Why Treasury Needs To Lead the Way in the ISO 20022 Transition

By June 12, 2024No Comments

Banks face a deadline to use the new payment messaging standard, presenting challenges and benefits for corporates.

The adoption of international financial standards and language for payment messaging under the framework known as ISO 20022 will require corporate treasury teams to step up and proactively lead a transition made difficult in part by differences in how—and how fast—banks are approaching changes involving data-rich payment communications. Banks must transition to ISO 20022 by November 2025.

  • The new format should ultimately produce benefits but realizing them will require reviewing and updating existing payment data structures in ERPs, TMSs and other back-office systems and understanding how to leverage this data—a potentially arduous task for corporates.
  • Those were among the key takeaways from the spring meeting of NeuGroup for Global Cash and Banking sponsored by ION Treasury. An audible, collective groan emerged as more members learned that they may be in for a painstaking process adhering to requirements that may vary from bank to bank. “It concerns me if we have to have a different format tree for every bank,” one member said.
  • Jerald Seti, VP Product Management, Financial Services at ION, said, “From both an input and output perspective, it’s a huge change. If you’re not trying to get ahead of the curve now, it will be difficult to catch up later on.”

Understanding ISO 20022. ISO 20022 is a global standard for financial messaging that uses XML format to define data elements in payment messages. The standard aims to enhance the quality and transparency of financial communications by providing granular details through specific tags.

It is important for treasury to understand that at any time before or after the November 2025 deadline, banks can decommission the Swift MT, BAI2 and CSV messages used to communicate with corporates. That means finance teams need to make appropriate system and record modifications in a timely manner. Key changes in payment messaging under ISO 20022 include:

  1. Introduction of purpose codes
  2. Enhanced remittance information
  3. Detailed name and address information
  4. Inclusion of Legal Entity Identifiers (LEIs)

Develop a project plan. The sooner corporates face these inevitable changes the better, since most sit on a plethora of payment details and reporting messages. Treasury teams, the keepers of bank relationships, are best positioned to educate other areas of finance, shared service centers and technology cohorts on the requirements of ISO 20022. Treasury should proactively develop and roll out a comprehensive project plan, coordinating across internal departments as well as with banks and tech vendors.

Mr. Seti laid out these key steps in the transition process:

  • Assessment. Take stock of current systems and determine what needs to be changed in your infrastructure. Think about how you will leverage the more granular data available from within the ISO 20022 framework.
  • Coordination and communication. Begin internal and external conversations with stakeholders to formulate the transition plan. Functions affected internally include tax, payroll and accounts payable; externally, work with partners such as TMS and ERP providers, and relationship banks.
  • Testing. Create environments with TMS providers and banks to conduct penny tests, ensuring systems can handle the new format.
  • Set your own deadlines. Michael Kolman, Chief Product Officer at ION Treasury, said, “Our advice to corporates is to set your own deadline.” This reinforces the importance of early and active engagement with all stakeholders involved in the transition process ahead of upcoming but unpredictable bank-imposed deadlines.

The bright light at the end of the ISO tunnel. While the initial workload may seem daunting, the long-term benefits of adopting ISO 20022 are substantial. Enhanced data analytics, business intelligence and machine learning possibilities will result from the detailed information captured. Corporates may see improvements in reconciliation accuracy, fraud protections, streamlined sanction screening, and advanced straight-through processing capabilities.

  • “With AI machine learning, you should be able to create new workflow exception rules without having to program anything,” Mr. Seti noted. Additionally, Julie Zawacki-Lucci, leader of the global cash and banking group, said the move to ISO 20022 formatting presents a “no pain no gain” exercise wherein dissecting payment messaging creates an enriched data environment that should result in better cash forecasting and working capital analyses.
Justin Jones

Author Justin Jones

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