Announcer: Welcome to our Wells Fargo Global Financial Institutions webinar on ISO20022, analyzing the business case. Today’s speaker is Michael Knorr, head of Payment, Risk and Liquidity Risk Management for GFI Payment Services. Michael, you may begin.
Thank you so much, and welcome, again, to ISO 20022. I, myself, have worked on 20022 for a number of years and while some of the specifics of the business case that I’m referencing here are about the specifics in the U.S. market, this is also equally applicable to many other international marketplaces that are looking at the adoption of ISO 20022. And I will begin with introducing the audience to this topic and why it’s important. I will provide a brief background on ISO 2022 and the overall context and dive into the detail of the business case and what should be considered when markets looking at adopting this new messaging standard.
Now ISO 20022 has been around for a number of years. You know, 12 years ago, the industry got together to look at new ways of how to express financial messaging data in a new common format. There are alternatives methods that have existed in the past or still existing in parallel be it swift or be it other sort of EDI standards and the goal was to come up with a unifying standard that allows financial institutions and their customers to seamlessly interact with each other. So here, we have a sort of single overview slide that, again, we’ll broadcast also at the end again and that’s a good slide to keep in mind as we go along for this. So while a lot of these concepts on the slide might be still new and foreign, hopefully by the end of this webinar, you’ll be able to, you know, also recognize the importance ISO 20022 and explain even some of these concepts.
As I mentioned already, ISO 20022 is the common language for users as well as providers of financial services. So what does that mean? In the past, some financial messaging, thinking about the swift standard, was just in the interbank realm. However, this new standard will cover basically not just the banks, itself, but also all of their customer interactions and hence, we can provide a certain consistency between the end customer, the interbank market and down to the recipient of payments or other financial interactions. As you can see with these little bubbles on the right hand side, ISO 20022 is not just for payments. Although whooshes very 64 different messages in this space, but also covers, for example, trade services as well as card transactions and securities as well as FX. So it’s a standard or a messaging methodology that is much more comprehensive than a lot of the other standards that used to be out there. And it’s not just a messaging protocol or messaging, itself, but it’s also a way of how to think about business processes and business models that then can be expressed basically in this specific format. Globally, we have around 76 market initiatives that are right now focusing on the adoption. Europe is leading in this and the introduction of SEPA many years ago gives sort of that marketplace a little bit of a leg up in the adoption of the specific message standard. But many other markets have also followed suit namely over in Asia and even now the latest on shore payment system in China, CIPS, have also implemented this new messaging standard. That also means the U.S. needs to come to grips with how to react to ISO 20022 and if it should be adopted going forward. You know, one the U.S. market goes, we feel it will have a profound impact also on the entire interbank space and could be then the tipping point for wider adoption of this messaging standard amongst the banks and replaced with existing swift messages that many of us are using today.
So let’s start into more detail of what ISO 20022 is about. Now, we’re starting by actually not looking at financial flows but thinking about physical flows and here, I’m using the example of the 380 which has over four million individual components produced by over 1,500 companies in 30 countries and all this stuff needs to be tracked and accounted for. You know, different parts are getting shipped all across the globe. Each little part is basically has its own tracking I.D. and number and gets monitored as part of the entire manufacturing process. Now this is only possible because these physical supply flows are also supported by various standards that allow ompanies to code and identify different components and track them throughout the entire manufacturing process. Now what works in the physical space can also be applied into the financial environment, and financial flows also very complicated if we think about it, right? The business components that are required to basically order, basically different products, the type of purchase orders, invoices that need to be exchanged and the type of processes that need to take place to track the fulfillment of the underlying shipment or obligation, what’s required to sort of send out an invoice or bill when attainment actually happens, currency conversions or you know, supporting for larger amounts for sort of trading and hedging operations are required in order to facilitate that.
