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"The ability to send and receive a greater amount of data opens up the opportunity to extract more information from payments and to achieve better outcomes, such as quicker, simpler and more automated reconciliation, or faster end-to-end payments." - Victoria Cleland
In this article, I am exploring the impact of ISO 20022 and 10 risk management takeaways from a pivotal speech given by Victoria Cleland, Chief Cashier and Director of Notes at the Bank of England. ISO 20022 offers a robust framework for financial institutions to exchange richer, more structured data, enabling enhanced risk management, fraud prevention, and operational efficiency.
Her address underscored the critical role of this global messaging standard in reshaping not only the technical infrastructure but also the risk management landscape across the industry.
The adoption of ISO 20022 and the related initiatives outlined in the speech have implications for risk management in the payment industry. They provide opportunities to enhance data-driven risk assessment, improve operational resilience, and strengthen compliance with industry standards and regulations across financial services firms, especially FinTech and payment businesses.
TABLE OF CONTENTS
Summary of Victoria Cleland’s speech
Victoria Cleland's speech highlighted the pivotal role of ISO 20022 standards in revolutionising the payments landscape. By adopting this global messaging standard and working collaboratively, the industry can pave the way for a more efficient, resilient, and innovative payments ecosystem.
Key takeaways:
The ISO 20022 Ideathon: Cleland announced the winners of the UK Finance-NatWest Bank's first-ever ISO 20022 Ideathon. The competition showcased a wide array of creative and diverse entries, highlighting the transformative potential of the new standards across various domains, from fraud detection to ESG issues.
The Harvest Season Analogy: Cleland drew parallels between achieving a bountiful harvest and implementing ISO 20022. Just as a good harvest requires planning, the right tools, and favourable conditions, successful adoption of ISO 20022 demands careful preparation and understanding of how it will be used to adapt to changing demands in the payments landscape.
Renewal of Real Time Gross Settlement (RTGS) Service: The Bank of England's RTGS service, which settled an average of £775 billion in payments daily last year, is undergoing a multi-year transformational Renewal Programme. This aims to enhance resilience, accessibility, interoperability, and user functionality. A new core settlement engine will be introduced in the next year with increased technological resilience and cybersecurity.
Transition to ISO 20022: In June 2023, CHAPS, the UK's high-value payment system, successfully transitioned to the new standards. This facilitates the exchange of richer and more structured data, marking a significant advancement from the previous messaging standard rooted in 1970s technology.
Expected Benefits: The adoption of the new standards brings immense benefits. It promotes wider interoperability, enhancing resilience in the payments ecosystem. It also supports straight through processing, resulting in faster and cost-effective payments, especially in complex cross-border chains.
Enhanced Structured Data: The ability to send and receive more data allows for quicker and more automated reconciliation, leading to faster end-to-end payments. The Bank will mandate the use of purpose codes and Legal Entity Identifiers (LEIs) for certain CHAPS payments from November 2024, followed by structured addresses and remittance information from November 2025.
Boosting Competition: ISO 20022 promotes competition in the industry by enabling technology vendors to offer products across different countries and currencies. It also allows for the flexibility to evolve with new services, such as synchronising payments between different ledgers.
Importance of Harmonisation: While the new standards provide opportunities for global financial messaging, harmonisation in the data model is crucial for seamless cross-border payments. Efforts are being made to establish harmonised data requirements for cross-border ISO 20022 messages.
Role of Various Players: Achieving the full potential of the new standards requires collaboration from a wide range of players, including financial market infrastructures, financial institutions, corporates, vendors, and ERP providers.
Transformational Potential of ISO 20022: Cleland emphasised that ISO 20022 should not be viewed merely as a regulatory requirement. If nurtured, it has the power to transform the payments ecosystem and unlock its greatest benefits.
ISO 20022 Standards Enhanced Data for Risk Management
ISO 20022 enables the exchange of richer and more structured data. This can significantly aid in fraud detection and prevention, as well as improve automated processing. Having more information about transactions allows for more effective risk assessment and mitigation strategies.
The adoption of the new standards revolutionises the payments industry by enabling institutions to leverage richer data for comprehensive risk assessments, fraud detection, and regulatory compliance. This transformation not only strengthens fraud detection and prevention mechanisms but also facilitates more effective and automated risk management practices.
