ISO 20022 Migration for the Australian Payments System –
Issues Paper – April 2019 2. ISO 20022 Migration

2.1 What is ISO 20022?

ISO 20022 is an internationally recognised standard that was developed and is maintained by ISO. ISO 20022 is a general purpose standard for development of financial industry messaging in the payments, securities, trade services, cards and foreign exchange business domains. For payments, the ISO 20022 standard covers messaging related to cash account management, payments initiation, clearing, and settlement.

The general features of the ISO 20022 standard are:

• Open standard – the message definitions are publicly available from the ISO 20022 website.
• Flexible – definitions can be adapted for new requirements and technologies as they emerge.
• Enhanced data content – ISO 20022 messages have an improved data structure (e.g. defined fields) and expanded capacity (e.g. increased field size and support for extended remittance information).
• Network independent – the adoption of the standard is not tied to a particular network provider.

ISO 20022 is being implemented internationally by a number of key financial market infrastructures (FMIs) and SWIFT has planned the migration of cross-border payments to the ISO 20022 message standard. Domestically, ISO 20022 has been adopted in the New Payments Platform (NPP) and Fast Settlement Service (FSS) and is also the message format being adopted by the ASX as part of its Clearing House Electronic Sub-register System (CHESS) Replacement Project.

2.2 What are the benefits?

There are a number of potential benefits of adopting the ISO 20022 message standard. The extent to which benefits are realised depends on the objectives of the migration in each jurisdiction and the extent to which enhanced message content is adopted. The potential benefits may include:

• Efficiency – migration of agreed domestic payment traffic to ISO 20022 offers a range of potential processing efficiency enhancements, such as improved straight-through processing, consistent use of message standards and improvements in transaction screening and monitoring processes.
• International harmonisation – ISO 20022 message guidelines for high value payment systems have been developed through High Value Payments Plus (HVPS+), and ISO 20022 standards for cross-border payments are in the process of being prepared by Cross-Border Payments and Reporting Plus (CBPR+).^[1]
• Competition and innovation – the enhanced data-carrying capability of ISO 20022 messages is an enabler for institutions to deliver more innovative and competitive services to their customers.
• Future-proofing – the ISO 20022 standard has been designed to adapt to new technologies as they emerge and can be upgraded to meet evolving requirements.
• Fraud and financial crime management – the expansion and addition of information fields can help to facilitate payment tracking and verification, which can assist in the mitigation of fraud and other financial crimes. The use of highly structured ISO 20022 fields also supports greater automation of a number of compliance activities (e.g. Anti-Money Laundering/Counter-Terrorism Financing (AML/CTF) monitoring and sanctions screening).
• Resiliency – increasing the consistency of message formats is one step towards enabling messages to be more easily directed through alternate networks and systems (e.g. in a contingency event).

2.3 International experience

Over the past decade there has been an international push to migrate to ISO 20022 messaging from a number of key FMIs. SWIFT estimates that by 2025, 87 per cent of the value and 79 per cent of the volume of high value domestic payments messaging worldwide will use ISO 20022. A number of the migration projects are being completed as part of a larger infrastructure refresh.

The Bank of England plans to migrate high and low value domestic payment systems by 2024. The key drivers are to improve resiliency, strengthen risk management, reduce fraud, and promote competition and innovation. To meet these objectives, the Bank of England will introduce a Common Credit Message across its domestic payment systems.

The US Federal Reserve Banks have proposed a plan for the migration of the Fedwire Funds System by late 2023, to be undertaken in three phases: preparing for ISO 20022 migration, including ‘cleaning up’ existing message formats; implementing a ‘like-for-like’ ISO 20022 message (limited to existing content); and expanding content. This work will be coordinated with an ISO 20022 migration for the private sector high value payments system, the Clearing House Interbank Payments System. Key drivers for this project include: maintaining consistency with cross-border messaging standards (due to migrate as part of the SWIFT cross-border project); improving the end-to-end efficiency of payments; and enabling richer and more structured data.

The European Central Bank (ECB) is proposing to have a ‘big-bang’ implementation of its consolidated TARGET2 and TARGET2 Securities systems in November 2021. Both systems will use ISO 20022 messaging. The key driver for the project is the consolidation of the two systems, though the ECB has also noted the benefits of ISO 20022 supporting extended remittance information.