Now all these interactions that you can see on the picture also need to come together. While in the physical space obviously various standards exist to track sort of physical flows, the financial service industry still needs to work on basically creating something similar for their financial supply flows and that’s sort of what ISO20022 tries to achieve. It’s basically a methodology that all the participants in the financial supply chain can talk to each other, right in a common language. As initially stated this is not just for bank to bark and interbank, but also the corporate side, could also involve consumer and even the government to interact basically in these different processes. So it’s business process focused so it’s not just here is the payment message, but it focuses on what the purpose of the payment is, how basically accounts payable, receivable, ecommerce and payroll flows need to interact in a seamless manner to provide a high level of automation in this in this space. What ISO 2022 also tries to address is the topic, I don’t see anybody with this but data fidelity. It means how do you make sure, really, as data and instructions emanate from a corporate system down through the interbank chain that really its meaning doesn’t change that meaning is clear and that, again, can really sort of be transported through the entire financial process? So that is protected here with these interlocking business processes, started from the commercial process to payment process to clearing and then finally the regulatory that’s especially important for us banks as we have a lot of regulatory obligations in light of anti-money laundering, know your customer and screening of transaction and it’s the meaning of different parties and meaning of different transaction is not clear that can in the end lead to a lot of delays and payments as we would need to trigger investigations and ask ordering and originating parties what the meaning of some of those data elements are and hence having a better standard will provide automation and a greater level of efficiency in here.
We have a quick example, right, what we mean by that. For example, vendor name in the ERP system could be represented obviously as a regular name. This could come here in tagged information. Could be translated different format and before you know it, because the tag seems to be changing here in different message types could be reinterpreted as something different. So a name here, Frank Rich, basically could suddenly end up meaning a country instead of just being the first and the last name of somebody in somebody’s back end system. ISO20022 provides a framework in which of each of these data elements get a tag and format requirement so as the data is transported between different systems, does not basically change its meaning and its meaning is clear to all involved and all involved parties in the chain.
Now what are the issues with the current formats that we have? Here, unfortunately, it’s a very busy slide, but here are sort of five specific topics I would like to talk about. We’ll spend a little bit of time on this specific slide. And all of us in the banking space obviously know that the financial service or payment chain is becoming more complex and that has to do with partially our large customers creating different industry entities, treasury centers, account payable centers, account receivable centers and they also try to exert themselves into the payment chain. At the same time, we have more hierarchy of different banks that interact with each other and in some areas we’re running out of space in the existing MT103 messages that cannot capture all that all the different parties anymore and what we end up doing is sometimes truncating parties, overriding them and putting them in free formatted fields that causes the problem that I previously mentioned that the granularity or data fidelity does not get preserved along the entire chain of the payment order and it’s easy then to misinterpret different parties in the chain because it’s not clear what the role is in payment instruction. The second point where we see issues with the current formats and that sort of would call for looking at ISO 20022 in more detail is that also requirements from a regulatory perspective are getting more granular. Parties are being expressed. Now as, you know, if the companies could reference this in departments, right, that are interacting with payments, we know that there are sometimes issues of recognizing properly sort of post office boxes and having clarity on when they should be used, not used, expressing proper references to towns or to countries and locations. While the market has done sort of improvements and of country data is encoded, the same needs now to happen with other aspects of geographic data including sort of post codes, you know, towns and streets and the likes because that all helps with the underlying EML and screening process that’s required for many banks to do. The third aspect is also that the market and again, some of the stuff is regulatory driven needs to have better idea of what the purpose of the payment is. Now this is sometimes better understood using example and in the U.S. we can think about the sanctions that were placed against Russia last year where specific types of payments were basically placed under sanctions if they’re related to certain financial transactions.
