further four years for companies to get ready for the MT 1, 2 and 9 series messages to be switched off in 2025.  During this period, SWIFT will provide a ‘messaging clearing house’ to support short term interoperability.

Far-reaching impact on the back office

By creating a common language and model for payments data, ISO 20022 improves the quality of data that is available across the payment ecosystem.  This will enable more efficient communication between participants and related infrastructures.

The new messaging framework will more closely reflect modern cash and payment movements compared to the standards set when the MT series was first introduced.

By streamlining the payments lifecycle, institutions will benefit from improved operational efficiency and compliance as well as enhanced straight-through processing (STP).  Richer data will make it easier for businesses to detect fraud and help target financial crime.

According to Stephen Gilderdale, Chief Platform Officer at SWIFT, the migration to ISO 20022 ‘completes the picture, providing a rich common data model for cross-border payments end-to-end, leading to improved customer services, more accurate compliance processes and better STP.’

SWIFT ISO 20022 will have a far-reaching impact on a number of different back-office systems which may need to be upgraded to use the new data model.  Getting the right design and approach to the implementation is therefore critical to success.

Importantly, there will also be opportunities for institutions to get ahead of the curve, by planning ahead to exploit the additional transactional information that will be available.

What are the opportunities?

The main objective of the ISO 20022 messaging framework is to create a globally connected financial world where payments flow seamlessly between systems and jurisdictions.

In addition to enabling new client experiences, the availability of more meaningful data, such as better structured reference information, will provide companies with the opportunity to change and improve post-trade reconciliation processes:

• There will be more options available that can be used to automatically determine transactions that match – vital to achieving enhanced STP
• Richer data will provide even more opportunities for AI and machine learning-powered reconciliation systems to correctly identify possible matches. This will reduce the number of false positives generated, ensuring manual investigation is kept to a minimum and focused on genuine breaks
• Enriched data will improve analytics and support better decision making

Impact on existing reconciliation systems

One of the reasons there is a long migration window is that adopting these new standards will require major changes to existing systems and processes which will be time-consuming (potentially multi-year transformation projects) and costly to achieve.

Take legacy reconciliation systems as an example.  To reflect the new messaging formats will require the creation of a new data schema so that the new data attributes can be added.  This is not a trivial task.  Changing a legacy system to use just one extra piece of data can take several months and require specialist IT support.

Therefore, getting ready for ISO 20022 will require the vendor and/or the institution to potentially commit a lot of resources to implement this change.

Don’t rely on interoperability

November 2022 will mark the beginning of the CBPR+ compliant payment and cash reporting messages, transitioning from the MT format to ISO 20022.  During this period, SWIFT will provide optional translation capabilities to enable interoperability between ISO 20022 and MT users.

Receivers who receive certain ISO 20022 messages may opt to have an MT translation of that message, delivered in the same envelope as the original ISO 20022 message.

But the sooner an institution is able to send and receive the new messages the better.  There is no need to wait until you are approaching the final switch-off date.  Whilst the translation capabilities available might seem like an attractive option in the short term, this is counter-intuitive to the benefits on offer from the new messaging framework. 

Another approach to be avoided is to do your own transformation or data mapping of the new ISO 20022 messages into the older MT format so that they can be processed by existing systems.  Although technically this will work, it will actually hinder operational flexibility as you will lose the ability to act on the additional information – and if you are getting the same data but in a new format, then you still lose out on the potential benefits.

Why modern reconciliation platforms can play a vital role

SaaS-based reconciliation platforms such as Duco have a distinct advantage.  They have a data framework that is inherently flexible and the integration of new data items can be achieved using configuration, not code.  This gives institutions the ability to respond more quickly and start using the new data attributes without needing lengthy IT projects.

SaaS reconciliation platforms also empower users to adapt, change and create new match rules without needing vendor or IT support, meaning that new reconciliations can go live within days or hours, not weeks or months.  This level of business agility will be invaluable in dealing with future changes such as the introduction of new metadata.

Carpe Diem

ISO 20022 should be viewed as a business driver for change and improvement rather than an additional cost associated with using the SWIFT network.

The migration fundamentally promises to deliver a faster and more efficient payments infrastructure.  However, there are many additional benefits to be gained by leveraging the additional high-quality data that will be available under the new standard.

Making productive use of the new data fields contained within SWIFT ISO 20022 messages will help institutions achieve enhanced STP which benefits all participants in the payment ecosystem.

In practice, this means that as you start to plan your back-office transformation, make sure to include your reconciliation system in the migration plan.  Optimum benefits will come from taking a broader view of your systems, rather than looking at individual applications in isolation.

If you are on a legacy reconciliation platform, it might be worth looking at upgrading to a more modern SaaS-based platform that will enable you to start enjoying the benefits of the new data sources as soon as they become available.

You will be able to apply the most advanced techniques possible in the field of AI and machine learning without reconciliations becoming an onerous part of the overall transformation project.