1. Richer Data for Comprehensive Risk Assessment
ISO 20022 introduces detailed data fields, including Legal Entity Identifiers (LEIs), purpose codes, and structured remittance information. These fields enhance the transparency and granularity of payment messages, providing financial institutions with the data needed to conduct more accurate and comprehensive risk assessments.
2. Automated Risk Mitigation
The structured format of the new standards enhances automation in risk management processes. By standardising the way data is captured and shared, ISO 20022 reduces reliance on manual checks, which are not only time-consuming but also prone to errors. Automated systems can seamlessly analyse large volumes of data to identify potential risks, reducing operational inefficiencies.
Example in Action: A bank's risk management system receives a payment message containing detailed contextual information, such as the payer's and payee's identities, transaction purpose, and historical behaviour. Leveraging advanced analytics and machine learning, the system automatically flags a high-risk transaction—such as a large sum transferred from a recently created account to an overseas entity with a history of suspicious activities. The system halts the transaction, safeguarding the bank's assets and reputation.
3. Supporting Fraud Detection and Prevention
Enriched data provided by ISO 20022 significantly strengthens fraud detection frameworks. Purpose codes, for instance, offer insights into the intended use of funds, while LEIs provide clarity on the parties involved. Combined with real-time data analysis, these features enable institutions to detect fraudulent activities more swiftly and accurately.
Proactive Fraud Prevention: By utilising ISO 20022's structured data, financial institutions can integrate advanced monitoring systems that flag transactions based on pre-defined risk criteria. This enables proactive intervention before fraudulent transactions can be processed.
4. Enhancing Cross-Border Payment Security
ISO 20022 is particularly valuable in cross-border payments, where the risk of fraud and compliance violations is higher due to varying regulatory standards. The enriched data supports better alignment with international AML and KYC requirements, ensuring that institutions can effectively monitor and manage risks in global transactions.
Why This Matters: By leveraging ISO 20022's data-rich environment, financial institutions can move beyond traditional, reactive approaches to risk management. Instead, they can adopt proactive strategies that harness enriched data for fraud prevention, compliance, and operational efficiency. The structured data allows for faster, more accurate decision-making, ultimately reducing risk exposure while maintaining customer trust.
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Operational Resilience in a Data-Rich Ecosystem
The adoption of ISO 20022 marks a transformative step for operational resilience in the payments industry. By enabling the exchange of enriched, structured data, this global standard enhances the efficiency, reliability, and adaptability of payment systems.
Enhanced Data Precision and Error Reduction
ISO 20022 introduces standardised and detailed data formats, reducing ambiguities and errors in payment processing. By including precise data points such as Legal Entity Identifiers, purpose codes, and structured remittance information, financial institutions can eliminate the inefficiencies caused by incomplete or inaccurate data. This improved clarity minimises delays, streamlines reconciliation, and prevents costly disruptions. Additionally, ISO 20022's enriched and structured data aligns with regulatory mandates, ensuring compliance with global standards for data accuracy and transparency.
For example, in a cross-border payment, enriched data fields ensure that every party involved—banks, intermediaries, and recipients—interprets the transaction uniformly. This not only avoids the need for manual intervention but also mitigates the risk of errors propagating through the system, bolstering operational stability.
Automation for Streamlined Workflows
The structured messaging enabled by ISO 20022 supports higher levels of Straight Through Processing (STP), significantly reducing manual processing efforts. This automation enhances efficiency, allowing payment systems to handle higher transaction volumes without sacrificing accuracy or reliability.
Operational workflows benefit directly from this shift. Processes that previously relied on manual oversight, such as payment validation or reconciliation, can now be automated using advanced data analytics. This reduction in human intervention not only improves speed but also reduces operational risks associated with human error.
Resilience Through Interoperability and Redundancy
One of the most valuable features of the new standards is its ability to facilitate interoperability between payment systems globally. This interoperability creates redundancy within the payment ecosystem, enabling transactions to be redirected through alternative systems during disruptions. As a result, single points of failure are minimised, and the overall resilience of the payment network is enhanced.
