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ISO 20022

New standards on payment transactions impose major changes in the financial sector

In an environment of cross-border payments and globalization, the International Organization for Standardization (ISO) requires novel and modernized solutions while taking into consideration various needs of the stakeholders. ISO develops and publishes international standards in numerous fields, including financial services. With the aim of simplifying global business communication in the financial context, ISO 20022 has been implemented. In the same manner as the world counts plenty of languages, various messaging standards and formats exist. ISO 20022 is eager to put an end to this diversity and grow into a unique and universal language for financial messaging within the payment industry.

By proposing a single standardization approach through methodology, process and repository, ISO 20022 facilitates the communication of financial information between relevant stakeholders and systems while coordinating the expanding number of cross-border payments. Consequently, regardless of the currency in which a payment is made, a uniform payment standard is used, which creates a fast and highly structured payment communications.


How does ISO 20022 exactly work?

ISO 20022 is based on the Extensible Markup Language (XML) format computer standard. XML is used to encode the data and permits an integration of various characters, allowing a real global harmonization of payment processes and leaning towards an enhancement of automation and standardization. However, the ISO 20022 incorporates more than common credit transfer and direct debit messages and includes status reports and account statements as well.

While separating the business and the syntax, the new ISO Standard is divided into eight parts.
The syntax refers to the structure of how data is exchanged by following logical data and information procedures. Data is structured in different components, which are reused across all messages. This syntax-independent business modelling approach is the key feature of ISO 20022.

Further benefits concerning ISO 20022 and identified within the environment of financial exchanges are:

  • Simplicity
  • Harmonisation
  • Flexibility
  • Enriched data

T2/ T2S Consolidation

In the context of the Eurosystem’s "VISION 2020", project initiatives have been elaborated with the aim of exploiting synergies generated by using common components, strengthening the market structure while achieving process efficiency. Within Euro payment systems landscape, T2S and TIPS are already compliant with ISO20022 messages, and this year TARGET2 communication will be converted to ISO20022.

Even though ISO20022 is not a regulatory binding standard, Luxemburgish banks are nevertheless facing extensive implementation projects. Access to the TARGET2 system will solely be possible via the new format with the introduction in November 2022 through a "big bang" migration approach, which will further involve a far-reaching change in internal processes and procedures of the financial institutions.

Consequently, the T2/T2S consolidation is fundamental to fulfil the minimum reserve requirements and the individual payment transactions to central banks, but primarily being able to continue the participation in the settlement of monetary transactions. Ignoring the changes and not converting the banks' own systems could therefore entail a loss of direct access to the central bank’s money accounts, which in turn is an obstacle to the central liquidity management (CLM) of banks. In general, a comprehensive T2/T2S consolidation implies, in addition to the overarching introduction of ISO20022 messages, the establishment of a network agnostic connection to the TARGET services via licensed network service providers of the Eurosystem, a uniform access portal Eurosystem Single Market Infrastructure Gateway (ESMIG), a fundamental change in the cost structure due to the separation of individual payment transactions from central banks’ operations and predominantly the splitting of TARGET2 into CLM and RTGS.



By now, a large majority of financial institutions in Europe are operating with SWIFT and additional users will follow as a result of the upcoming T2/T2 consolidation. SIA-Colt and SWIFT have been selected based on a tender to offer future licensed network services for ESMIG.

Following ISO20022 standard, SWIFT has developed MX messages using xml syntax. As required by the Eurosystem roadmap, financial institutions which are directly participating in the T2/T2S consolidation will start exchanging MX messages by Nov 2022. As compared to the "Big Bang" migration of the Eurosystem, SWIFT offers a smoother alternative in the form of a four-years transition period within which it will provide MT/MX translation services to its network.

SWIFT users who are not directly impacted by the Target consolidation will, however, be affected by payment message standardization, as SWIFT will discontinue the support for category 1, 2 (credit transfers) and 9 (cash management) messages by November 2025. Financial institutions should therefore use the time to become ISO22002 compliant and gradually adapt their processing systems in parallel with the ongoing market harmonization.

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