Payment messaging upgrade promises benefits

By John Hintze

Migrating to the ISO 20022 messaging format and its richer, more structured data to support high-value payments will offer numerous benefits to banks and their customers. But getting there presents banks with significant challenges this year and ahead.

The largest U.S. banks with extensive global reach have been preparing for years to move to ISO 20022. Many payment systems outside the U.S. already use, if perhaps earlier, less refined versions. The new messaging format is arranged in a logical hierarchy and aligned to related business processes transmitted between payment providers and receivers.

Such additional detail compared to existing payment messages should enable banks’ commercial clients to make faster and much more efficient payments. That’s especially true for cross-border, high-value payments, which typically use the SWIFT network and a string of correspondent banks, a complex system that can introduce unexpected fees and increases the potential for running afoul of anti-money laundering regulations and sanctions.

In fact, it is the SWIFT network’s migration that U.S. banks should have already started preparing for. In November, banks’ payment systems, whether internal or from a third party, must be ready to receive SWIFT’s new ISO 20022-based MX messages or be unable to receive cross-border payments using SWIFT technology. They have until November 2025 to send MX messages.

Banks participating in the high-value-payment CHIPS network, run by the Clearing House, must be able to receive and send ISO 20022-based XML messages by November 2023, while the Federal Reserve recently recommended delaying its Fedwire Funds Service’ implementation of ISO 20022 XML messages until first-quarter 2025, but it does not provide a specific deadline.

“We see the flexibility of the file as well as the extended data potential as the biggest benefits for both banks and customers,” says Amy Sahm, manager for the international group at Lancaster, Pennsylvania’s Fulton Bank, with $25 billion in assets. “Having more information around the payment in a universally accepted format could help to reduce sometimes challenging investigations [related to potential sanctions violations or money laundering]and improve funds-availability timing.”

Some U.S. banks will likely seek to develop payment systems by November to both send and receive ISO 2022-based payments, to take advantage of the benefits such as greater straight-through processing. The lack of structure and data in SWIFT’s current MT messages, a format that’s been in use for more than 20 years, often means instead that companies must manually intervene to determine the purpose of payments they receive.

Moving to a new payment messaging format, however, is costly and potentially complex. Payments is a core bank service touching systems across the institution that will have to be adapted. Some systems are internal and will require resources that must be planned and allocated for. And some elements of the payment process may be outsourced to third parties, although banks will nevertheless remain responsible should mishaps arise. To give banks more time to adapt their payment systems, SWIFT’s FINplus service translates MX messages to the legacy MT format, and it has been available for testing since November.

“The availability of the translated MT can allow banks to retain existing operational processes to limit the impact” during the period when cross-border payments have migrated to ISO 20022 but domestic payment systems have not, says Stephen Lindsay, head of standards at SWIFT.

Sahm—who is also secretary-treasurer of the board of ABA’s transaction banking subsidiary BAFT—says Fulton Bank is actively working with its SWIFT service bureau to implement the translation service before November. She adds that the service bureau will screen MX messages prior to their conversion to the MT format, when data likely will be truncated, to ensure there are no problematic transactions.

Banks will be responsible for any truncated data in the event regulators have questions, and so must make sure it is available. “We are seeing institutions either storing the MX data payload or building ISO 20022 data stores for the data, to satisfy travel rules and other compliance requirements,” says Syed Ali, senior manager at Accenture.

Fulton Bank has also contacted its upstream global correspondent banks to receive their ISO plans and will test their MX messages before November, Sahm says, adding it began testing receiving MX messages this spring.

Translating the MX messages will provide interim relief, but U.S. banks’ payment systems must be able to handle the full ISO 20022 message by first quarter 2025. Robert Pepitone, senior CHIPS product manager at the Clearing House, responsible for USD cross-border high-value payments clearing and settlement, notes that CHIPS’ messaging format was purposely developed to be understood by the SWIFT and Fedwire systems and so their formats are very similar.

He adds that “the current CHIPS format pales in comparison” to ISO 20022 in terms of structure and data.

That means many if not most U.S. banks will have plenty of work ahead of them in 2023. Besides the technology and operational changes, they will have to educate staff and customers as well as upper management, since the enriched data is expected to spur new payment-related products and more insightful analysis into customer payment patterns.

Preparing for receiving SWIFT payments will provide a significant leg up. Lindsay says SWIFT is advising customers to set themselves up appropriately for testing, including upgrading and configuring the messaging interface they use for the FINplus test service, and self-testing or testing with SWIFT to validate their readiness. Then customers must be sure their messaging interface is configured properly for the FINplus live service.

“Allocating resources and time to effectively plan and execute this transition will be a challenge and one that banks should be planning to address now,” Lindsay says.

ABA responded January 3 to a request for comment regarding the Fedwire migration, noting the importance of Fedwire and CHIPS migrating to ISO 20022 on the same day, since the two systems work closely together. ABA expressed concerns about the lack of detail in terms of Fedwire’s testing strategy and requirements, and it recommend that the Fed issue a “technology roadmap” to provide key dates and milestones related to banks’ system requirements and testing.

Andrew Foulds, director of clearing solutions in EMEA at core provider Fiserv, notes that banks will turn their attentions to the benefits of ISO 20022 payment messages after completing the bulk of implementation challenges. One such benefit will be more efficiently linking payments to supply chains, improving companies’ liquidity and providing data to improve logistics, accounts payable and other key functions.

“The main benefit will be the ability to turn payment data into information,” Foulds says. “Enabling this data to be turned into information will drive faster and more accurate decisions, streamline reconciliation and help with dynamic liquidity functions.”

John Hintze is a frequent contributor to the ABA Banking Journal.