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ISO 20022: implications for next level correspondent banking integration

ISO 20022: next level correspondent banking integration

This article gives insights into the challenges & benefits and into how KPMG proposes to start with establishing a vision towards ISO 20022 migration.

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Arthur Van Ommen

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KPMG Nederland

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Financial Institutions (FIs) that are performing correspondent banking are facing a migration to ISO 20022 during the next years. It is a complex transformation, required to remain compliant and reachable in the correspondent banking network and towards the European Central Bank settlement system (Target). Establishing a vision towards ISO 20022 migration needs to be initiated somewhat urgently as this change likely involves all payments processing components in the FIs' architecture.

Correspondent banking migrates to ISO 20022

Correspondent banking is the exchange of financial messages between FIs, including central banks. For interoperability purposes, the message formats for correspondent banking are currently standardized through SWIFT MT messages, offering automated message exchange already for over 40 years.

ISO 20022 is a standardized format for the exchange of financial messages, which is used by a wide range of clearing and settlement systems, such as SEPA (Instant). This format has advantages over SWIFT MT, as the message structure is improved and messages are enhanced with richer data. Customers and FIs can benefit from those improvements. The new standard can bring great advantages to the correspondent banking system, especially for compliance purposes (enriched messages for improved monitoring) and straight-through processing.

Agreements have been made to adopt the ISO 20022 format in the coming years, starting with payment messages as of November 2021. This immediately leads to implementation challenges, as this migration requires more than a simple message translation, especially when the FI wants to reap the benefits from this as well.

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Challenges to ISO 20022 migration

Message translation in itself will not provide a final solution to this challenge. Imagine an incoming ISO 20022 message is translated to MT and is subsequently absorbed in the product administration or translated back to ISO 20022 for further processing by other FIs. This would reduce the enhanced nature of the (enriched) message, and might therefore miss essential information for interpreting the message, validation of the content and monitoring of the transaction. This is especially a risk for parties that act as intermediaries, as in many jurisdictions intermediaries are required to pass on all the payment details they receive.

This use case highlights that the ISO 20022 migration requires a more complex change in FIs' landscape, which often leverages multifold application components. This not only includes back-office components, but also front-ends used for payment initiation, reporting and cash management (treasury) systems. All those components require to be adapted to the new field length, additional fields, character set, and the new message format. Complexity is multiplied by the amount of applications, as different application components have different owners, users, roadmaps, priorities, compliance procedures, etc. This reasoning assumes that all application components where payments data is processed are known beforehand.

Timelines to the overall implementation are clear: payment messages according to the ISO 20022 standard will be introduced from November 2021. Following a 4-year phase of coexistence, the legacy MT-payment formats shall be deactivated at the latest end of 2025. However, your FI – as international payment service provider – must be capable of receiving incoming ISO 20022 messages from the first day of the go-live. In addition, connecting with the European Central Banks over the (consolidated) TARGET network requires compliancy as per 22 November 2021. Postponing or deciding not to implement are not an option.

Benefits from ISO 20022 migration

Although the migration to ISO 20022 will certainly entail challenges, it can also bring benefits to both institutions and customers. This is also why the financial community drives the change to implement ISO 20022 for cross-border business. Some of these benefits include better data definitions as well as more information. This enables more efficient AML and sanctions screening to reduce compliance concerns, improves end-to-end straight-through processing and improves service to customers.

ISO 20022 provides a rich and well-defined structure for important data and it supports, among other things, non-Latin character sets. This structure, compared to SWIFT MT messages, allows institutions to create more elaborate AML monitoring scenarios. Two examples:

  1. An ISO 20022 message might contain a 'Payment on Behalf Of' field which is not present in an MT message (or this is incorporated as free text) which could be used for AML scenarios related to a UBO. 
  2. Having the data more granularly stored in the message without the current size limitations (e.g. 'street', 'town' or even 'building name') means that less data parsing and data normalization is required for sanctions screening. In addition, sanctions screening algorithms can better target the elements that could pose an actual sanctions risk.

This can increase both the effectiveness and efficiency of sanctions screening. Such a reduction in false positive alerts could mean a reduction in compliance costs for institutions.

Additionally, another appealing advantage of ISO 20022 is the potential for improving the end-to-end straight-through processing (STP) rates and processing times. Especially if the entire payment chain uses a uniform format, the likelihood of errors is lower. Also the structure of ISO 20022 contains less free format text fields than currently present in the large number of MT message types. This improved message structure allows for better (automated) interpretation of the message.

Apart from operational efficiencies, the richer data capabilities of the ISO 20022 based messages allow for increasing the value delivered to customers of banks. Through richer and more structured data, customers can improve processes as reconciliation, liquidity management, creditor management, debtor management, etc. Customers can therefore improve their operational processes as well.

Start with establishing a vision towards the ISO 20022 migration

Payments pose traditionally a fragmented challenge within FIs. Therefore, establishing a shared vision to the ISO 20022 migration is crucial to the success of the transformation. We list several elements that underpin the vision to the ISO 20022 migration:

  • Depending on the architecture and arrangements, set expectations with application vendors and determine (internal) responsibility. If third-party application vendors contracts cover this change, they should provide a roadmap to compliance. 
  • Besides compliance, this is an opportunity to reengineer. Customer expectations have changed dramatically during the last decade, and ISO 20022 could be a great moment to improve the systems' landscape. This strategic decision allows for reducing legacy as part of the complete payments chain, as opposed to a soloed migration of individual services. 
  • The transition approach is a baseline for the transformation design. The transition from MT to ISO 20022 could take place as a big bang, or can be spread over time (for example: incoming messages before outgoing messages). This principle is leading to the overall design of the transition phase. 
  • This ISO 20022 transformation should also be managed in coexistence with other developments, such as instant payments, PSD2 and Open Banking, Target2 consolidation and SWIFT GPI. 
  • Of course the right stakeholders and knowledgeable project staff should be involved. KPMG has the expertise and knowledge, as well as the skills and experience to help execute this transformation.  

Want to know more?

Please contact Arthur van Ommen or Jori van Schijndel

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