Now today in payments, it’s not the clear what the purpose of the payment is and they need to be interpreted and basically if payments need to be interpreted, mistakes can be made and in this case, you know, payment that maybe should not be executed might need to be executed or it requires manual work because, again, referrals need to be done to the originator of the payment to find out what was really the purpose. In other countries, this has already proliferated as well. We know in China, in India, Jordan, South Africa, I think most recently also Malaysia, a lot of countries their regulators now are looking at deploying purpose codes and unfortunately, all of them might look different in the future and also the meaning might vary, right, if this is a payment for a service or it’s a donation or you’re buying goods of services, all these are today, different. ISO 20022 can help here by providing a well-defined list of payment purpose codes that different countries and actors can map against. The fourth item here becomes actually very topical. It’s sort of unique into the identification of payments across the entire payment chain. Today, MT103s and 202s have very limited space of reference numbers as they sort of make it through the different banks and a lot of times reference these unique reference numbers get overwritten from basically bank to bank to bank and we don’t have any unique identifier that can travel through the entire payment chain. So that is we have two problems with that. One, corporate customers would like to have their unique identification also transported through the payment chain and also for us in the interbank space, if there’s no unique number, it makes it very difficult to identify a payment.
This is also recently been identified as an issue in a new initiative by swift called the global payment innovation initiative that is also recognized well for basically to support many new innovative solutions. In payment tracking, we do need an end to end identification number actually on payments. So while this is obviously soft in ISO 20022, we see also now another initiatives around it trying to address and make sure that payments have unique end to end identification number and last but not least, we have issue around globalization. Not everybody has any more that in financial payments a name that can be uniquely expressed in the Latin character set that is prevalent today in financial messaging.
As we know from the internet that has done a great job to allow basically those people that and companies that have what’s called double bite characters so they basically have non-Latin characters and think about Chinese and Japanese languages to express theirs also correctly in messaging terms. That’s also what ISO 20022 provides and that obviously is a key ingredient here for further globalization that if we want to support more global flows we got to recognize to correctly express somebody’s name, we cannot always rely on sort of the translation of double byte character names into the Latin character set and some of the examples here on the screen show while the name might be very different in the original language back in English, there might be sort of the same. That creates confusion, again, and problems with screening and regulatory sort of regulatory monitoring in that space.
So another reason to look at the adoption of ISO 20022.
So what’s the overall value proposition of this new format outside of tackling some of those issues that I previously mentioned?
it tries to recognize and harmonize all the various standards that exist out there today. It’s not just swift that a lot of banks use today for communicating payment information between themself and their clients but also many other formats are still out there, right? EDIfact, twist, various proprietary formats that exist and if everything would be mapped on a one to one basis, it would be very costly and difficult to do so. So having a single common message mod until the middle would really help sort of to improve the overall efficiency of payment messaging in general. Hopefully by now I was able to explain a little bit that ISO 20022 is more than just a messaging model. That’s obviously the final outcome, but you’ll see in the scheme Ma or when you process the message, but there’s a lot more to it because there’s the whole common definition model that helps to express data elements in the standard way and it also goes back to standard business model, how payments are defined, how the different actors in the payment are defined and what their role is to each other. For more information, you can look up that website stated below or just type into your browser, ISO20022.org and there’s a lot of material on there and some videos as well that help to explain sort of the background and how to work in this new model.
Now with this background at hand, I would like to turn the attention now to the business case. That would speak against the adoption of ISO 20022 and we’re going to specifically focus on the U.S. model because that’s where a lot of discussion is taking place now, if the U.S. should go down that path and if the U.S. dollar is adapting this new messaging standard, then this will have obviously profound impact obviously on the overall payment messaging for the rest of the globe as well especially as some markets like in Asia and your Euro are going down this path as well. A lot of markets are on the holdout to see what the U.S. will be doing and it’s worthwhile to take a look in how this discussion is taking place.
I originally mentioned already that there are various means that ISO 20022 is covering T’s no the just the payment space. Although that’s mainly what we’re focusing on in this talk. It’s trade, services, securities and foreign exchange. All these different domains have been implemented already somewhere. FX, ice sew XML related has already been adopted, for example, CLS, continuous link settlement, for some of their transactions. The securities market has been very active in the adoption of the standards and even the U.S. and DTTC is going down this path also various European exchanges. Card space and some markets outside BS are on the process of attempt doing ISO 20022 and replacing partially the existing standard on the cart side out there as well. Very active and in that space and it’s not just as I mentioned covering just payments but various other financial transactions and the good thing is the standard makes sure that all these different nomenclatures and data harmonize with each other so it makes it easier to basically pour data between the different domains but also if you want to aggregate data on values, amounts and parties will become a lot easier across all of these because they follow a more common standard and outline.
