ISO 20022 - A brief overview of the new ISO messaging systems

What is ISO 20022?

ISO 20022 is the standard for message processing payments and securities transactions across all international SWIFT (and many non-SWIFT) payment systems, with adoption already underway in both major, and minor nations across the globe. With so many countries adopting ISO, it *will* become the de-facto operating structure for all banks.

The advantages the new ISO standards bring are numerous, ranging from reduced system friction in interactions with overseas banks, improved internal data security, higher-quality customer data and encouragement for banks to adopt new cloud based technologies. Additionally, new, more structured and secure data organisation and processing guidelines will lead to reductions in fraud, financial crome and reduce operating costs and act as platforms for new innovations in messaging protocols. In short; this is as significant as replacing all the various cable connecting formats of the past with the new standard USB-C format.

The New ISO XML Messaging Formats

The core to ISO 20022s new payment schemes is their extensible markup language (XML) format, upon which all future data processing will rely on.
XML has many advantages when compared to most other message types. It is descriptive, easily understandable and can contain more than double the amount of information in previous message types.

ISO20022 is applicable to domestic, cross-border, Automated Clearing House (ACH) payments, real-time payment systems (RPS), and high-value payment systems (HVPS). Banks and financial institutions (FI) thus move from the existing SWIFT MT and ISO8583 messaging standards to ISO 20022.

However in comparison to the previous MT/ISO 8583 message types contain a choice of 36-128 possible data fields, (e.g. specific fields like first name, last name, address etc.) Whilst the ISO20022 XML-based message type can contain an infinite number of data fields, all of which can be custom and tailored specifically to the data requirments of a bank. (after all, the "*X*" in *XML* stands for "*extendable*" meaning an an unlimited).

Here's a brief list of some of the advantages the new ISO 20022 XML format has over the legacy MT format and existing ISO 8583 formats:

Unique message identification numbers
Detailed instruction and processing information
Easy-to-read narrative text descriptions
Additional optional fields for user-defined data
Detailed party information such as name, address, contact details etc.
Data elements that support multiple languages, currencies and transactions types
Standardised formatting and coding of fields to facilitate automated processing
Easy modification of existing fields
Simpler integration new fields with minimal risks of bottlenecking or broken code
Hierarchical structure built with nested elements, allowing for more logical, context based data grouping (I.e. being able to easily and automatically distinguish between street names, city names, zip codes etc.)

Above diagram shows existing MT format and additional ISO20022 data

Example of XML based message type compared to a less structured MT format message.

ISO 8583 vs. ISO 20022

The majority of MT functions which ISO 20022 will be replacing are the older ISO 8583 messaging protocols. ISO 8583 was originally specified as a message type for processing payment card information and was used as the base for the Faster Payments scheme in the UK. This is where the most friction is likely to arise when updating your banks systems, and because of that, it's important to understand the differences between both systems.

For example, in the XML based message type, the creditor field includes and automatically distinguishes between fields (such as the name and address of the payer, as well as additional structured elements for street name and zip code in the address field). In the case of an uncommon payment address, or one with a conflicting name (say Cuba street in the US, being confused with the country of Cuba) the system uses new technologies like AI and machine learning to improving the overall quality of the data available.

ISO 20022 Format

However, ISO 20022 is far more flexible in terms of how data is processed, added, categorised and gathered. But in the main, it includes whole new schools of possible fields which can be used to generate large amounts of well-organised, useful, high-quality data.

Examples of Additional Data in the ISO20022 format

For more concrete example, in the XML based message type, the creditor field includes and automatically distinguishes between fields (such as the name and address of the payer, as well as additional structured elements for street name and zip code in the address field). In the case of an uncommon payment address, or one with a conflicting name (say Cuba street in the US, being confused with the country of Cuba) the system uses new technologies like AI and machine learning to improving the overall quality of the data available.

The ISO messages enabling payments are standardised and versioned for specific markets and geographies.

Conclusion

As of now, ISO20022 has already been partly adopted in China, Switzerland, India and Japan for use in high-value payment transactions, but is soon to be adopted in 70 countries around the world by 2025-2026, with regulatory backing. This will enable faster, more secure and more efficient payments across borders as well as providing the opportunity to develop new payment services and products, such as digital wallets, mobile banking apps and payment gateways. ISO20022 will provide a much needed upgrade to existing payments infrastructure and systems, but implementation will not be a simple process.

Embracing ISO 20022 standards will require a degree of flexibility on the part of all banks to properly implement. However, if an organisation is able to successfully manage and de-risk the transitional process, as well expanding it's capabilities with new techniques and technologies, they will be in a far stronger position to face a dynamic and changing world economy.

In summary, we've provided an overview of ISO 20022 and the significant existing formats it's replacing, and its benefits over the previous ISO standard.

To go back to the example at the beginning, ISO 20022 really is the USB-C of payment messaging formats.