For instance, in the event of a localised system outage, payments can seamlessly shift to another infrastructure without compromising data integrity or transaction speed. This flexibility ensures that the payments ecosystem can continue operating smoothly, even under challenging circumstances.
Real-Time Monitoring and Risk Mitigation
The rich, structured data provided by the new standards empowers financial institutions with real-time visibility into transaction flows. Advanced analytics tools can leverage this data to detect anomalies, identify potential fraud, and respond to emerging risks more effectively.
By integrating ISO 20022 with monitoring systems, institutions can proactively address vulnerabilities, whether related to cybersecurity threats or operational inefficiencies. This capability enhances risk management while supporting the broader goal of operational resilience by ensuring continuous service delivery.
Improved Scalability for Evolving Payment Systems
As payment volumes grow and new technologies emerge, scalability becomes a critical factor for operational resilience. ISO 20022’s flexible and data-rich framework is designed to support the demands of modern and future payment systems, including innovations like real-time payments, blockchain applications, and Central Bank Digital Currencies (CBDCs).
Financial institutions adopting ISO 20022 can more effectively scale their operations to accommodate increasing transaction volumes while maintaining high standards of accuracy, security, and reliability. This scalability ensures that institutions are well-prepared to meet evolving customer needs and regulatory requirements in an ever-changing payments landscape.
Interoperability and Redundancy
One of the most critical benefits of ISO 20022 is its ability to enhance interoperability between payment systems across different jurisdictions and infrastructures. By providing a unified messaging standard, ISO 20022 enables seamless communication and data exchange between financial institutions, market infrastructures, and corporate entities. This interoperability not only improves operational efficiency but also plays a crucial role in risk mitigation by introducing redundancy into the payments ecosystem.
1. Risk Diversification Through Interoperability
With ISO 20022, financial institutions can connect to multiple payment systems without the need for bespoke integration. This connectivity ensures that if one system experiences downtime or disruptions, payments can be rerouted through alternative channels, reducing reliance on a single point of failure.
Example: In a scenario where a regional payment network becomes unavailable due to a technical glitch or cyberattack, ISO 20022's standardisation allows financial institutions to instantly switch to another network or settlement system without additional reconfiguration. This ensures continuity of service and reduces potential revenue losses or customer dissatisfaction.
2. Supporting Cross-Border Resilience
Interoperability is particularly valuable in cross-border payments, where transactions often involve multiple intermediaries and systems. By harmonising data formats and communication protocols, ISO 20022 simplifies these interactions and reduces friction. This streamlining not only enhances resilience but also helps to manage risks related to inconsistent data or system incompatibilities.
Practical Implication: Banks in different countries, leveraging ISO 20022, can process payments in real-time even if one national payment infrastructure faces delays. The enriched data fields ensure that critical information is retained, enabling smooth transaction processing across systems.
3. Built-In Redundancy for Enhanced Resilience
Redundancy is a cornerstone of operational resilience. ISO 20022 facilitates redundancy by allowing financial institutions to maintain connectivity with multiple payment systems simultaneously. This redundancy ensures that alternative pathways are readily available in the event of outages, disruptions, or operational issues within a specific system.
Case Study Example: During a system failure in a high-value payment network, a corporate treasury function could redirect its urgent payments through another compatible platform, ensuring critical transactions—such as payroll or vendor payments—are not delayed.
4. Harmonising Regional and Global Payment Standards
ISO 20022 also addresses the challenge of harmonising regional and global payment standards. By providing a common language for payment messaging, it supports greater alignment between national infrastructures and international systems. This reduces fragmentation and strengthens the overall resilience of the payments ecosystem. This harmonisation also supports adherence to evolving regulatory requirements, enabling financial institutions to meet international compliance standards with ease.
5. Strengthening Cybersecurity Through Collaboration
Interoperability fosters collaboration between financial institutions and payment service providers, enabling them to share data and insights on potential threats. This collective intelligence improves the ability to respond to emerging risks, such as cyberattacks, in a coordinated and effective manner.
Why Interoperability and Redundancy Matter: The ability to redirect payments during disruptions is not just a technical benefit—it is a critical component of operational resilience. ISO 20022's interoperability ensures that financial institutions can maintain service continuity even under adverse conditions, protecting their reputation and customer trust. Moreover, by reducing system dependencies, the standard minimises the risk of cascading failures within the financial system.