Now what are the specific assessment that the U.S. has done, right, to look at its strategy, right, for the adoption or against the adoption of ISO 20022. So we’ll cover a few of them here as part of this webinar to just highlight the key the key items. The first one is really that, you know, we got to look at this more from a strategic perspective. Meaning what happens in the future, how is the U.S. market communicating in the future with the rest of the globe? So the global momentum that has built up out there and I mentioned already what happens in Europe, what happens in Asia is definitely of great importance to the U.S. and many of its large corporates. However, many of the smaller corporates have not really picked up ISO20022 yet and there we see dominance of the existing U.S. specific formats in the EDI space, for example. So while in Europe and other markets also medium sized and smaller corporates have started to adopt ISO 20022 that is less the case in the U.S. so far.
Now the second aspect obviously forth U.S. is sort of global competition and to make sure that the U.S. payment system remains compatible to where the rest of the world sort of is heading and that’s definitely while slow a steady adoption of ISO20022 is taking place. Also some of the regional payment systems that clear U.S. dollars might also look at the new messaging standards and it becomes a competitive issue also for the U.S. marketplace. If the U.S. is not compatible, right, where the rest of the market is going. Another reason that is sometimes mentioned as a you know to support the adoption of ISO 20022 goes along with one picture I showed earlier that had this picture of the various translations that are going on between different formats. So the more proprietary formats are out there and the translation costs increase further and, you know, if we can sort of agree on a more common messaging format then this would make it easy obviously and reduce the expense in translating different formats and also the risk, right? As I mentioned in the loss of data fidelity because not all these formats are fully compatible with each other and having a more well defined messaging format out there would obviously help and reduce overall risks.
Now the next set of considerations here deal with consistent and rich data and that really matters a lot from the international space because a lot of the domestic formats and just exist in other markets were not rich enough in other data content. The U.S. has done a good job to sort of adding more data elements and definitely also supports transportation of remittance data into their payment orders. While other markets hadn’t done so, the U.S. for a number of years and namely here in the U.S. ACH system and the EDI addendum records and now the enriched wire format that the U.S. is supporting and ships as well as said wire does allow companies transport remittance data with wire and that enriches the U.S. context. Into the probability with the global marketplace remains sort of an important an important consideration for the U.S. market as that might, you know, where the rest of the world is going will make it otherwise more difficult for U.S. companies and banks sort of to interact with them and that’s where obviously ISO 20022 will make this better.
We spoke already about a little bit about the regulatory needs and obviously having well defined party fields and addressing some of the deficiencies of data granularity will help sort of regulatory screening, AML and other risk management efforts to sort of improve monitoring as well as hopefully reduce some of the manual costs that go along today with actually stopping automated process and then doing follow up work in our back offices. If the data quality can be improved through sort of these sort of formats, then obviously that will definitely benefit the overall bottom line. The last consideration that the market is looking at and that looks more technical is well, it will be just be easier to use ice sew XML and XML from a development perspective, right as the younger generation and technology that has grown up, right, with XML and Java script and the likes doesn’t want to really use these legacy formats anymore either. So it will become easy and cheaper to innovate obviously around a more modern standard so fewer and fewer people will be indicated in the old standards and sort of as the newer generation and technologists that are growing up so there will be the propensity to actually look for having more modern formats in place and that’s a big reason sometimes for, you know, for other markets where this has been pushed. We have seen also more new innovative solutions coming up from non-bank providers in the space to help with integration, provide more value added services for banks and together with banks for their for their clients.
