In this Northey Point blog we explore India’s ISO 20022 adoption journey with an excellent article written by Shahid Ali.
The UK’s ISO20022 journey started with the Current Account Switching Service and the Cash ISA Transfer Service (both of which were key deliverables during my tenure as Bacs’ CEO) and is moving forward with the Bank Of England’s RTGS regeneration, in SWIFT and the development of Pay.UK’s New Payments Architecture.
With ISO20022 destined to be significant part of payments globally it is interesting to take a look at India’s adoption journey and we are pleased to be able to feature Shahid Ali’s perspective on ISO20022 in India.
Why ISO20022?
Shahid Ali writes:
ISO20022 is resonating to extend, even those not in financial industry must have heard it once. What is this all about and what promises it will fulfil?
ISO is standard body which is used to register various market needs which require standardisation across. For financial industry as well, a lot of standardisation has been made like 3-digit currency code with ISO4217 (EUR, INR, etc.). 2-digit country code with ISO3166 (IN, US, AE, DE, etc.). Some more interesting standards are IBAN (ISO13616), and BIC (ISO 9362). Follow of these BIC and IBAN standards has given great push on error reduction.
There was time when most of initiation of transaction was done using paper and verbal ways in branches, and people do make mistakes in giving account number of beneficiaries. But when IBAN got in place for a country, it is likely to have no mistake due to validation sets on length and mod 97 rule.
When the financial industry started transmitting data and funds over networks, it was having slow speed, low transmission data capability, and prevails multiple standards (no single common language). SWIFT come with various message type (MT) set which was based upon field-based approach for across industry payment, treasury, trade, reporting etc. Due to limited hardware capability, it was targeted to have smaller message structure. Although, over the time it keeps on evolving and able to manage multiple scenarios with various tweaks, while at the other hand, multiple drawbacks keep coming. These drawbacks keep getting managed by some multilateral or bilateral keyword and values.
At one hand SWIFT was evolving and adjusting with new use cases, while at other hand local clearing houses keeps having their own formats like in India for RTGS it has R Series, NEFT it has N series, UAE FTS has CB series. While some clearing houses like SARIE in KSA, takes SWIFT MT as base and start using with minor changes. With multiple ways of handling payment data transmission, market gets crowded with various formats.
Similar mindset people start feeling need to have more enriched message type, which led to evolution of ISO20022. Idea was to make things simple which all understand and adapt quickly. To provide structure which can fit all the scenario and provided dedicated tag for each need to improve STP.
Standard set of keywords to be used for enumeration like, for purpose code, charge bearer, reason codes. Giving each element more space and structure in order system processing can become easier like for remittance info, sender to receiver info, parties address, etc.
How it is different from SWIFT?
Whenever ISO20022 is talked, SWIFT MT format comes as obvious comparison. SWIFT MT format is always talked, as MT format is widely used than any other format. As SWIFT decided to move from MT to ISO20022, termed as MX format. This migration was long awaited, and it is finally here in year 2022. Due to its complex nature, this migration has been planned with wide timeline to provide sufficient timeline to adopt in bank landscape.
Following key areas which are used to indicate differences:
MT Field has changed to ISO20022 tags
With MT, the keyword used to indicate placeholder was field like tag 59a for Beneficiary, while ISO20022 it has been changed to xml tags like <Creditor>.
More Agents and Parties
In SWIFT MT world processing bodies were called as Banks which is now called as Agents in ISO20022. Further common standardization has been made for parties as well, like ordering customer is called always as Debtor, Beneficiary customer as Creditor. New parties as Ultimate debtor and creditor has been given dedicated tag as placeholder.
Standardisation on Codes:
Earlier codes/qualifiers in MT are now called as “CodeSet” in ISO20022. This applies to various enumeration tags like charge bearer, return reason codes, etc.
Structured Information
For each information, dedicated tags has been introduced. So, keyword concept to be used for use case. In SWIFT MT, for ultimate debtor keyword was /ULTD/ and for ultimate beneficiary it is /ULTB/ and it is captured in field 70.
Extended Character Set
ISO20022 is further extended to support more character set. Also it supports special character as !#&%*=^_’{|}~”;@[\] $ <>
Below is high level comparison of SWIFT MT and ISO20022 structure organization. SWIFT has 5 blocks of information categorize for dedicated purpose. While ISO20022 when uses MX, it is structure with Application Header and Document (content of message)
What are the catalysts?
