March 7, 2023 - What is ISO?
The International Organization for Standardization (“ISO”), an independent non-governmental organization of national standards bodies from more than 160 countries. It has published standards for a wide range of industries, including ISO 20022, a new message format that many global payment and messaging systems are adopting. Last week, the LSTA and LMA published the updated LMA/LSTA Standard Administrative Details Form, which now includes optionality for inputting Standard Settlement Instructions/Wire Instructions for those transactions that align with the ISO 20022 updates. Given the sheer number of cross-border payments whether for principal, interest, fees or otherwise, it is important that our market focuses on the operational and technology changes inherent in moving from SWIFT MT to ISO 20022.
Digging a little deeper, what is ISO 20022?
Currently, domains and geographies use vastly different standards and information formats. Due to the need for unification, the industry created message definitions – that is, agreements on how to organize the data they want to exchange in structured formats (syntax) and meaning (semantics). The result of this effort — ISO 20022 — is a highly structured, data-rich international and open standard for exchanging electronic messages between financial institutions. This message structure, form and meaning can be used to relay financial transaction information using a common language for payments worldwide.
ISO 20022 messages are available for the complete payments chain: customer to bank (payment), bank to bank (payment clearing and settlement) and reporting (cash management). Messages are also available for supporting functions such as exceptions and investigations, bank account management, remittance advice, direct debit mandate management and regulatory reporting.
What are anticipated benefits from adopting ISO 20022?
The main difference between the current standard (ISO 15022) and ISO 20022 is that the latter message has a richer set of payment data and better structured information that will allow for improved analytics and may help banks and other entities comply with sanctions and anti-money laundering requirements. Clarity, accuracy, and transparency will replace ambiguity while faster straight through processing will result in less need for manual intervention in favor of automation. The consistent view of ISO 20022 business processes, message components, elements and data content across multiple markets will create interoperability for cross border real time payments. Formats that could not previously work with one another have been harmonized. The potential to receive enriched structured payment data via APIs will increase scalability for the back office procedures, bringing much needed clarity and transparency to our market.
What is the timeline for adoption of the new standard?
SWIFT aligned the start of the global ISO 20022 migration (e.g. pacs.008 and pacs.009) for cross-border payments and reporting (CBPR+) with the European Central Bank’s timetable to go live for all impacted banks on March 20, 2023 with the coexistence of ISO 20022 MX and legacy MT until November 2025. According to a Policy Statement issued in December 2020 and updated by the Bank of England in January 2022, GBP payments will begin to migrate from the April 2023 go-live for enhanced data in CHAPS to the summer of 2024 when the Bank will mandate the use of Purpose Code and LEIs for payments between financial institutions. From November 2025 (again when SWIFT retires MT messaging for payments), the Bank will mandate the use of Structured Addresses and Remittance Data for all payments.
CHIPS and Fedwire have current expected migration dates of April 2024 and March 10, 2025, respectively. In addition, the Federal Reserve Banks will provide three ISO 20022 testing environments to ensure that the Fedwire Funds Service community is well-prepared for this single-day ISO 20022 implementation.
What is the difference between a PACS.008 or PACS.009 payment method?
Both pacs.008 and pacs.009 are used for cross-border/international wire transfers. A pacs.008 is a SWIFT file format with which banks exchange payments with one another and is the MX equivalent of MT 103, used for commercial payments. A pacs.009 is a SWIFT payment message used to move funds from a debtor account to a creditor, when both the debtor and creditor are financial institutions. It is the MX equivalent of the MT 202 and is used for treasury payments.
Due to the complexity of the ISO 20022 migration, it is important that management collaborate with their operations and technology teams and software providers to understand the new standard and meet the above timelines.