• Michael Levens, Global Head of Payments at Delta Capita


• 03.10.2023 04:45 am
#data

ISO 20022 is an open global standard for financial information. It provides a more consistent, significantly richer, and highly structured data set that can be used for most financial business transactions. 

These messages will be vital to the payments industry and will play an important role in the overall modernisation of payment processes. Specifically, they provide a structured and data-rich common language that is readily exchanged among corporates and banking systems.

There are several benefits that banks will be looking to realise with the adoption of ISO 20022:

1. Improved Straight Through Processing (STP) - Better STP will reduce the cost of processing by reducing query resolution and improving matching and reconciliation rates.

2. Reduced friction in payments screening - Easily identifiable data will reduce the number of false positives but also allow banks to use multiple data elements within transactions to better screen for sanctions, fraud, tax evasion and anti-money laundering.

3. Opportunities for new product development and revenue generation - The ISO journey has just begun, and like the internet grew in unimaginable ways, innovation, and product development, with the help of more data, will result in exciting new avenues for payments.  To enable this it will be vital that standards in the use of structured data are agreed so that the data means the same for all actors in a transaction. Otherwise, the industry starts to run the risk of processing data which is not meaningful to them or their clients.  

Market Infrastructures are starting to mandate the use of some enhanced data during the 2023 – 2025 migration period.

When to Adopt? 

What are the immediate timelines that banks should be looking to adopt structured data?

During the 2023-25 migration period banks need to understand what their adoption roadmap needs to be for the 2025 target to be fully ISO ready when CBPR+ will retire the MT format and the market will accelerate to gain the benefits of the new messaging standard.  

Banks need to identify what changes they need to implement and which key Data Elements they need to capture and use both in the short and longer term.  Some will be mandatory from either Market Infrastructure or regulating bodies, such as LEI and Purpose, Category and Service Level codes, as indicated above.  Other data, widely adopted by industry as whole, will drive the development of better processes, lower costs, more accurate data for sanctions and reconciliations, and development of new and innovative value add products for banks and their clients.

Now is the time and opportunity to start to think about the bigger question; how to capture the extra data available and to build compelling new services for clients and to win market share.  This can be through direct competition with FinTechs/Payment Service Providers or through collaboration utilising channels such as Open Banking and APIs.

What data elements should banks be considering now?

There are several core elements widely considered. Structured address is being widely adopted, whereas Ultimate Debtor and Creditor elements are optional - although they are likely to be widely adopted by industry for screening usage. In addition, some Market Infrastructures will be requiring full details of all agents to be included in transactions.  

In some regions, Market Infrastructures are starting to encourage the use of the Transaction Purpose codes, Legal Entity Identifiers (LEIs) and Structured Remittance Data, such as the Bank of England in 2023.  The use of these codes will be mandated from summer 2024 in the use of its CHAPS system.

Those banks that look to adopt structured remittance data early could:

1. Gain competitive advantage by lowering costs through better efficiencies such as reconciliation and the reduction of back-office intervention.  

2. Improve client reconciliation and reduce the time it takes clients to query transactions.  

3. Drive the wider adoption of AI initiatives and channels through which clients can interact by using more data elements.

Better management information may be driven in both credit and compliance risk, especially when multiple elements are used in looking at sanctions and AML checks. For example, the adoption of LEIs within payments could:

• Drive a better understanding of systemic risks run with multinational corporates and other financial institutions.  

• Improve screening processes by using this element to help identification.  

• Support credit risk assessment by third parties or help in the construct or audit of accounts for the small and medium enterprise market, using Open Banking APIs.

• Be utilised by central banks in regulatory reporting such as large transactions or exposure reports by pull APIs.

• Understand client behaviour and adjust offerings appropriately – right product to the right clients at the right time.

The adoption of purpose codes may indicate whether a client is sending and receiving funds in accordance with their stated objectives in the onboarding process and ongoing KYC approval process, as well as ensuring better fraud detection and alerting rates. It can also allow ‘perpetual’ real time KYC updates on a client via Transaction Monitoring and indicate frequent usage of certain products which can be used to develop new or streamline existing products, providing additional product offerings to clients.  

The Way Forward - why a gold standard?

With institutions having a lot of new data to adopt in the run up to the 2025 end date it is difficult for clients to see the long-term benefits and return on investment.

Increasingly clients are looking for guidance on what to adopt, such as what transaction codes and purpose codes. Others are looking to adopt the closest equivalent to an old MT code to try to minimise project costs.

Whilst there are two different approaches, both options come with risk. Adopting standards in isolation runs the risk of inadvertently implementing slightly different standards and codes from each other which may mean one thing to one institution but means something else to another.  For example, Purpose, Category and Service Level codes potentially mean different things in different Market Infrastructures and Financial Institutions. In that case, the exchange of data does not add value and the differing data could mean that data models and product adoption are not materialised.

Market feedback to date is that FIs are only looking to map as closely as possible to existing MT usage requirements to save time.  We also believe there is a lack of understanding in existing FI market places such as derivatives, custody service, etc, about what can be used. Therefore, we anticipate that there could be a lack of: 

• Use of more appropriate codes

• Lack of use of structured remittance information elements in pacs.008

• Optional elements being ignored unless mandated by Market Infrastructure

This could represent a missed opportunity to make full use of the new messages and their future use cases.

The benefits could therefore be much longer to realise. Institutions will need to come together to agree on the adoption of standards to help realise the benefits from this migration period and beyond.

By adopting golden standards as an industry, it is likely several benefits will be achievable:

• Benchmarking industry wide – By agreeing to the adoption of certain codes and data it will allow institutions to benchmark the standards and help everyone achieve common benefits.

• More clout to business cases (internally) – More clarity to senior management on Market Level/Peer Benchmarks - By coming together use cases and potential benefits that can be achieved by the industry will help cost, define, and benchmark internal project business cases to senior management.

• Earlier ISO benefits – If agreement is achieved for adoption of extended data elements rather than waiting to be mandated by Market Infrastructures the migration benefits will be realised quicker. Therefore, the product and future benefits will be able to be developed more quickly.

• Modernisation impact – By adopting these standards this will help the modernisation of systems by allowing less manual intervention and the creation of better user interfaces and dashboards. This could automatically interrogate data and produce meaningful outputs for end users.

Ultimately this allows better decision making either in sales, product development, risk assessment or other use cases.  For example, with ESG increasingly becoming adopted in risk and supplier decision making, the inclusion of data within payments that includes sustainability or social information can be used.  Regulatory reporting could become easier if common codes are adopted in either push or pull APIs to auditors and regulators.