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As financial institutions move quickly toward compliance with ISO 20022 messaging standards, many treasury teams have felt pressure to migrate their own systems. For more on why, see Part 1 of this article series, “Fortune Favors the Proactive.” The key benefit of this transition for corporate treasuries is that by modernizing their digital infrastructure, they may create an opportunity to access much richer data about each of their banking transactions.
Supporters of the ISO 20022 messaging format hail it for its potential to create a common language for financial transactions. Currently, Swift, SEPA, CHAPS, and the Federal Reserve all have their own message formatting nuances. The transition to ISO 20022 will help information flow more freely among the dozens of payment channels in use around the world. However, focusing on compatibility among banking systems ignores an even larger benefit of ISO 20022: improving the readability of messages around financial transactions, especially when compared with the often-cryptic Swift messaging format.
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Data Is the Key
ISO messaging uses the XML programming language to store, transmit, and reconstruct data that both humans and machines can read. Its clearly defined fields—with tags and values such as name, settlement date, and account number—are easier to understand than fields in many of the traditional messaging formats. This new data structure lies at the heart of corporate treasuries’ potential for greater transformation, as it offers significant advantages for data analysis (including for cash forecasting and fraud detection), real-time treasury management, and sanctions screening.
The comprehensive data that ISO 20022 provides on transactions—notably, the payment’s origin, purpose, end-to-end ID, and regulatory compliance–related fields—will be key in facilitating real-time treasury management and enabling greater visibility of ongoing transactions. As the data will be transmitted in a standardized format, it will enable quicker and more accurate reconciliations, which will allow treasurers to view cleared banking activity in closer to real time. Standardization also means treasury staff will be able to more easily analyze and aggregate data from different payment systems, which will significantly enhance cash forecasting processes by setting up better-informed projections of future cash flows.
The ISO 20022 standard will also streamline compliance and regulatory reporting for companies, as its messages on transactions will include dedicated tags that support compliance, such as legal entity identifiers (LEIs), tax codes, and universal identifiers that will help regulators track payments as they move across borders. These tags will also help artificial intelligence (AI) models and machine learning (ML) tools better understand the data. As a result, the AI or ML systems will do a better job of completing their tasks, which may include payment-anomaly detection. Likewise, ISO 20022 has the potential to improve companies’ sanctions screening by facilitating more accurate comparisons between government lists and the beneficiaries of, and other parties to, specific transactions. The move away from approximate matches of long address strings will reduce the risk of false positives, improving the efficiency and accuracy of screening processes and minimizing bottlenecks in cross-border payments.
By adopting the ISO 20022 standard early, corporate treasuries can sooner access the benefits of having higher-quality data on payments. AI-driven financial modeling will benefit from the granular attributes of ISO messaging data to inform cash flow forecasting based on historical trends. Similarly, ISO-related data will allow blockchain networks to communicate with traditional financial systems more easily, and payment systems will be able to use more detailed ISO payment instructions to trigger blockchain-based smart contracts.
Applying these tools and insights to ISO messaging data will better equip corporate treasuries to adapt to the complexities of the macroeconomic environment. Those that watch and wait risk falling behind their competitors, as well as missing the wave of improved data analysis and insights that will be unlocked by ISO messaging.
Mandate or Opportunity?
Some in the industry see the migration to ISO 20022 as no more than a move from one payment system to another. This view is short-sighted. Though the migration might seem onerous, the transition to ISO 20022 presents a significant opportunity for corporate treasurers. Those who transition early will likely gain a strategic advantage against competitors in terms of efficiency, analytics, and compliance, leaving late adopters behind the curve. Further, some global financial institutions and large multinationals may require ISO 20022 compliance for business partners in the future, making proactive migration a risk mitigation strategy.
Treasurers must look to lead the transformation and use the benefits of the migration to ISO to transform their treasury operations. Doing this sooner rather than later will not only enable treasury groups to reap the rewards in a more timely manner, but also to ensure that their organizations are fully prepared for the future of payments.
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Jerald Seti
Jerald Seti is the vice president of product management for financial services at ION Treasury, having joined Openlink/ION in 2004. He provides bank connectivity and transaction lifecycle management solutions for corporate treasuries, financial institutions, and central banks. Prior to ION, Seti served as capital markets product manager at MISYS, and before that, he improved automation at Wall Street firms. He holds an MBA from NYU’s Stern School of Business and a BA in economics from New York’s Binghamton University.