So if you’re a bank today that needs to make a choice how to react to this and determine if ISO 20022 is really for you, what considerations should take place here? Number one is, is this really relevant from a domain perspective? With that, I mean is this relevant to your core business? That will depend what your core business is today and you can just recall these little bubble charts where I said, well, payments or FX, for securities. So the more you’re engrained in these different domains then the more important, obviously, the standard will become for you. Just for consumer banking, this is probably not so relevant, but if you’re in Capital Markets, trade finance and more international a bank is then the more relevant these new standards are. Now for banks where this is not really a strategic issue, then some of the message changes, even in the U.S., will go to ISO 20022 can probably outsource to other providers and even here in the U.S., Federal Reserve, might be looking at specific tools for their current clients that can be deployed by them and will help with some of that migration.
Now if this is if the domains that ISO 20022 is strategic for a bank, then there are two choices. Is sort of the underlying infrastructure already supported by third party vendor, then that should be good news, right? Because banks might have upgraded infrastructure and if the messaging format changes in the U.S., then basically the vendor will cover that under the underlying contractual terms, but obviously there might be other back and front end integrations required to web front ends and electronic banking systems so here is a careful review of the impact is obviously required. Now if banks are already still on legacy platforms that are supported internally then the introduction of ISO 20022 will obviously be a big, big impact and hence the question should arise if there’s, you know, still sufficient time to look at modernizing the infrastructure and upgrading it. Well, ideally to a vendor supported platform or more modern technology to ready the infrastructure for the advent of 20 or 22 in the near future. I’m going to talk a little bit more about the time line in a second.
So some banks will be well prepared to do the previous investments that they’ve done in the infrastructure to support ISO 20022 and in other cases, big decisions will need to be made, right? To upgrade the infrastructure or in another way outsource some of that activity to a third party processor.
Let’s summarize so conclusions for the business case for adopting ISO 20022 in the U.S. As you’ve seen from my detailed remarks so far, the benefits are obviously qualitative at this point and having been fully realized. The industry has been struggling to really find an overarching business case from a financial perspective and, you know, we’ve also done some research in other markets to see how they were able to justify sort of the adoption of this new of this new format. In some markets it was basically done as a regulatory manned date and we can think about the efforts in the Eurozone to implement SEPA or other common market initiatives because they have to do something, right, around the divergent local standards and something had to be done to bring the common European platform. In other markets, well, there are decisions like, you know, I think in Japan every couple years to just modernize everything and hence, it’s quite common to just change message formats and move ahead with sort of the new solution. Also in markets where you have fewer banks, like in can today some of these integrators, some of these upgrades are easier to manage than the thousands of banks that the U.S. has to deal with. Now some of the information definitely from local marketplace and regulators were a little bit difficult to get because they probably weren’t tracked and definitely was more from a regulatory push perspective so the overall costs might not have been tracked in the entire market and there was sort of a top down approach to implement this new standard. However, we’ve seen due to some these global initiatives that large momentum does exist in ISO 20022 definitely among the large corporates as well as global banks. So that needs to be sort of kept in mind also from the U.S. perspective.
So the conclusion for us in the U.S. so far has been that while a compelling financial business case might not exist so far, the adoption of ISO 20022 might be still relevant from a strategic perspective because the U.S. payment system is obviously very much integrated into the entire, you know, global economy and typical for a lot of financial activity across the globe. So keeping that environment sort of at par where other markets are going, I think is very important. So far, as you can see on this slide this is sort of the preliminary time line that the U.S. is considering to work against and this was basically also introduced at Sibos in Singapore last year by the U.S. community. So while I’ll spare you all the details of each step here, the important thing sort of to take away is that the U.S. is trying to Target 2020 initial roll out. Now the states might move but it’s sort of at least initial Target that the industry has set for itself and that’s not too far away anymore. It’s just four years from now this might become a reality. Where are we now? The Federal Reserve and the clearinghouse have sort of are hiring, sort of staffing up, right? Their perspective projects to start the detail planning, what this means for the U.S. market and their various industry groups working with them to really find out what the overall costs are and not just in the infrastructure, itself and the payment system but what it will really cost the banks to participate in it and if this time is even reasonable.
