Published : 3 weeks ago, on 15/11/2024

Nick Botha, Global Payments Lead at AutoRek

By Nick Botha, Global Payments Lead at AutoRek

The transition to ISO 20022 is transforming the future of financial messaging and cross-border payments, by delivering a standardised approach to processing payments.

Currently, there are a lot of disparate networks, in different geographies, operating within their regime. The introduction of the new messaging standard aims to create standardisation across the market, as we move towards a more centralised payments economy around the globe. However, the transition to ISO 20022 doesn’t come without its challenges.

How will the transition to ISO 20022 impact firms?

The November 2025 deadline to enable ISO 20022 for cross-border payments is fast approaching. Operationally, firms are set up to process cross-border payments, and significant technology investment has been made to support the transition. There has been extensive workshopping across different geographies globally, but the industry is going through a transitional period. While some firms have adopted the messaging system, others are still using older versions as not all firms have the resources or funds to implement the new system immediately.

As a result, there is a transitional phase where firms are trying to transact with other firms using different messaging formats, which may create frictions and challenges in terms of interoperability. This could lead to firms encountering complications as they try to align their systems with one another due to differing levels of adoption.

Internally, firms must consider whether their internal systems can handle the complexity of processing the vast amounts of data required by ISO 20022. This internal interoperability challenge could be just as significant as ensuring smooth communication with external counterparts. Firms will need to allocate substantial resources and funding to ensure that both their internal tech stack and external transactions operate efficiently.

The transition to ISO 20022 will require engineering from front end of the payment process and ensuring that it functions smoothly throughout the entire payment cycle. This will be crucial as firms move forward in adapting to the new messaging standard.

Why should firms leverage the opportunities ISO 20022 brings?

The transition to ISO 20022 presents both challenges and opportunities for financial institutions.

One of the key advantages of ISO 20022 is the potential to reduce costs associated with payments. Firms will be able to achieve economies of scale in their payment processes, allowing them to handle larger volumes more efficiently. Additionally, ISO 20022 facilitates improved management of payments, data processes and data analysis. These benefits include enhanced interoperability, data management, cost reduction and economies of scale. For firms that have yet to embrace ISO 20022, it’s crucial to explore how the messaging standards align with their strategic direction of cross-border payments for your business.

How can firms navigate and overcome the challenges of ISO 20022?

However, along with these benefits come challenges, particularly around resource deployment. Migrating to ISO 20022 is an expensive undertaking, and firms must find ways to control their operational costs during this process.

Some firms may encounter diseconomies of scale, where the cost of handling additional transactional volumes increase in parallel with revenues, preventing margins per transaction from improving over time. This creates a situation where it becomes more expensive to prove higher transactional volumes than the revenue generated.

The best way to address this issue is by creating operational efficiencies, through automation, which reduces the operational cost per transaction and enable firms to benefit from economies of scale. By doing so, companies can start generating more revenue from processing more transactional volumes. Automating core processes is crucial for achieving these efficiencies, as it helps reduce costs and drive profitability.

Automation allows financial institutions to achieve economies of scale, particularly when managing higher transactional volumes. While smaller data sets – such as a CVS file with a few lines of data – might be manageable, handling millions of transactional records with complex data requires automation to maintain efficiency. Automating reconciliations, for instance, is a key driver of operational efficiency, as it reduces the overall operational cost of transactions.

When it comes to ISO 20022, it’s critical that external software vendors can ingest and process the new messaging format.  By ensuring that their systems are equipped to process the ISO 20022 messaging standard efficiently, firms can streamline their operations and ensure they are prepared for the future of financial messaging.

Key takeaways

The introduction of ISO 20022, as a new messaging standard, will help standardise the processing of cross-border payments. The transition to ISO 20022 may present challenges, particularly around interoperability, especially between firms and their internal systems. Despite these challenges, ISO 20022 offers significant benefits, such as reducing costs associated with payments and improving data insights, analysis and management.

Nevertheless, the migration to ISO 20022 is an expensive exercise, but firms can control operational expenses by creating efficiencies through automation. Automation plays a crucial role in enabling firms to streamline their processes and handle larger transaction volumes effectively. Financial solutions are capable of ingesting ISO 20222 messaging and handling all data types, formats and volumes, making them an important tool for firms navigating this transition.