As the culture over the last decade has switched to the ubiquitous smartphone, customer expectations have transformed regarding payment systems. From this instant transaction culture has emerged new Payment Service Providers (PSPs) delivering real-time, instant payments. Banks and Payment Infrastructures normally delivering payment settlement in several days have shifted dramatically on faster settlement systems, connecting the legacy systems these new real-time services providers to better capture these emerging payment markets. The financial messaging standard ISO 20022 comes into play to provide interoperability between legacy payment systems and rich payment instructions mechanism for the sophisticated e-payment and mobile system.
Real-time payments – forerunners and technology
Debit/credit cards have driven the real-time payment trend early on – offering consumers an experience at POS (point of sale) with next day or next month settlement. Technology such as PayPal and similar closed-loop Person to Person (P2P) payment systems linked to the internet marketplace have done the same on e-channels. The ability to send and receive a payment between two bank accounts within seconds requires real-time/instant payments settlement, and an increasing number of countries have or are developing real-time infrastructures to enable this. In the past decade alone, many countries in Europe, Africa, and Asia have implemented closed loop real-time payment systems alongside legacy infrastructures to enable consumers and businesses to instantly transfer and receive payments with immediate availability of funds.
Limitation in term of scalability and acceptance was that both payer and payee would be required to have the same payment system. In parallel to that, a number of countries, most notably in Europe with the Single European Payment Area (SEPA) have ignited the industry transformation towards ISO 20022 messaging standard, four years ago with the legal mandate of migrating all ACH in 34 countries.
Currently, ISO 20022 is used by thousands of financial institutions across EU for both direct debit and Credit Transfer. The next step is the deployment of SEPA Credit Transfer Instant requiring real time posting and fast settlement with mechanism to cover intraday settlement risk by banks ACH. The European Payment Council managing SEPA schemes on behalf of the European Central Bank, has published the new rulebook for SEPA Instant Credit Transfer. The SEPA ACH across 34 countries are now preparing SEPA Instant Credit Transfer pilot with members for deployment next year upgrading SEPA posting and settlement process to move from next day settlement to funds available to beneficiary and confirmation to originator in less than one minute.
Singapore has been one of the pioneer countries in Asia with deployment of ISO 20022 in its ACH and RTGS. Since the end of last year, there are running in parallel the FAST real-time ACH -- and with 17 banks running on it, it is probably one of the most advanced ACH running live real-time settlement with ISO20022 in the world.
Features of ISO 20022 as an attractive messaging platform
Banks and PSPs are keen to find a way to rationalise their internal and external standards in order to “translate” between various countries’ standards. Because ISO 20022 is feature-rich and based on XML, it can be used for many financial business areas (payments, trade finance, securities, foreign exchange, cards, corporate-to-bank messaging) as well as for internal processes such as cash management.
ISO 20022’s flexibility also sets banks up for new real time payment infrastructure without the need to implement a new data standard.
For corporates, ISO 20022’s rich remittance data is a huge benefit. Many legacy data standards only offer tens of characters of data, which can lead to major problems with payments reconciliation and traceability. ISO 20022 has the capacity for unlimited remittance data, with the use of additional optional fields available in countries that set a limit on ISO 20022 remittance data. Add to this the possibility for global interoperability between the growing number of countries adopting the standard, and it is no wonder why ISO 20022 has become an increasingly popular messaging standard for real-time payments.
The Canadian payments industry impulse has decided to adopt ISO 20022 across multiple systems, covering low-value, high-value, and business-to-business payments messaging. Migration guidelines and agenda has been published by the Canadian Payment Association. This will have the benefit of rationalising data standards across these systems (replacing three separate legacy standards) and achieving compliance with other modern international payment systems. Perhaps the biggest benefit for Canadian banks and end users (particularly businesses) will be the increase in remittance data that ISO 20022 will bring. In turn, this will greatly improve payments reconciliation and traceability, and could help enable the future development of a faster payment system for low-value payments in Canada.
In the United States, the move to ISO 20022 is taking its first steps with the development of a real-time payments infrastructure. A 2014 external business case assessment tendered by the Federal Reserve, NACHA, The Clearing House, and other stakeholders deemed no overarching industry-wide business case to move to ISO 20022, although it did detail strategic reasons to move to ISO 20022, including global adoption of the standard, interoperability, rich remittance data, and cost savings and processing efficiency. As the Fed has spearheaded efforts to modernise the US payment system, the adoption of ISO 20022 is seen as a key pillar for improving the speed, efficiency and security of US payment systems. The Clearing House is the first ACH in the USA to have announced the development of a real-time payment system by 2017. The infrastructure will be built together with UK payments processor VocaLink, and will run on ISO 20022. VocaLink, pioneered real-time payment deployment with the Faster Payment Scheme deployment in the UK, but now it will be run on ISO 20022 instead of UK BACS domestic payment formats.
In conclusion, the first ISO20022 standard draft was issued in 2004. It took 10 years to have it widely deployed at an international scale with 34 countries and thousands of banks using it for cross-border credit transfer and direct debit, but with its adoption in the US and Canadian markets and the rise of interoperable real-time payment systems across the globe, it is fair to say that ISO20022 is no longer a technical phenomenon but now a global de facto industry standard, there to stay and grow.
By Olivier Denis, Senior Product Development Manager, EastNets.