ISO 20022: Transforming the Financial Industry with Standardized Messaging

The adoption of ISO 20022 brings to mind the tale of the Tower of Babel, but with a twist — instead of confusion, it’s about creating a unified language. No matter how brilliant your idea, years of effort can go to waste if your team communicates in different languages, just like people in Babel. However, imagine a scenario where everyone communicates in the same language and understands each other seamlessly.

This is the essence of ISO 20022. Similar to how the Tower of Babel’s confusion was resolved by a common language, ISO 20022 standard brings coherence and speed to the financial industry. The standard simplifies and enhances the work of fintech companies, offering a unified language for describing transactions. With ISO 20022, companies can specify details such as the involved parties in fund transfers, the currency used, and more, all using a single standard.

This article delves into the intricacies of ISO 20022, explaining its functions, the transition process, and significance for businesses globally.

What is ISO 20022?

ISO 20022 is an international and global standard that empowers financial institutions to conduct transactions and share payment information through a unified platform. The International Organization for Standardization (ISO) is known for issuing different standards, like security management or quality control, which are acknowledged universally.

The predictions of SWIFT suggest that by 2025, all financial institutions and businesses must adhere to the ISO 20022 standard to remain competitive in the global payment industry.

What is the Purpose of ISO 20022 migration?

ISO 20022 migration centers around clarity and precision. This global standard in financial messaging streamlines secure and efficient communication among financial institutions.

By adopting a new messaging format, ISO 20022 establishes a unified language for both financial institutions and traditional infrastructures. This harmonization simplifies transaction processing across diverse countries and regions.

What was Before ISO 20022 Payments?

Everyone is familiar with SWIFT. In the 1970s the company came up with Message Type (MT) standard that were intentionally created to have a compact size and contain minimal datasets which made the processing easy. All organizations around the world have been using it for a long time, but fintech constantly evolves and needs more functionality than these messages can cover.

The distinction between SWIFT MT and ISO 20022 lies in the format of data transmission, the level of detail in transaction specifications, and the security of these transactions.

SWIFT employs its own fixed format, limiting the precision and scope of transaction information compared to the more comprehensive ISO 20022 payments.

ISO 20022 utilizes Extensible Markup Language (XML), a human-readable markup language known for its flexibility in structuring data, and Abstract Syntax Notation (ASN.1), a protocol efficient in encoding complex data structures. 

These protocols improve the efficiency of financial services for businesses, banks, and customers alike, which was challenging to maintain previously.

The Benefits of ISO 20022

When companies universally adopt new rules, those who hesitate to comply, especially with ISO 20022, may be left out of the game. Refusal to follow this standard means your organization won’t compete equally with others.

Also, ISO 20022 keeps changing, making old ways of transferring money useless. Without adaptation, your business won’t just operate at a lower efficiency—it may struggle to function. 

Today, ISO 20022 significantly enhances transactional information accuracy for financial institutions. Key advantages include:

#1. SPEED

Clear and organized messages assist machines in reading information more quickly. As a result, the transfer of data is becoming faster.

#2. SECURITY

The new standard reduces the risk of fraud using digital signatures, making it hard to forge. ISO 20022 also uses encryption, ensuring only those with the encryption key can access the information.

#3. SATISFIED CUSTOMERS

Being clear about commission details and money transfer information builds customer trust. When people trust your business - they recommend you to others and boost your business’s confidence.

#4. SIMPLICITY

ISO 20022 brings simplicity to financial interactions by providing specific, well-formatted messages for both bank-to-bank and bank-to-customer transactions. It covers PAIN (which includes details about the initiation of payment transactions) and PACS (which involves information related to the clearing and settlement of payment transactions).

The data exchanged within the transaction chain is granular and well-structured, significantly enhancing ease of use. 

#5. INNOVATION and FLEXIBILITY

ISO 20022 helps businesses understand customers better by providing more data in a single standard. This wealth of information allows for analysis. Tons of results from this data will enable you to create additional customer services and diverse income sources for your organization.

Challenges of the ISO 20022 Migration

Even though using ISO 20022 brings many benefits, the new ways it introduces might often create fear of the unknown. Thus, there can be difficulties in getting used to ISO 20022. Let’s take a closer look at these challenges.

