ISO 20022: is it a must have for domestic payments processing?

ISO 20022 has been around since 2004 – and while it’s taken two decades, traction is finally being achieved to optimize and enhance the cross-border and high value payments space. Now, the next challenge that needs to be addressed is: what does this mean for domestic payments – is migration required? And if not, what are the benefits to migrating and what are the use cases that support this decision-making process? To answer those questions first we need to set the scene on which guidelines are relevant.

The migration from the legacy SWIFT Message Types (MT) to ISO 20022 messages in the correspondent banking space (known as MT to MX migration) is underway, albeit slowly (going from 15% when the migration started in March 2023, to 18% as of the end of 2023). There are clear standards for cross-border payments (CBPR+) and for high value payments (HVPS+), along with recommendations for how best to use the guidelines (CPMI), and for when timelines have been set.

What is what?

A little bit of terminology to refresh your memory:

• MT (SWIFT Message Types) - introduced in 1977 and is the standard is used for payments, cash management, trade finance and treasury business.
• ISO 20022 (MX format) - established in 2004 to implement improvements that reduce manual intervention and enhance fraud prevention.
• CBPR+ (Cross Border Payments & Reporting Plus) - global guidelines on business practices and the implementation of ISO 20022 to ensure harmonised deployment and implementation by banks
• HVPS+ (High Value Payment Systems Plus) - usage guidelines for high-value payments to support full STP and improved customer outcomes, and ultimately, promote interoperability between Market Infrastructures (MIs)
• CPMI (Bank of International Settlement (BIS) Committee on Payments and Market Infrastructures) - focuses on the end-to-end chain to address possible misalignment across usage guidelines set for a specific step in a cross-border payment
• Domestic payments – no global “obligation” to migrate but an update to the IP+ (Instant Payments Plus) guidelines are on their way

Speaking all the “dialects” of ISO 20022

Now, how do these relate to each other? CBPR+ and HVPS+ are very similar (with the former covering cross-border correspondent banking transactions and the other covering high value payments) but there isn’t a perfect match - a payment sent to an Market Infrastructure (MI) will use the credit transfer message type (pacs.008) based on the HVPS+ usage guidelines, and once it is passed on to a correspondent bank, it will use the CBPR+ usage guidelines. Therefore, banks will need to ensure that they understand both guidelines, and “speak” all the “dialects” of ISO 20022.

CPMI takes things one level deeper – effectively translating common guidelines into practicalities (common usage of the Unique End to End Reference ID or UETR) for example, how to use the date and time elements and so on.

But what does all this mean for domestic payments?

Banks in the cross-border space have to migrate to ISO 20022 and high value clearings are recommended to migrate, but no-one seems to be talking about domestic payments. In this particular space, there is no obligation, unless driven by a country’s central bank or monetary authority. So, they don’t have to invest in these changes, right? Well, it depends. If connecting with other countries’ payments processors is a must, then going for a common standard makes sense. It could also be of interest to the bank participants to have closely aligned formats for their domestic and cross-border transactions, since this would enable them to better utilize their payment and operations resources in terms of knowledge sharing.

Conclusion

For corporates, the value of ISO 20022, in providing data to support better reconciliation, for example, are equally relevant for domestic payments. Where a country or region is thinking of replacing their existing payments platform, as is happening in the Nordic region, consideration has to be given not just to using ISO 20022 but also thinking about what needs to be included to facilitate cross-border connectivity, when that time comes. So, no one size fits all answer – each processor needs to look at their own use case to see what makes sense.

And while there’s no global obligation for domestic payments to migrate to ISO 20022 at the moment, it could be a strategic decision to evaluate what’s best according to the payment needs, in order to facilitate cross-border connectivity and utilize their operations resources more effectively.