The motivation behind ISO 20022 

To your average individual, sending a payment is considered a simple thing to do, but behind the scenes, it is a different story. As a payment passes through the plumbing of the banking and payment networks, banks will check for various data points to ensure that the transaction meets compliance requirements.

This is especially true for cross-border payments, which must meet the different regulatory requirements of all the jurisdictions it flows through.

The challenge is that the current payment messaging formats only allow for limited information to be attached to the payment instruction. When sending an international payment, the sender may have the beneficiary’s account name, an international bank account number (IBAN) and a bank identifier code (BIC).

However, a bank’s compliance team is likely to delay the transaction, contacting the sender to gather more information, such as the beneficiary’s address or whether the recipient is the ultimate beneficiary.

Improving the payment experience

The ISO 20022 framework will improve the payment experience by enabling the sender of the payment to input extra information at the beginning.

The ISO 20022 format has over 1,000 different placeholders for data, so the sender can include additional available data such as the beneficiary’s address, passport details or company legal entity identifier (LEI).

As a result, the payment process should flow more smoothly and reduce the need for bank compliance teams to contact the sender and probe for details.

Providing richer statement data

The additional data capacity of ISO 20022 will also provide richer statement data. This will be of huge benefit to accounts teams performing reconciliation processes. Imagine a member of the accounts team sends a payment to a supplier to settle several invoices.

Today, that person would also need to send an accompanying message to the supplier’s finance team to explain which invoices the payment relates to.

With ISO 20022, this detail can be included in the payment instruction itself. As a result, for any one entry on a bank statement, hundreds of lines of data will explain in granular detail what this payment is for.

This will vastly improve reconciliation processes and eliminate the common challenge that businesses face of struggling to tally the amounts on their bank statement with the payments they are expecting to receive.

Helping organisations to improve compliance

Finally, ISO 2002 will also help organisations improve regulatory compliance.

In forcing those sending the payment to add details about the beneficiary and the purpose of the payment, it will encourage organisations to invest in sanctions compliance and transaction monitoring tools or to add Account Name Verification checks to demonstrate they know where the money is being sent and who the beneficiary is.

Separately, richer statement data will help improve and automate reconciliation, reducing the risk of fraud associated with the manual reconciliation processes that prevail today.

Next time, I will be writing about the implementation of ISO 20022 and how to overcome critical migration challenges.