ISO 20022 Brings the Challenge of Standardization to Swift Participants

The PaymentsJournal Podcast

The upcoming conversion to ISO 20022 presents both challenges and opportunities for banks. It allows them to drive potential efficiencies by redesigning operational processes around Swift messaging. However, there is also the challenge of data ingestion; banks will need to ensure every tech platform in their stack, particularly reconciliation and reporting tools, can effectively handle ISO 20022 messaging.

In a recent PaymentsJournal podcast, Nick Botha, Payments Sector Lead at AutoRek, and Brian Riley, Co-Head of Payments at Javelin Strategy & Research, explored where things stand with ISO 20022 conversion, and how workarounds may cause banks more problems than they solve.

What ISO 20022 Promises

ISO 20022 introduces a single standard approach to facilitate communication interoperability between financial institutions, their market infrastructures, and their end users. The deadline for both corporate bodies and financial institutions to prepare their systems is November 2025.

As the adoption date approaches, banks are relying on Swift’s expertise and resources to ensure the transparency and validity of their transactions. Swift is preparing to introduce a messaging system with comprehensive data insights for many of the 11,000 participating firms. The goal is to create standardization across the market as the transition to a more centralized payments economy unfolds globally.

ISO 20022 messaging is designed to provide detailed information on recipients and participants in any payment. It aims to manage data processes and analysis more effectively, potentially reducing some of the cost associated with payments, allowing firms to achieve economies of scale. However, these economies of scale can sometimes be illusory.

Where Do Things Stand Now?

Organizations are currently in a transitional period where many have adopted the ISO 20022 standards, but others are lagging behind. Migrating systems can be costly, and not all organizations have the resources and funds available to make the switch immediately. During this period, conflicts may arise in messaging when advanced firms transact with those that are still catching up, leading to some friction.

Significant resources will need to be allocated to this project to ensure interoperability not only with counterparts in the wider economy but also in within the organizations’ tech stack and IT communication systems. The move to ISO 20022 is already somewhat overdue, but for companies that have yet to make the switch, it’s not too late.

“A lot of workshopping has been happening across different geographies globally within the Swift network,” said Botha. “If you haven’t done it yet, understand how it will apply to the strategic direction of cross-border payments for your business, especially if you are in the Swift network. If you’re not in that network, it’s still worth adopting the principles behind how this can work, because those 11,000 institutions are working with another 50,000 or 100,000 institutions that aren’t a part of that network too.”

Diseconomies of Scale

As banks and other financial institutions strive to keep operational costs down, they encounter a paradox. In the payments space, increasing transactional volume is typically seen as a path to profitability. But, producing additional volume comes with its own costs, such as expanding infrastructure, providing internal support, and implementing fraud reconciliation software.

The cost of adding transactional volume increases alongside the revenues generated by those transactions. Typically, the margins per transaction don’t increase over time.
“We’ve had some clients speak to us about how there’s actually a diseconomy of scale at some point,” said Botha. “We’ve seen some firms stop acquiring new clients because they’ve hit that point.”

The best way to counteract this effect is by creating operational efficiencies and reducing the operational cost per transaction on a daily basis. As margins per transaction increase, the company can gain more revenue from processing additional volume. This leads to benefiting from economies of scale.

“Do you really want to be the one who tells your boss you have to slow down volumes because you lose more each transaction?” said Riley. “That doesn’t seem to be something that would work well towards your bonus. This is real-time stuff that needs to get done in very short order.”

Working with a Trusted Partner

If a company is handling a CSV file with a single line of data containing 10 to 15 fields, this task could probably be managed manually by one person. However, large companies deal with millions of transactional records and significant amounts of data that require automation. In such cases, a partner can be exceedingly valuable. They can manage not just payments data but automate the entire process.

“We save our clients a lot of time in their daily process of just handling the data,” said Botha. “When it comes to ISO 20O22, the major benefit is the reconciliation piece. The reporting aspect has been validated and reconciled.

“That’s where AutoRek fits—not just in the banking space but in the payment space, insurance space, and even the asset management space,” said Botha. “We are joining them on the journey of transitioning into ISO 20022 messaging. This is the global one-world economy of payments that we’re looking to move toward.”

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