Upgraded Technology
When SWIFT had started in 80s, the technology was very slow, and idea was to send bare minimum data to make transaction happen. So, MT format which is having smaller message data was used. Now as technology is advance and system can read a lot of data and process them quickly, it is time to have more structure data, even though it can increate length of file.
Need of Common Language
As time moves, we all have learned that multiple formats need a lot more effort to understand, document and collaborate. So, now it is time to have one common single language which all understand easily. Once format is resolve, it is more about business and not to struggle with technology and data.
Why does ISO20022 implementation matter now?
SWIFT Adaptation
ISO20022 is here from long time, and slower adaptation concern was getting raised. Although, due to various other evolution ISO20022 migration has not been taken up on global scale. Now SWIFT has announced that cross borer space will be migrated to ISO20022 from Nov 2022 with co-existence till Nov 2025. This is one of the most important trigger points for adoption.
Regional Clearing Connect
Another important trigger point demand for connected regional clearing. When two clearing get connected, it become important to speak same or much similar language and solution to same is ISO20022.
Better data always mean better payment
Compliance and Fraud is growing as we move towards digitization. So, it becomes need to see what all area can be corrected to move better data which can move without or very less friction. A better data like knowing beneficiary belong to embargo country or it is just some info which looks like it is clear in ISO20022 as they have dedicated country field. So, having dedicated country and dedicated city, street, building makes compliance system processing easier to hold only embargo country rather any wrong hit on city or street or building.
Global adoption on ISO20022
Global adoption is really happening with new pace, although many clearing or countries has already adopted it. It a complex process to change any thing in clearing and settlement as it has direct impact on financial transaction and can hit economy as well. Below is highlight on adoption done and planned.
India Payment Flavors: A Closer Look
India is considered one of best innovative country in context of payment products. Most widely acceptable and prominent one is UPI, which is getting recognition beyond boundaries and will soon be adopted outside India like UAE, Singapore, Bhutan, France.
Today, we are at the top of innovation, but there was time when India also started from basic building blocks. Let us go into history to see how India started and where we are now.
RTGS : Backbone to All
In 2004, as a base it first started RTGS Product. A real time gross settlement solution for bank-to-bank settlement mechanism. Sooner it was opened for customer with larger amount transaction as well.
NEFT : Once upon a time, a big leap
Then a year after, in 2005, India launched NEFT, which stands for National electronic fund transfer. It is based upon deferred settlement mechanism, in which fund are settled on periodic deferred frequency. This clearing method was introduced for customer to send money which has relatively lesser urgency.
ECS : Start of Bulk Payment Feature
Where NEFT and RTGS is normally considered as start of payment innovation, although ECS was one the starting mechanism which laid down before them in 2003. This was used to transfers benefit/ interest from MIS account to SB account.
NACH : Fulfilling Bulk Payment Needs
ECS was one of product for bulk disbursement of benefit / interest, but it also kept under usage for government related operations only. While with advent of new demand, NACH takes shape to manage bulk need of payment in 2007 for non-government organization as well.
IMPS, UPI, BBPS … Continued
Once above traditional products RTGS, NEFT, ECS and NACH has taken the shape, time comes to talk on innovation and government come with a new body to work dedicated on such innovation, it was start of NPCI (National Payment Council of India) in 2008. They first come with a 24*7 product IMPS in 2010, then much faster and innovative UPI, an alias based open, faster, 24*7 product, and it continues… to BBPS… Account aggregator (AA).
At one hand, India is innovating new products like UPI, BBPS, etc. to meet new use cases, while at other hand of it, it was regularly polishing old ones as well. In last 2 years, RTGS and NEFT are made 24*7 availability as well.
Additionally, NEFT has now only 30-minute cycle.
So, even if you are using deferred settlement product, it is not going to take your more than 30 minutes to reach fund in beneficiary account.
At one hand, focus is to coup up with speed, while at the other hand some steps are taken to focus on standardisation in message format as well. RTGS when launched used to have R formats like R14, which has been oved to ISO20022.
So, evolutions are happening, but do we feel ISO20022 is only to talk from adoption perspective, or will it become native language of clearing houses over the time?
When NPCI came with UPI (Unified Payment Interface), which was a new door to fintech and big techs. This got overwhelming support and lot is changing in mindset of banks and regulators. Charing of electronic transaction are becoming obsolete, and innovation are getting discovered to make profits.
Dig deeper
Let us deep dive in some of the major payment products. To see the evolution journey, standards and formats used by them and how closer or far they are from ISO20022, a language which everyone will be speak sooner.
For comprehensive analysis of Indian Payment and ISO 20022, you can download the full pdf from Shahid Ali’s LinkedIn post.