#1. COMPLIANCE STREAMLINING

The complexity of optimizing sanctions and compliance checks during the ISO 20022 transition may impact the efficiency of remittance processes.

Advice: To address this challenge effectively, fintech consulting firms, such as DashDevs, recommend refraining from sending messages with enriched data during the ISO 20022 transition. This approach minimizes complexity and supports a smoother transition in compliance processes.

#2. MIGRATION COMPLEXITY

Your business may face significant changes during migration, dealing with multiple message systems, legacy issues, anomalies, and resource inadequacies.

Advice: Plan for migration early. ISO 20022 adoption is not just a simple software upgrade but a substantial change that requires careful consideration and preparation.

#3. UNIFIED DATA INTERPRETATION

If the financial institutions you partner with don’t understand ISO 20022 like your organization, it will be challenging to set up and keep data consistent.

Advice: Work closely with partner institutions. Create a shared plan for managing data and ensure it aligns with governance, quality, harmonization, migration, and ownership. This collaborative approach ensures that everyone involved understands ISO 20022 standards, leading to consistent data practices.

#4. TESTING

The absence of testing means potential issues or bugs in the system may go undetected, leading to operational disruptions, errors in financial transactions, or security vulnerabilities. There’s also a higher likelihood of non-compliance with the standard, leading to potential regulatory issues.

Advice: Allocate enough time and resources for the meticulous design and execution of test scenarios. Rigorous testing helps identify and resolve potential issues or discrepancies, ensuring a smooth and successful transition to ISO 20022. 

#5. COMPATIBILITY

Legacy systems, diverse platforms, and varying technological infrastructures can pose issues to a smooth transition to ISO 20022.

Advice: Before and during migration, assess the compatibility of your existing systems with ISO 20022. Think about partnering with tech experts, such as DashDevs, to ensure that the integration of ISO 20022 aligns seamlessly with diverse technological environments. Reliable fintech vendors can help you with modernization and smooth transition to new standards.

Essential Resources for a Seamless ISO 20022 Transition

If your organization has enough in-house expertise and the time constraints are nor a concern — you can navigate the migration to ISO 20022 independently. I recommend you check out the following resources to simplify the process and enhance your understanding:

• SWIFT Website. The SWIFT website is a reliable resource that extensively describes ISO 20022 implementation. It offers a detailed roadmap to guide you through the migration process.
• Official ISO Website. This is another resource where you can access all the information you need about the standard. Learn about who needs it, why it’s important, the timelines, and the transition process. They even provide an ISO 20022 guide for beginners called “ISO 20022 for Dummies”, which can be helpful if you’re managing the process without external guidance.

If you lack experts inside your team, I recommend you partnering with experts to navigate the transition and understand how to transition all payment formats to the new standard, follow the link below:

• Consultation with fintech experts: Booking a chat with DashDevs, experts in fintech for over 13 years, can make your move to ISO 20022 quicker. They handle all the legal and practical details. This speeds up the shift from years to months, making it easier to understand the process.

Plus, this partnership keeps your company and customers safe as you adhere to innovations and stay competitive in the fast-changing market.

Brief Conclusions

I want to emphasize the notion I introduced at the beginning. When we communicate in the same language, we understand each other better and achieve better results together. This is precisely how ISO 20022 software operates: a unified framework with a standardized approach. 

Transitioning to ISO means you not only adhere to new regulations but also have a chance to employ data in diverse and creative ways. The messaging format enhances automated processes, expediting issue resolution.

From a business standpoint, there are evident advantages. It streamlines reconciliation, enhances invoice details, and simplifies manual tasks. This means reduced waiting times for payments and an overall improvement in working capital. ISO 20022, with its flexible payment approach, is well-aligned with the needs of businesses and the market dynamics. Considering its adaptability and opportunities, the optimal time to start implementing this standard is NOW.

DashDevs Provides All the Services You Need

DashDevs, with over 13 years of expertise in fintech, specializes in transforming fintech businesses. We guide each client through operational processes and ensure compliance with regulations.

Our team of experts offers extensive consultation on ISO 20022 to make your transition seamless and efficient. Book a call with us now to open the full potential of new rules on the market and stay armed with innovative technologies.