2.3.1 SWIFT ISO 20022 migration for cross-border payments

SWIFT has been consulting with SWIFT participants worldwide as part of its decision to facilitate an industry migration of cross-border payments. The key drivers for this work include: the increased adoption of ISO 20022 in domestic payment systems; enabling consistent customer experience across domestic and international payment systems; supporting development of new services due to enhanced message capabilities; and assisting with compliance activities (e.g. increasing the efficiency of AML monitoring).

SWIFT's cross-border migration is planned to begin in November 2021 and will include all users of payments and cash management messages (MT Categories 1, 2 and 9).

The migration will involve a coexistence phase, lasting approximately four years. The coexistence phase will allow a mix of old and new messaging while members are completing their migration to ISO 20022. The coexistence of old and new messages is facilitated by translation services, provided by SWIFT, enabling users to translate messages between ISO 20022 and their MT equivalents. At the end of the coexistence phase, all users are expected to have migrated to ISO 20022 and translation services will be removed. However, SWIFT note that internal translation can continue to occur while back-office systems are upgraded. At this time, SWIFT also plans to withdraw support for the MT message Categories 1, 2 and 9 used in cross-border and correspondent banking payments.

As part of the consideration of the scope of a domestic migration, there may be advantages to the industry in coordinating a domestic ISO 20022 migration with this related cross-border work. For example, coordination may simplify the overall migration to ISO 20022, reducing the time when support for old and new formats is required and synergies in back-office system upgrades may be explored. Moreover, aligning cross-border message formats with domestic message formats means that richer data can be transported end-to-end with international payments without translation or truncation.

2.4 Objectives of an ISO 20022 migration for payments in Australia

In Australia, some key objectives for a migration to the ISO 20022 standard include:

1. Modernisation – the growing adoption of ISO 20022 in other FMIs worldwide combined with SWIFT's cross-border migration project and its end goal to fully migrate all payments and reporting traffic to ISO 20022 are key drivers for adopting the ISO 20022 standard in domestic payments messaging. This would include, at a minimum, the migration of domestic messaging traffic in:
   • The SWIFT Payment Delivery System (PDS), covering clearing and settlement messaging between HVCS members.
   • Any back-office, reconciliation, treasury, AML/CTF or sanctions screening systems that uses the relevant MT message formats.
   • The Reserve Bank Information and Transfer System (RITS) Automated Information Facility (AIF), which is used by RITS members for liquidity management and statement provision.
   • RITS Batch settlement arrangements that use SWIFT MT messaging (i.e. Mastercard, eftpos, and CHESS).
   • SWIFT MT messages between participants and the Austraclear debt securities settlement system.
2. Simplification – broad migration to ISO 20022 will, over time, facilitate increased automation by providing structured information, potential content enhancements and consistent service delivery across various payment functions.
3. Use of enhanced content – expanded data-carrying capacity and the use of additional and structured fields are expected to facilitate improvements in areas such as processing efficiency and risk management. It will also enable increased competition and innovation in potential service offerings.

2.5 Risks and challenges

The migration of current MT message formats to ISO 20022 for domestic (and cross-border) payments will involve significant work for the payments industry. Changes will be required to: back-office systems; treasury and liquidity management systems; fraud, AML/CTF monitoring and sanctions screening systems; and downstream client systems. In addition, changes to business processes, data storage capacity and the possible use of translation services will need to be considered. Alongside these implications, other high-level challenges that may be faced by payment industry participants include (but are not limited to):

• Prioritisation against other initiatives – there are competing payments-related projects requiring investment of resources and personnel within each organisation and across the industry (e.g. the ongoing work by NPP participants to rollout NPP services to their customers).
• Business case approval – the process within each organisation to seek funding approval to undertake the ISO 20022 migration project will vary. All organisations will need to consider how they will obtain the necessary approval, taking into account potential synergies with the cross-border migrations and the timing of other industry payment efficiency initiatives.
• Project horizon – given the potential broad scope of an ISO 20022 migration project, the total length of the project may be quite long, requiring ongoing funding and resource commitments.
• Cross-border migration – all financial institutions submitting SWIFT MT payments internationally will be affected by the staggered global rollout of implementations of ISO 20022 messaging and the different migration approaches adopted between jurisdictions.

The costs of migrating payments messaging to ISO 20022 will depend on each participant's current ISO 20022 capability, the required investment in replacement infrastructure, and resourcing needs.

Footnote

HVPS+ is a task force formed by SWIFT, along with major global banks and market infrastructures, to define and refine a global implementation framework and message usage standards for high value payments to harmonise compatibility of ISO 20022 messages across borders. CBPR+ is a SWIFT working group with responsibility for developing global usage guidelines for cross-border payments. [1]