ISO 20022: Europe Leads the World Toward a Global Payments Standard

By Renee Wijnen Caruthers

In Europe, the Single European Payment Area (SEPA), which will effectively eliminate cross-border payments between participating European countries, is ushering in payments innovation. European banks and other large multinational banks that operate in the region are leaders in deploying the global ISO 20022 message standards for mass euro payments. If these standards are implemented quickly, the European Union estimates that SEPA and a European e-invoicing system could lead to a cumulative cost savings of EUR 123 billion in the area of payments, and EUR 238 billion in the area of invoicing over a period of six years.

The ISO 20022 standard, developed by the International Organization for Standardization, a worldwide federation of national standards bodies, is designed to provide the financial industry with a common platform for the development of messages in a standardized XML syntax. While generally hailed throughout the global financial services community as superior for the richness of data it can accommodate and its interoperability, adoption rates of the standard still vary widely. Despite Europe’s lead, in the United States ISO 20022 has so far attracted only the largest banks with much of the financial industry still waiting on the sideline.

“In the U.S. it’s almost a geography problem,” says Andy Schmidt, global payments research director with TowerGroup. “If you want to send a payment from a bank in Florida to a bank in Washington state it’s a domestic payment and it’s not a big deal like it is in Europe with cross border different payment rules. The challenge in terms of adoption is that there are a lot of legacy systems and a lot of proprietary systems in place and people are saying why do I need to go to a new system if banks can accept payments now?”

One U.S. bank that has taken an early adopter approach to ISO 20022 is J.P. Morgan. “With EMEA as a focus, grounded in SEPA, many banks and application providers are moving to support the standard but it is still relatively early days,” says Bob Blair, Asia head of channel management for J.P. Morgan Treasury Services and vice convenor of the ISO 20022 Registration Management Group (RMG). J.P. Morgan is one of the industry leaders in development and adoption of the ISO 20022 standard. The firm offers ISO 20022 payment initiation and reporting capabilities, and supports SEPA clearing and other clearing e-banking applications using SWIFT FileAct and InterAct as a transport between applications. J.P. Morgan’s corporate clients may use ISO 20022 to integrate core treasury, payable and receivable applications with their suppliers, buyers and banking partners.

Blair says J.P. Morgan’s clients have expressed interest in ISO 20022 for purposes of compliance with SEPA and also because the standard is a newer and clearer common layer for data. Another benefit that has started to draw interest is ISO 20022’s potential for improving straight-through processing. “An important thread in the development of these new standards is the concept of STP to be applied not only to intermediaries but also to both ends of the chain – the originator and beneficiary of the payment,” Blair says. “The payer and payee should be capable of communicating to each other clearly across the payment chain so that when a payment arrives at the beneficiary there is clear information in a predictable format as to what obligations are being settled,” Blair says.

In addition to J.P. Morgan, other large multinational banks like Citigroup and Bank of America are forging forward with the standard, as are some multi-national corporations, like Microsoft and GE, but outside of that top tier many firms are still stalling for time.

Roger Durepos, senior manager for industry affairs, SWIFT and payments at Royal Bank of Canada, and chairperson of the Canadian National Member Group, which was part of the ISO technical committee that developed the standard, notes that in Canada adoption of the standard remains cautious, similar to that of the U.S. The lack of an industry-wide catalyst, like the SEPA initiative in Europe, has allowed firms to put the new standard on the back burner, he says.

“In Europe, with SWIFT and SEPA adopting the standard, the industry is making appropriate changes to comply. In North America it’s a business case to make the change and if other standards have been working for years it’s harder to make the case,” he says. “But it’s a better standard that’s richer and in the long run it’s a benefit to clients and financial institutions.”

J.P. Morgan’s Blair adds that the bruising economy has also slowed the process. “The economy has been painful over the last year and that slows projects down. Standards are no different,” he says.

Putting that technology to the test from a corporate treasury perspective, Microsoft has been receiving XML statement reporting from one large bank since December, using SWIFTNet FileAct, says Ed Barrie, group manager in Microsoft’s corporate treasury department. Microsoft’s treasury department is currently working to get up in production with four other banks to ensure that it can achieve uniformity of messaging when communicating with different parties.

“The standards as they have been defined are very robust and should meet the majority of needs, however I think there is a lot of room for interpretation of the rules in terms of how things should be populated in the message,” Barrie says. “We are testing with four other large banks because we want to make sure that there is not too much hybridization of the standard, and that we can achieve the benefit of using one format with five banks.”

Microsoft has begun mapping of those messaging formats into its SAP ERP system, but is not yet pushing the messages into other downstream systems to work toward improved STP. The company first wants to complete the beta test with the additional four banks and conduct a thorough analysis of where and how the SAP system will hold and sort the messaging data that is being received.

TowerGroup’s Schmidt believes that because ISO 20022 does not have some of the limitations of some of the other formats currently in existence, it will win out eventually. Once more of a quorum of firms around the world are using it, service providers like Metavante adopt it, and technology offerings for converting to the standard become more prevalent, the smaller tier firms will come on board, he says.

Indeed, service providers are starting to take issues like ISO 20022 into consideration as they help clients plan the modernization of their payments architecture. Payment servicing systems such as Microsoft’s Payment Services Factory are built upon the concept of a service-oriented architecture (SOA). A SOA-based enterprise platform uses open interfaces and industry standards to improve operations and results in an integrated, consolidated and highly available platform. Another benefit to a SOA-based payments system: as new payment services are added and made available to many applications, legacy applications can be turned off gradually, allowing a manageable path to modernization while relieving the mainframe for core banking processes.

Meanwhile, although the rest of the world may not have the push of a payment overhaul like SEPA to drive it, outside of Europe, a groundswell of support for the standard is beginning to grow. Japan has announced that it is working toward support for the standard for domestic cash and securities, says Blair. China and Brazil have also indicated that they are working toward adopting the standard, although they have not yet made formal announcements, he says. Within the U.S., the Federal Reserve Bank, has for years been working with banks and corporates to enhance its FedWire funds transfer proprietary messaging format. What has resulted is a new syntax expected to be available at the end of 2010 that is mapable to or from ISO without any data loss.

While it may be still early days, the potential of the new standard within and outside Europe is tremendous, observers say.

“Lower tier banks in some regions may need to be pushed, but it’s a superior standard,” says Schmidt. “The format allows enough information to be put into the fields available to tell you everything you need. Imagine being able to get remittance data with the payer, amount, date, currency information a single message from anywhere in the world.”