Resolution Planning
The enriched data enabled by ISO 20022, particularly Legal Entity Identifiers, is instrumental in enhancing resolution planning and mitigating systemic risks in today’s interconnected financial ecosystem. LEIs provide a standardised framework for identifying entities and their relationships, enabling institutions to manage financial disruptions more efficiently.
Key benefits include:
Data Precision: ISO 20022’s structured messaging, combined with LEIs, offers unique identification for entities involved in transactions. This precision streamlines information gathering and allows regulators to quickly assess counterparty risks and exposures.
Example: During a market disruption, LEIs enable authorities to trace exposures to a failing institution and develop targeted interventions, preventing cascading failures.
Systemic Risk Mitigation: By providing transparency into interdependencies, LEIs support authorities in stabilising volatile situations, especially in cross-border payments where complexity is higher.
Regulatory Compliance: LEIs align with global regulatory standards, ensuring institutions can meet resolution-related requirements effectively. This reduces non-compliance risks and facilitates smoother reporting processes.
Practical Use: Institutions leveraging ISO 20022 can generate detailed, accurate reports for regulators during stress scenarios, demonstrating their readiness and compliance.
Crisis Management: Enriched, structured data allows for faster, more informed decision-making during periods of uncertainty. This empowers financial institutions and regulators to implement timely, effective resolution strategies.
Ecosystem Collaboration: ISO 20022 provides a common language for resolution planning, fostering collaboration between institutions, regulators, and payment system operators. LEIs strengthen this by offering a universal standard for identifying and managing risks at the entity level.
Why LEIs and ISO 20022 Are Foundational for Resolution Planning: The combination of ISO 20022’s enriched data framework and LEIs creates a robust foundation for resolution planning. By improving transparency, enabling rapid risk assessment, and fostering collaboration, these tools enhance systemic stability and ensure financial institutions are prepared to navigate future disruptions.
Vendor Risk Management
The adoption of ISO 20022 requires financial institutions to collaborate closely with technology vendors to ensure seamless integration of this advanced messaging standard into their systems. These vendors play a critical role in providing the tools and platforms necessary for handling enriched, structured data. However, this reliance on external providers introduces its own set of risks, making vendor risk management a crucial aspect of ISO 20022 implementation.
1. Addressing Compatibility Challenges
Vendors developing ISO 20022-native solutions must ensure their products can operate effectively within diverse technical environments and comply with varying regulatory requirements across jurisdictions. Compatibility issues, if not addressed early, can lead to delays, disruptions, or costly system modifications.
Proactive Vendor Evaluation: Institutions must assess potential vendors for their ability to adapt to technical complexities and regulatory changes. This involves evaluating the vendor’s experience with ISO 20022 implementations, their understanding of local and cross-border payment systems, and their capacity to deliver customised solutions.
2. Conducting Comprehensive Risk Assessments
A robust vendor risk management process is essential to mitigate potential issues. This involves evaluating vendors on several dimensions, including their financial stability, technological expertise, security measures, and compliance track record.
Checklist for Vendor Risk Management:
Track Record: Has the vendor successfully implemented ISO 20022 solutions for other institutions?
Security: Does the vendor adhere to cybersecurity standards that align with ISO 20022’s emphasis on resilience?
Regulatory Alignment: Is the vendor equipped to navigate jurisdiction-specific regulatory requirements?
Flexibility: Can the vendor adapt their solutions to unique organisational needs?
3. Collaboration for Seamless Integration
Effective vendor risk management hinges on collaborative efforts between financial institutions and their technology providers. Open communication channels, shared development roadmaps, and tailored solutions are critical for ensuring a smooth implementation process.
Collaborative Solutions: Institutions and vendors must work together to resolve challenges such as integrating ISO 20022 with legacy systems, maintaining operational continuity during the transition, and training employees to use new tools effectively.
4. Leveraging Vendor Expertise for Future Resilience
Vendors that specialise in ISO 20022 not only help with initial implementation but can also serve as strategic partners in building long-term resilience. Their expertise in enriched data processing, regulatory compliance, and emerging technologies (such as real-time payments or blockchain) can position institutions to remain competitive in an evolving payments landscape.
