The Power of Fintech – International Payment Transformation

Payments (including transaction banking offerings) are at the center of everyday banking. They generate around 25 percent of all revenue in the Australian financial service institutions and are one of the most critical attributes customers look at when choosing financial institutions.

Covid19 saw the most significant disruption to payments in 20 years, moving from physical to virtual/digital, application, or API-based payments.  This explosion of digital transactions has also seen a rapid decline in legacy payments in Australian banks, closing hundreds of branches and more than 2200 ATMs.  CitiBank exited its credit cards business in the Asia Pacific region to focus Buy Now Pay Later(BNPL) and FinTechs (like PayPal), expanding their domestic and cross-border commerce roles.

SWIFT MT ISO15022

For more than 25 years, financial institutions have leveraged the same SWIFT MT (ISO15022) based payment messaging instruction set to process cross-border and high-value payment instructions to banks, correspondent banks, and ultimately final intended recipients anywhere in the world.

SWIFT was introduced to replace Telex messaging in 1973 as a payment instruction to enable international funds transfer. It provided a unified messaging and code-based systems amongst certified member intermediaries.  Two hundred thirty-nine banks founded it, however now leveraged by 11,000 institutions.  Its core business delivers applications, business intelligence, compliance services, messaging, trusted connectivity software solutions. It is used by banks, brokerage institutes and trading houses, securities/derivative dealers, asset management companies, clearinghouses, depositories, exchanges, reserve banks, corporate businesses, treasury market participants, service providers, foreign exchange, and money brokers.

There has been an unprecedented amount of disruption and seismic changes occurring in payments globally. With less fanfare, the update to Swift FIN MX/ISO20022 payment messaging format is one of the most significant and far-reaching changes transforming the high value, domestic Real Time Gross Settlement (RTGS), and international payment industry. This year, the payments industry has seen instant payments grow, open banking, Australian BNPL fintech achieve multi-billion valuations, digital payments/API, cryptocurrencies, distributed ledger/Blockchain applications, and increased use of the digital wallet, etc.

What is ISO20022?

ISO 20022 is an ISO standard for electronic data interchange (XML) between financial institutions. It describes a metadata repository containing descriptions of messages, business processes, and processes for the repository content. In addition, ISO defines a common language that will allow connected systems to have an automated dialogue.

The standard covers financial information transferred between financial institutions, including payment transactions, securities/derivatives trading and settlement information, instant payments (e.g., Australia’s NPP and UK’s Pay.UK), credit and debit card transactions, and other financial information. Swift MX (also known as Swift FIN MX) is Swift’s implementation of ISO20022 and provides a faster pathway for institutions looking to migrate from Swift MT to MX.

Why do we need ISO20022

ISO 20022 is a general-purpose standard for developing financial industry messaging (as a common language) in the payments, securities, trade services, cards, and foreign exchange business domains. For example, in cross-border payments, ISO 20022 standard covers messaging related to cash account management, payments initiation, clearing, and settlement. All major RTGS is adopting ISO 20022, cross border and high-value payments systems (HVPS) globally, one of the most far-reaching changes in the financial services industry. 

ISO 20022 message facilitates a significant amount of data to travel with a payment in a common language. This enables benefits such as:

• Complete information on payment parties and remittance data can provide a reduction in payment processing errors
• It sanctions screening and reconciliation and provides a higher level of automation
• Operational efficiency, transparency, and customer service should improve under an interoperability industry standard, enabling firms to be able to offer differentiated products and services to end clients
• Firms have the potential to enrich their businesses by offering new value-added services

In addition, ISO20022 adoption also reduces financial crime, security, improving processing and settlement, resiliency, agility to adopt new technology, strengthen risk management, and promote competition and innovation factors.

The upcoming article in this series will discuss why banks need to switch to ISO20022 now more than ever. Stay tuned!