Australia’s 2018 launch of its domestic faster payments scheme, New Payments Platform (NPP), has transformed the way Australians pay, as evidenced by a predicted 48.7 percent five-year CAGR. NPP was one of the first schemes in the Pacific to use ISO 20022 messaging standards, providing the Reserve Bank of Australia (RBA) a unique opportunity to consolidate and migrate all payment types to ISO 20022 and speed up payments modernization.
The full benefits of ISO 20022 go far beyond modernization, and only by taking a holistic view of ISO 20022 will financial institutions in the Pacific be able to take true advantage.
SWIFT
SWIFT is actively driving the adoption of its MX messaging, which is its ISO 20022 format. As the platform for many high-value payment systems globally, this move has caused a ripple effect throughout the payments ecosystem. The new MX messaging format takes advantage of ISO 20022’s interoperability and ability to carry more payment details than SWIFT MT messages. This common language and model results in richer messages and improved data quality, enabling simpler passage of payments from various payment streams (e.g., international to domestic). SWIFT gpi instant payments service was introduced to speed cross-border settlement and will be using the ISO 20022 format for payment details exchange.
The RBA has already announced its migration plan, which calls for a co-existence period of November 2021 to November 2024 for SWIFT MT and ISO 20022 messaging, with an end to MT messaging thereafter.
Retail commerce
Another area of opportunity can be found within the retail commerce space. Nexo standards, based on ISO 20022, enable faster, interoperable and borderless payments acceptance by standardizing the exchange of payments acceptance information between merchants, acquirers and PSPs. Nexo standardizes card initiation transaction details and payment communication messages. Ultimately, this will lead to universal payments acceptance, and the ISO 20022 messaging standard is a perfect fit.
Through this, banks can open their retail commerce area to broader merchants and better support borderless trade.
Platform modernization
The inevitability of migrating to ISO 20022 demands modernizing legacy payment systems and potentially decades-old core infrastructure. Existing systems will find it challenging to perform ISO 20022 message processing, increasing operational expenses and potentially exposing performance issues. To bridge the gap between legacy and modern systems, banks should consider using an ISO 20022-native payments hub to provide the ability to process and orchestrate ISO 20022 messages while minimizing the expense and inefficiencies of retrofitting legacy systems.
Owing to the crucial role this payments hub will play, banks must work to find a proven solution that is reliable and scalable to their needs. A basic translation wrapper or add-on to existing systems will not be sufficiently robust to manage the rich data and real-time demands of migrating entire payment volumes to ISO 20022.
In addition, a cloud deployment model adds real value to the payments modernization process. It also offers scalability, high availability and cost savings, with simplified scheme maintenance and regulatory compliance. This means banks can innovate at speed, responding to global payment trends while modernizing effectively.
Looking beyond the Pacific
Of course, the ability to send and receive instant payments around the world is paramount. There are large ISO 20022 transformation programs happening globally, such as the Asian Payment Network (APN), as well as efforts throughout the Americas and Europe. Australia should strategically align with neighboring areas, especially the APN network. This alignment will facilitate improved cross-border commerce, enable banks to transact directly with businesses and help drive regional growth.
ISO 20022 and APIs
23 countries, under the governance of ISO TC68 Financial Services, have agreed to work together to focus their efforts on defining the first ISO standard for APIs in financial services. This is a crucial step in driving further payments innovation and interoperability. There is a considerable opportunity for ISO to define a consistent approach to the build of APIs based on the ISO 20022 business model. Leveraging the best capabilities of ISO 20022 (data-rich, well-structured messaging) and APIs (light and nimble integrations) will deliver the best outcome for all members of the payments ecosystem.
Considerations to overcome some potential migration challenges
| Discretionary approach to IT spending, which may result in de-prioritizing ISO migration programs | Treat migration activities as innovation opportunities |
| Since there is a higher risk involved in migration, financial institutions may sideline the migration until it is made mandatory | Focus on long-term, sustainable transformation goals as opposed to real-time operational objectives |
| Since ISO 20022 message format carries rich information on payments, legacy systems potentially have performance challenges resulting in additional infrastructure cost | Bridging the gap between legacy and modern systems, potentially with an ISO 200222-native payments hub will help to overcome the challenge |
| If each payment method uses wrappers and envelopes to meet its requirements, it may result in compatibility issues across the various payment methods | Introduce the governance models and standards for ISO messages and avoid overloading of the fields and limit the usage of wrappers and envelopes |
| Financial institutions face the potential risk of needing to run legacy systems with non- ISO and ISO standard messaging systems side by side | This risk mitigated by strategically decommissioning non-ISO systems rather than going for a big bang approach. In most of the cases, the non-ISO system will interact with the payments hub, which can perform the message transformation |
| Lack of strict control measures and a governance process to accommodate changes and new requirements mandated by the RBA or relevant standard bodies | Building an ISO 20022 governance model with proper control measures and metrics, and leveraging the entire scope of ISO by using message standardization and end-to-end referencing |
| Potentially sufficient risk in interpreting and implementing the data privacy standards across the paying value chain using ISO 20022 | Data privacy rules need to be incorporated during the design phase, and critical standards need to be governed by a central standards body and aligned to consumer data rights |
Opportunity knocks
The migration to ISO 20022 is more than worth the effort, and while 2025 (the SWIFT compliance deadline to enable full ISO 20022 for cross-border payments) may seem far off, the time is now to start planning and working with industry experts to speed the migration and maximize the benefits. Plus, this will provide ample time to account for any changes that may occur between today and the deadline.
But to fully leverage ISO 20022, financial institutions must think beyond migration and take a holistic view of their payments ecosystem. A successful transformation program will bring immense benefit in the form of improved customer experience, better internal operations and modernized banking services to suit the future needs of the API economy and consumer expectations around instant gratification, especially as they relate to real-time payments.