Example: A bank partnering with a vendor for ISO 20022 compliance gains access to advanced fraud detection systems, real-time analytics tools, and enhanced STP capabilities. By leveraging these features, the bank not only meets immediate compliance requirements but also strengthens its operational resilience and service offerings.
5. Aligning Vendor Relationships with Operational Resilience Goals
As discussed in the Operational Resilience in a Data-Rich Ecosystem section, the ability to handle enriched data and ensure seamless workflows is critical for resilience. Vendors play a pivotal role in this process by providing the technological foundation for ISO 20022’s data-driven benefits. Institutions should align their vendor relationships with these broader goals, prioritising providers who can support continuous system upgrades, scalability, and future-proof solutions.
Why Vendor Risk Management is Essential: The successful adoption of ISO 20022 is not just about technological upgrades—it’s about building a resilient, future-ready payments ecosystem. Technology vendors are central to this effort, and managing these partnerships effectively is key to avoiding disruptions, ensuring compliance, and unlocking the full potential of enriched data. By conducting thorough risk assessments, fostering collaboration, and leveraging vendor expertise, financial institutions can mitigate risks and position themselves for long-term success in the ISO 20022 ecosystem.
Conclusion
The adoption of ISO 20022 represents more than just a technical upgrade—it is a transformative milestone for the payments industry. By enabling the exchange of enriched, structured data, this global messaging standard opens new possibilities for operational efficiency, risk management, and compliance. From fraud prevention to cross-border security, enhanced resilience, and vendor collaboration, ISO 20022 sets the foundation for a more interconnected, scalable, and secure financial ecosystem.
As institutions navigate this transition, they must leverage the full potential of the new standards by integrating it into their risk management strategies and operational frameworks. Enhanced data precision, real-time monitoring, and collaboration with technology vendors are not just opportunities—they are imperatives for staying competitive and resilient in an ever-evolving financial landscape.
Victoria Cleland’s analogy of the “harvest season” reminds us that the benefits of ISO 20022 will not materialise without careful planning, strategic execution, and ongoing collaboration among industry players. By embracing this standard as a strategic enabler rather than a regulatory requirement, financial institutions can unlock its greatest advantages—greater transparency, streamlined operations, and a payments ecosystem that is robust enough to withstand future challenges.
The journey to full ISO 20022 adoption is a chance for the industry to reimagine payments, not just as transactions but as the cornerstone of global financial innovation and resilience. The time to act is now.
FAQ: ISO 20022 and Risk Management
What is ISO 20022?
ISO 20022 is a global messaging standard that enables the exchange of richer, more structured data between financial institutions. It is designed to improve transparency, efficiency, and resilience in the payments ecosystem.
How do the new standards enhance fraud prevention?
The enriched data fields, such as Legal Entity Identifiers (LEIs) and purpose codes, enable better transaction transparency and real-time monitoring. This allows financial institutions to detect and prevent fraudulent activities more effectively.
What role do the new standards play in cross-border payments?
ISO 20022 harmonises messaging standards across jurisdictions, reducing friction in cross-border transactions. Its structured data ensures greater alignment with AML and KYC requirements, enhancing security and compliance.
How do the new standards contribute to operational resilience?
By standardising data formats and enabling interoperability, ISO 20022 supports Straight Through Processing (STP) and redundancy in payment systems. This reduces errors, streamlines workflows, and ensures continuity during disruptions.
Why is vendor risk management important for ISO 20022 implementation?
Technology vendors play a critical role in integrating the new standards into existing systems. Effective vendor risk management ensures seamless implementation, reduces compatibility issues, and aligns vendor solutions with operational resilience goals.
How do Legal Entity Identifiers (LEIs) support resolution planning?
LEIs provide unique identification of entities involved in transactions, enabling regulators and institutions to assess counterparty risks, trace exposures, and implement effective resolution strategies during financial disruptions.
What is the biggest challenge in adopting ISO 20022?
One of the primary challenges is harmonising data models and standards across regions to ensure seamless interoperability in cross-border payments. Careful planning and collaboration among industry stakeholders are essential to overcoming this hurdle.
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