Expanding the functionality of ISO 20022
In 2009, ISO 20022 restructured and expanded the message sets for payments initiation, payments clearing and settlement, exceptions and investigations and numerous other areas, based on experience in actual implementation and usage experience. The results have been very successful as ongoing versions of the message sets have been updated and built on that base. However, there remain many potential applications for ISO 20022, some of which could help corporates to achieve long-cherished goals.
Currently, message development for specific business needs are underway in the payments domain in four important areas: remittance advice; real-time payments; account switching; and invoice tax reporting.
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To accommodate the growing need for robust remittance information associated with a payment, two stand-alone remittance advice messages were published in April 2014. They allow for remittance advice information to be contained in the messages outside the payment transaction information. The defined flows allow for these standalone messages to be exchanged outside of the typical financial transaction process, such as the buying or selling organizations exchanging the messages directly or, alternatively, banks may provide value-added services by sending the remittance advice message to corporates. Two types of messages are available: The first carries the full remittance information; the second carries how or where information about the remittance is delivered, such as a URL where further information can be found on a portal or that it has been sent by email, fax or post, for example.
Customer demand and regulatory pressure in the U.K. is also driving the need for message sets associated with the processing of real-time payments and account switching (typically for consumer bank customers). Following completion of the pilot program, candidate message sets will be submitted to ISO 20022 for approval before final messages are published.
Functionality, such as account switching, has long been a problem for corporates and banks alike. The creation of a message set may help a bank's client move to a new bank in a timely manner, while maintaining existing banking arrangements such as direct debits and their associated mandates, shows the flexibility of ISO20022 in addressing common payment-related problems. Additionally, it offers further evidence that the standard is capable of meeting the many challenges that face the financial services industry as well as corporates.
A third pilot is underway for a message set for invoice tax reporting, which was submitted by the Finnish ISO 20022 user community. This group wants greater harmonization of how value added tax (VAT) information is reported by corporates and banks to various government agencies. Currently, reporting requirements for VAT vary significantly, even within a single country. The hope is that by standardizing the process considerable efficiencies can be achieved.
Future opportunities for ISO 20022
While the three pilots currently underway will ultimately expand the functionality of ISO 20022 in very important ways, there are many other challenges faced by both banks and corporates where ISO 20022 could play a crucial role. For example, many companies may benefit from a message set to support Payee Positive Pay, both for check and ACH. Payee Positive Pay is an anti-fraud measure that sends data to a bank when payments are issued. It helps to ensure that payments can be validated against details such as payee name, amount and date. If there is a discrepancy the company can decide not to pay. While some banks have retro-engineered solutions for Payee Positive Pay using existing message sets, these are not a clean fit and are sub-optimal.
Other opportunities for ISO 20022 include card transactions, which could be included in payment transaction messages and relevant details reported for cash management activities. While some work has been done on developing data content for card transactions, greater clarity is required on definitions. Corporates would like the data elements in messages that support purchasing cards and virtual cards to be more robust so that they could be confident they offer the same functionality of messages associated with the movements of funds from an account.
Another potential application for ISO 20022 is related to the remittance information for royalty payments, where volumes have increased markedly in recent years. Royalty payments differ from other remittance-type payments due to the specific reporting details required in a message that are different from invoice information typically associated with a vendor payment, such as explaining the source of the royalty.
The healthcare industry may also see benefits from an ISO 20022 message set associated with explanation of benefit claims. This could provide the appropriate level of information to make reconciliation easier for insurance and healthcare companies and potential alternate delivery of information to consumers.
Continuing growth
ISO 20022 must constantly innovate and expand if it is to continue to prosper — and just not maintain the status quo. Growing corporate involvement is an important part of ISO 20022's future. Similarly, the growing dominance of ISO 20022 in market infrastructure is significant. Where new clearing systems are created, or existing systems revamped, ISO 20022 is now invariably the standard selected.
One way a corporate or vendor may become involved is through their participation in the Common Global Implementation — Market Practice (CGI-MP) initiative, which defines how messages can be used by banks, corporates and vendors. This harmonization direction has been one of the most important developments in the business utilization of the ISO 20022 messages in recent years. While ISO 20022 is a global message standard, it does not specify how a specific code value should be used, or how information fields should be populated. Consequently, different banks have implemented ISO 20022 in different ways, making it more challenging for corporates who manage multiple banking relationships to implement.
CGI-MP harmonizes how banks support ISO 20022 in various business areas, and acts as a guide so that messages sent to one bank can be easily processed by another. For corporates, that means a minimal amount of work is required to implement ISO 20022, achieving the interoperability across bank relationships, and providing a broader usage on a day-to-day basis. Rather than the corporate having to change how a data field is used with each bank, CGI-MP defines guidelines minimizing the need for adjustments by the corporate, such as populating a common code to identify a non-urgent or urgent payment type.
Other opportunities for ISO 20022 include card transactions, which could be included in payment transaction messages and relevant details reported for cash management activities.
However, education — highlighting existing applications and benefits — is equally important to the future of ISO 20022, especially among corporates. For example, many corporates may not fully understand how to use a remittance field correctly or appreciate the full functionality of some message sets. The Association for Financial Professionals is reaching out to participants of ISO 20022 committees and other organizations to help make certain that educational opportunities exist for practitioners to understand the full capabilities of ISO 20022 and the future opportunities that could be realized.
For the financial community, one development that could increase corporate confidence in ISO 20022 is a certification process. This would enable banks, other financial institutions, corporations and vendors to demonstrate that they have a proven track record of supporting and promoting ISO 20022.
Look for Bank of America Merrill Lynch, a steadfast supporter of global standards, and leader in the ISO 20022 community, to search for ways to increase the use of this standard and remain on top of all new developments.
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