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Digital payment standardisation offers much-needed facelift for outmoded sector

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The global lockdown has definitively reshaped how we function as a global workforce. Among the many positive examples of how technology has enabled us to work and socialise remotely, it has also served to shine an illuminating light on industries which don’t quite live up to the standards set by other parts of our increasingly digital society.

This has never been more true than the payments sector, particularly the area concerned with transferring money across borders. The World Bank recently declared remittances as an essential service to ensure money keeps moving to poorer countries and shores up economies in badly-affected regions. Unfortunately, in many cases, it is often quicker to fly money on a plane to the recipient country than it is to make the transfer virtually through the existing correspondent banking model.

This is because the methods used by most banks to transfer money cross-border were developed for a slow-paced pre-digital world, with only basic and patchy standards for what vital information is carried with each payment. Thankfully, the payments industry has been working to establish a complete digital-first set of payment standards to be applied world-wide. This standard is ISO20022. 

Let’s look at why ISO 20022 is such an important step for the banking industry and businesses at large, and how its adoption may be accelerated by the current pandemic challenges.

Achieving true interoperability

The ISO 20022 payments standard was created with the digital world in mind. Its aim is to provide the financial industry with a common language and syntax for payments data around the world. This is the baseline which will help the industry achieve true interoperability - in short, granting institutions the ability to speak fluently and seamlessly to global counterparts around the world.

ISO 20022 captures structured and detailed payments data from the outset. The resulting rich data transfer has the ability to strengthen security and compliance, while reducing transaction errors at the same time - which means a quicker and more secure way for end users to send and receive money. When you consider that most of the friction - and as a result, delays - when sending money abroad is due to issues involving poor data like truncated street names or ambiguous payment codes, it’s easy to see why this standard is so key to moving towards real-time cross-border payments.

Blockchain and the future of payments

Whilst the ISO20022 standard undoubtedly improves the effectiveness of payments sent over legacy bank technology, when combined with emerging blockchain solutions it can be truly transformational.  This is because blockchain enables payments to execute immediately between counterparties anywhere in the world, with absolute certainty and transparency. Armed with the extensive standardisation enabled by ISO20022, these immediate payments can be checked, screened and executed in seconds worldwide.  

The result will be what we call the ‘Internet of Value’, where money moves like information does today - both domestically and internationally.  The future of payments will reside in these deeply interoperable systems, data-rich transfers that spark innovation as well as open exchanges of value. ISO 20022 is an important ingredient of that future.

To make this a reality however, banks and payment providers worldwide need to embrace these new models, which will fundamentally change the way they carry out international payments.  Ultimately this will also mean traditional banks moving away from their centuries-old correspondent banking model that is at the heart of today’s inherited payment inefficiencies.

We are the first company specialising in blockchain-powered payments to join ISO 20022. We believe the application of our experience building industrial-strength blockchain payment networks on these standards will act as the blueprint for how ISO 20022 can be leveraged by other financial institutions for the digital age.

Shining a spotlight on ISO20022 readiness

While there is a clear need for the democratising ethos of this standard, legacy payment networks often find the challenge of adopting it enormous. This is particularly acute for the world’s incumbent cross-border payment messaging network, SWIFT, whose migration hasn’t been without its own fair share of hiccups. Recently, SWIFT announced that it would be delaying its migration to the end of 2022. 

SWIFT has said that its migration delay to ISO 20022 is to ensure that financial institutions both large and small have the requisite time to make needed changes at whatever pace is comfortable for them. While this delay accommodates many financial institutions who are struggling to meet the previously-agreed 2021 deadline, it will hurt thousands of others who are ready to migrate and already migrating to the standard.

There is no doubt that the transition from SWIFT’s MT messaging standards to ISO 20022 standards designed for the digital age is complex and painful. This is because the legacy MT message standard has become deeply embedded within the plumbing of the world’s financial system over the past 45 years.

But time is not on SWIFT’s side: every year that its migration to full ISO20022 is delayed, the task of migrating becomes more challenging and more urgent. One could say that the banking world and SWIFT have been too comfortable operating with legacy infrastructure and messaging systems, opting for the short-term cost-avoidance of ‘no-nothing.’ As the years have gone by, the cost of the move and complexity has simply rocketed.

Unpicking the complex weave of legacy messaging indicates just how deep-rooted that complacency has become.

No silver bullets

While ISO20022 isn’t a silver bullet solution for the industry, it is a chance for the sector to make sure it is tooled up for a digital-first world. As it stands, cross-border money transfers are hamstrung by data-poor, opaque and diverse messaging systems that are simply not up to the job of supporting the rapidly-emerging digital economy. 

The challenges surfaced by the global lockdowns of 2020 have made efforts to streamline international payments all the more urgent, such as helping migrant workers maintain vital payments to families back home when traditional branch visits are no longer possible. This intensified demand for a much better, digital, cross-border payment experience has lit a fire under the industry, creating a real need to adopt ISO20022 as well as game-changing blockchain technologies. 

This presents the industry with a tremendous opportunity to upgrade its services much faster, helping societies worldwide recover more quickly from the shocks of the Covid-19 pandemic.

Marcus Treacher, SVP of customer success, Ripple