EXCLUSIVE: ‘You got the message?’ – Christian Fraedrich, Deutsche Bank and Edward Ireland, Bottomline in ‘The Fintech Magazine’
ISO 20022 will unite the payments industry behind a single standard, but it’s a big cultural change for banks – so migrate sooner rather than later, say Christian Fraedrich of Deutsche Bank and Edward Ireland from payments provider Bottomline
Modernising payments is what everyone wants – banks, fintechs, payment services providers and, not least, customers. The aim is more speed, less friction, stronger security and greater transparency. However, when it comes to cross-border payments, all these have been a particular challenge. But change is on the way, because ISO 20022 means there is now a common language for payments data across the globe. One industry, one format, with higher-quality payments for all – that’s the promise of the new standard.
Christian Fraedrich, who is responsible for cash business architecture at Deutsche Bank, is leading its ISO 20022 project, and he sees the new standard as a key step in the evolution of payments.
“We’ve seen many changes over the last couple of years,” says Fraedrich, “such as the SWIFT gpi initiative, which, for the first time, brought real, end-to-end transparency, as well as the ability to trace cross-border payments from initial instruction through to the credit in the beneficiary account. Not only does this provide transparency to the ultimate customers, but it also helps to streamline investigation and exceptions handling.”
Other notable improvements over recent years have been pre-validation, ensuring there is no missing or wrong information that prevents a transaction from being processed, as well as instant payment schemes on real-time rails.
“Now that ISO 20022 is rolling out,” says Fraedrich, “banks have one standard for instant, bulk, domestic and cross-border payments. They no longer need to think about what type of payment they are executing, although it’s more important to be sure of the service level agreement associated with each.”
Edward Ireland, who heads the ISO 20022 programme at Bottomline, a leading payments technology provider, is fully immersed in the industry migration and says that Bottomline is moving more than 450 customers across to ISO 20222 in the next couple of years. The current focus on meeting the regulatory compliance deadline for ISO 20022 is masking the fact that it’s been around for a long time.
“The standard has been with us since 2004,” says Ireland, “what’s new is that it’s about to become the single standard for payments. Moreover, it’s proven. India and China, the two most populous nations in the world, are already using it for domestic payments, and one of Bottomline’s major markets, Switzerland, moved successfully to ISO in 2015.
“It has also proved its value in the funds space, in terms of automating business.” So, how does ISO 20022 compare with the SWIFT MT standard, as well as other legacy standards? Ireland says it’s a big advance for payments and goes way beyond what we’re used to.
“The BACS standard 18 format was developed in the 1970s, and was suited for payments in that era,” he says. “ISO 20022 supports current and future needs. It’s far more granular, with much richer data and more definition of different business elements that can go into the messaging. We don’t have much structure to the information today; with ISO 20022 we’ll have more structured information and better end-to-end processing. It will enable the payment to become part of the wider transaction.”
ISO 20022 may have been around for a long while, but customer expectations and internal processing have increased the pressure to adopt it now, says Fraedrich.
“The rich and structured data helps our customers as well as supporting bank processes,” he says. “Compliance and the monitoring of money laundering also greatly benefit from more structured data, as does any type of exception handling.”
Having richer information with the payment instruction will help cross-border payments in the same way that payment operations are routinely supported in domestic schemes, adds Fraedrich. Because the essence of ISO 20022 is data and structure, he says it will enable banks to overcome many of the issues that can’t be solved with legacy formats. Ireland agrees that customer expectations and internal processing are key drivers of change.
“Customers are adding momentum to ISO 20022 migration,” he says, “and when we look at things like fraud monitoring and the sanctions screening that payment service providers must complete, they all have to be done well. And that won’t happen the old way. We need better data, which is what ISO 20022 provides. So, there’s an operational driver to use better formats, and then there’s customer expectation pushing the need for better visibility and more granular information.”
That said, there are significant operational challenges in implementing ISO 20022.
“It’s not simply a case of changing an interface to SWIFT, or to whatever local clearing system is changing,” he says. “It impacts end-to-end processing, and if you want to get the full benefit of ISO 20022 migration, you need to change all your systems along the value chain.”
Fraedrich explains that effective implementation means updating every processing system, in order to cope with additional data and to support straight-through processing, including systems that provide statements to clients so that they can benefit from richer and more structured information. He adds that training should not be an afterthought, because it’s important to be operationally ready. ISO 20022 migration is therefore also very much a cultural change.
“Many staff will have worked with the legacy format for a long time,” says Fraedrich, “so there’s a mindset challenge as well as a technical one. Also, there’s an interoperability consideration, as not everyone is migrating at the same pace, which adds complexity.”
Industry understanding is as important as acceptance, says Ireland. “Great work is being done to explain ISO 20022, and Deutsche Bank has been busy educating the market,” he says. “In the discussions we’re having now, everyone seems to have a good understanding of ISO, so the big question is not ‘what is it?’ but ‘how do I migrate?’.”
And not just how but when. As Fraedrich points out, it’s not a big bang approach, because SWIFT, the Bank of England, the European Central Bank, the Monetary Authority of Singapore, the US Federal Reserve Bank and other players are all moving at different speeds, so there will be a period of coexistence between old and new messaging systems.
“There is a danger of drift,” admits Ireland. “It’s a complicated space and some institutions are waiting until they are forced to do something. They’re saying ‘the point at which we move is the point at which we have to’. What we’re saying to customers is ‘don’t delay, move to ISO 20022 as soon as you can and start taking advantage of it’.
“We may not have all the great new business ideas available today, but they’ll develop as we learn about what customers expect and want. And, if we have the ISO 20022 building blocks in place, we can make these ideas happen faster and therefore increase customer satisfaction.”
Fraud prevention is one of the benefits that can encourage migration, says Fraedrich. The better the quality of an organisation’s data, the easier it is to identify fraud. Also, with a sound data pool, there is a good foundation to apply technologies like AI and big data screening. For both Fraedrich and Ireland, the overriding advantage of ISO 20022 is that it’s not only a standard for cross-border payments, but also for domestic and instant payment schemes.
“Ultimately, we won’t talk about cross-border versus domestic, just about a payment and the service level agreement attached to it, such as desired time or speed. From a customer perspective – and this is the most important point to stress – there’s just one standard for payment instructions, and banks can execute it in the most appropriate way.”