Now the U.S. is also considering to do a like for like adoption of ISO 20022 and that means at the same time, we’re not just looking at translating the existing, that’s a field that we have today and ships into the ice sew format but we’re really looking at the end to end benefits of adopting ISO 20022 and looking at other value add services that we would like to add in the industry like, for example, payment tracking might be one of them and how we sort of can implement that leveraging this new standard. So in this case, the business case is not just driven by pure conversion, but we are also looking at how further value add services can be provided to our clients in the marketplace. This is still early days, although, we talked about this already, as I said, last year with the clearinghouse and the fed. We’re still in this planning phase, as you can see here. This will take us until next year until we’re very well defined specifications out there that can be used by banks to really put budgets in place and work on it in 2018 and 2019. Now the just from an infrastructure perspective, fed as well as chips have already upgraded a lot of their backup infrastructure and sort of are, you know in sort of from a technical perspective ready to really implement these new message standards so you know, over the years a lot of core infrastructure has been uptraded there as well in the core payment system in the U.S. While the message formats haven’t been changed, the underlying technology has been upgraded and hence they feel are ready to now tackle this new format.
Now in summary, hopefully, you know, you can take a few things away from this. Number one is, yes, financial interactions and relationships are getting more complex. I talked about along the payment chains, I talked about more complex data that’s needed for party information and also the parties are getting more diverse. Not everybody can be expressed in the Latin character set we have to look across how we can support many non-Latin names in double byte character and this might scare folks in the banking space because we’re very used to looking at payment messages in this traditional swift format but we just got to recognize, right, as we’re also the financial, the Fintech community is going that can largely already support these that is sort of what banks will need to look at in the future. ISO 20022 is more than just a messaging standard. It’s a modeling approach, how to think about pears and the payment chain and how to sort of link them, right, and ensure that information can travel sort of with high level fidelity across different parties. The U.S. community as I mentioned is actively evaluating the adoption of this new standard and we are potentially targeting 2020 for potential migration to this new standard, but we’ll probably take until next year before we can really nail down this date and if it takes two more years then so be it. Nobody should take this as a guarantee there, but we are working actively on it and we’ll obviously keep our customers up to date about these developments. Now the benefits that I talked about are definitely just for mainly for the larger banks, the larger clients and it’s difficult to justify them really for the smaller U.S. banks. The fed, as well as the eco system here in the U.S. will need to figure out how to support smaller banks and their migration because they have large customers and it might be a big headache. Obviously, the fed is stepping in and might provide certain translation tools that will make it easier for smaller banks to adopt this standard.
For institutions that don’t feel strongly basically about ISO 20022 and they think about some of these things that I talked about are not so strategic, then outsourcing some of their payments or the underlying infrastructure might be the preferred choice and that’s also where Wells Fargo going forward might be interested in to look at some new products and services for domestic clients in this space and going back to our the first slide that I started out with and that’s sort of a good summary, again to highlight the key points that are trying to make. Important to not just think about ice sow XML as a message but a bottling approach, not just payments but many other financial dough pains are covered and the focus is really on interoperability around financial institutions, market infrastructures and end users and more banks engrained in multiple of these things and the more important basically it is to think about and actively engage obviously in the ISO 20022 discussion to learn about it and to think how this could also help to build efficiency in their own infrastructure. Bar code at the bottom, if you have a bar code reader QR code reader, snap a picture and it should get you to the ISO 20022 website and you can find a lot more information about ISO 20022 and underlying details. We also are inviting our customers to reach out to us if they have more questions about ISO 20022. Our view our further views on pit how we can help and please do reach out to your GPS sales representative. We will gladly set up some time with you to talk about any of 9 topics that were raised here or any other questions you might have around these about this new standard. So with that, I would like to thank everybody for their time and have a good day.
Announcer: Ladies and gentlemen, thank you for listening to today’s webcast. This concludes the program. You may now disconnect. Good day.
Michael Knorr, Head of Payment Risk & Liquidity Management for GFI Payment Services, shares how the ISO 20022 format can improve payments with its common language and approach for all users and providers of financial services.
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