Understanding the case for the securities industry
The industry will begin its migration to ISO 20022 in November 2022 and expects to completely transition by November 2025, at that time requiring full compliance. For the next 3 years, SWIFT MT will coexist with ISO 20022. In the payments world, the need to transition is clear-cut. As the payments ecosystem continues to expand, payment infrastructure must become more robust. However, on the securities side, the case has not been as straightforward. Relatively few financial firms have migrated to ISO 20022, and there is no timetable for the transition as there is in the payments industry.
According to Stuart Warner, head of direct custody and clearing, Europe, MENAT, and the Americas at HSBC Securities Services, “one reason is that the securities industry has gotten used to managing multiple standards. Another is that the existing ISO 15022 standard is enabling 90% of securities transactions to settle on time already.”
However, market needs are already beginning to force a migration to ISO 20022. Currently, more than 70 countries have adopted ISO 20022 in their payment systems. ISO 20022 will apply to all domestic, ACH, real-time, high-value, and cross-border payments, thus ensuring a holistic and resilient integration.
From our own observations, we see numerous drawbacks to clinging to SWIFT. SWIFT messaging incorporates basic instructions, which can prove to be an impediment in the successful transfer of payments. Compliance and Anti-Money Laundering (AML) processes result in regular delays, particularly where key information is missing from the transaction. SWIFT estimates that some 10% of international payments are held up along their journey for compliance checks, most of which are avoidable investigations. This opens up a large door for hackers to manipulate and also inject malware systems and viruses in the banking systems. Finally, data in Swift MT is very basic making it vulnerable to manipulation and failed payments.
Conversely, financial firms will benefit from ISO 20022 through:
- Enriched Data: ISO 20022 is more structured and standardized, offering richer, granular data which improves the overall quality and consistency in payments.
- Faster Straight-Through Processing (STP): ISO 20022 facilitates faster straight-through processing, which means there is less manual intervention. With this, payments are more accurate and faster too, making ISO 20022 more efficient.
- Compliance: ISO 20022 is data-rich, ensuring that payments don’t fail along the process and protecting important data. It eliminates costs that are otherwise incurred in keeping checks against failed payments and adhering to compliance norms.
- Flexibility: ISO 20022 is more adaptive and responsive to any changes in the financial ecosystem, economy, emerging technology and innovation.
- Enhanced Analytics: Enriched data means enhanced analysis of data, leading to better decision-making.
- More accuracy and less manipulation: ISO 20022 payment messages are more structured and data rich. Not only does this enhance customer experience in the form of less failed payments and more accuracy, but it also helps in preventing manipulation by pernicious elements.
However, this migration will come with certain challenges. Changing legacy-based SWIFT systems will require time-consuming and potentially expensive updates or replacements. Also, while all the new payment formats refer to the ISO 20022 standard, there are important differences between the implementation guidelines for different payment schemes (for example, HVPS+ and CBPR+). All of these challenges may mean decision makers will be reluctant to change and motivating them to do so will be another task.
Even though there are some impediments to overcome, the benefits of integrating ISO 20022 surpass the challenges. Financial institutions will not only save on failed payments, but also on increased compliance and avoidable time lapse in checking them.
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