It turns out that our daily lives have so many standards built into them that no one even realizes they exist. Standards play a critical role in the modern financial services ecosystem, including banking, payments, and crypto assets. One of the most important standards classes in the financial industry focuses on messaging standards. ISO 20022 basics explained for beginners shows that ISO 20022 is a messaging standard that provides a common language for the financial services industry.
The ISO 20022 standard is highly relevant to cross-border payment services and high-value payments, two major areas of the world that have gone through a major transformation phase. Learn more about ISO 20022, its importance, and its benefits.
Build your identity as a certified blockchain expert with 101 Blockchains' blockchain certification designed to boost your career prospects.
Prelude to the arrival of ISO 20022
Many may have thought that introducing new standards in the financial services industry would be a wasted effort. On the contrary, the background of the ISO 20022 standard paints a different picture and provides a rationale for introducing a new standard in the financial services industry. You will also find many references to ISO 20022 cryptography that may raise questions about its usefulness in modern banking and payment systems. The most popular messaging standard, MT, became a hot topic in the financial services market in 1977. SWIFT introduced a messaging standard to provide a common communications platform and message exchange for cross-border payments.
The MT standard played a key role in allowing banks to move telex messages. This standard provided a globally consistent communication system across financial services networks and improved the efficiency of cross-border payments. It is also important to note that the MT messaging standard was popularized at a time when moving digital information was expensive.
MT messages are tailored to support human readability while reducing data consumption. Initiatives such as automating message exchanges and optimizing MT message types play a key role in ensuring more comprehensive data validation. However, the limitations of the MT messaging standard necessitated a broader payment messaging standard that would enable seamless cross-border payments and data exchange.
Learn the basics, operating principles, and future prospects of cryptocurrencies from our cryptocurrency e-book
Understand the basics of ISO 20022
The cross-border payments ecosystem and the broader financial services industry are undergoing a major transformation. We can see the rise of new financial products and the growing influence of technology in financial services. At the same time, customer expectations are increasing and the globalization of financial services is breaking down many traditional barriers. Regulatory changes are also one of the notable factors challenging traditional standards, operating models, and infrastructure.
The ISO 20022 banking standard has emerged as the ideal solution to these friction points in the modern financial services industry. It is a flexible standard for banking messages that can facilitate interoperability with financial institutions, customers, and market infrastructure. ISO 20022 supports adding richer, more structured transactional data to payment messages. This is already gaining traction among all institutions within the SWIFT network. The ISO 20022 standard will become an essential part of all major global payments infrastructures due to its ability to optimize cross-border payment communications.
Explore the urgency to adopt ISO 20022
ISO 20022 will play a key role in transforming information flows by helping institutions within the SWIFT network take advantage of new technologies and payment processes. Approximately 87% of high-value payment messages will adopt the ISO 20022 standard by the end of 2025. SWIFT plans to begin transitioning to ISO 20022 in November 2022 and complete the transition by November 2025. A successful transition to the new standard will improve the experience for end users. The experience is significantly improved with the benefit of faster processing, ensuring cost-effective and more efficient payment services.
There may be some concerns as to why banks and other financial institutions are focusing on adopting ISO 20022. Banks' existing service models for cross-border payments rely heavily on human interaction in the interpretation, resolution, and delivery of payments. The main problem with such models is the lack of efficiency, which ultimately leads to increased costs. In addition, limitations in payment message structure, such as missing data fields and lack of structural clarity, make it difficult to meet regulatory requirements.
Migration to ISO 20022 provides an effective solution to these problems. The new standard provides a better, more structured data model for payment messages that facilitates end-to-end automation and integrates many legacy standards. Notable benefits of ISO 20022 that have caught the attention of financial institutions include enhanced interoperability, faster processing, and improved reconciliation.
Navigating the design of the ISO 20022 standard
Another important aspect in the answer to “What is the ISO 20022 standard for payments?” Standard design. ISO 20022 not only provides a better standard for cross-border payments, but also an enhanced data model. It is an open standard that leverages the concept of hierarchy in its design. The top layer of the ISO 20022 data model represents important business processes and concepts, and the middle layers contain message logic. The lowest layer of the model focuses only on syntax.
The ISO 20022 standard leverages a descriptive and easy-to-understand XML format that is longer and can accommodate more data than MT messages. Additionally, the hierarchical structure of message standards, including various nested elements, allows for logical data organization. Additional elements of the message standard facilitate more efficient data processing and improve the scope of automation. The element structure of the ISO 20022 message standard also allows you to include instructions that support specific business data elements.
The structuring elements of the ISO 20022 standard XML format support easier message exchange between different geographic areas and play a key role in improving interoperability. The ISO 20022 message standard also provides new elements with fields for including other details. The unique design of payment message standards provides the prospect of maintaining messaging consistency across the payment chain. By ensuring greater consistency, ISO 20022 can reduce ambiguous data while ensuring more efficient compliance monitoring.
I'm excited to learn about the use cases for cryptocurrencies in NFT, DeFi, and the Metaverse. Enroll in our Cryptocurrency Fundamentals course today.
How do financial institutions use ISO 20022?
The adoption of new ISO standards in the financial services industry is likely to attract attention. It is important to find ways in which financial institutions may adopt the new standards. Use cases for the ISO 20022 payments messaging standard may reveal further benefits for financial institutions. The following areas serve as the best examples of the importance of the ISO 20022 messaging standard in the modern financial environment.
Improved compliance
Traditional payment message standards lack detailed structure and context information. Lack of clarity about the parties can complicate and challenge the compliance review process. Financial institutions have to shoulder the burden of huge costs and payment processing issues stemming from legacy standards. ISO 20022 can solve these problems by providing better structured contextual attributes with dedicated elements for all parties to a transaction. With support for dedicated elements, you can include details such as town, country, and political party names in your payment messages. As a result, ISO 20022 enables more efficient transaction screening and streamlined operational processes.
Improved liquidity management and reconciliation
The next notable use case for the ISO 20022 payments messaging standard focuses on improving liquidity management and coordination. Existing standards suffer from space and structure limitations, as well as an inability to include different parties in the payment lifecycle. This not only prevents corporate customers from managing their cash flow effectively, but can also lead to payment delays. ISO 20022 addresses these issues by leveraging dedicated elements in the new data structure for remittance information. By leveraging structured transfers in conjunction with the ISO 20022 final party field, financial institutions can drive efficiencies through automation.
The benefits of transactions in the ISO 20022 messaging standard also present the potential for expanding global reach. We also find a reasonable universal message standard that accommodates all types of payments, thereby increasing interoperability. The richer data capabilities of the ISO 20022 messaging standard also ensure better protection against AML and fraud controls. Additionally, the new standard of structured data also increases transparency, which ultimately contributes to more efficient payments.
Start learning blockchain today with the world's first blockchain skills path with high-quality resources customized by industry experts!
final thoughts
ISO 20022 is an open standard for payment messages. It has the potential to bridge the gap between financial institutions, customers and market infrastructure. It provides new data structures for information about payment transactions, thereby increasing the transparency and efficiency of cross-border payments. ISO 20022 is intended to replace the MT standard, which has served as the messaging standard for the entire SWIFT network. Full implementation of ISO 20022 is underway at all major financial institutions, and being aware of the standard can help you maximize its benefits. Learn more about the benefits of ISO 20022 and how it can change the future of finance.
*Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. The claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains is not responsible for any loss suffered by anyone relying on this article. Find out for yourself!
