Ultimate Guide To ISO 20022 Migration - Deutsche Bank

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Deutsche BankGlobal Transaction BankingUltimate guide toISO 20022 migrationUltimate guide to ISO 20022 migration1

ForewordThis is the watershed moment for the industry.Over the next five years, the world’s primary paymentmarket infrastructures (PMIs) will undergo hugetransformational change in response to demands forincreased automation and cost efficiencies, enhancedmarket integration and real-time servicesThese PMIs lie at the heart of the financial ecosystem, providing infrastructurefor High Value Payments Real Time Gross Settlement (RTGS) systems, LowValue Payments Automated Clearing Houses (ACHs) and Real-Time RetailPayment Systems.As part of this transformational change, major PMIs such as the FederalReserve and The Clearing House (US), Eurosystem and EBA Clearing(Eurozone) and the Bank of England’s RTGS (UK) will all modernise their HighValue Payment Systems (HVPS), almost simultaneously.Underpinning each of those modernisation programs is the migration to ISO20022, widely recognised as the standard for the future. Indeed, ISO 20022has already been introduced for HVPS in Japan, Switzerland and China, andis established as the de facto standard in instant payments markets followingimplementations in Australia, US, Canada and Singapore. SWIFT will alsointroduce ISO 20022 for cross-border payments, with a view to phasing outexisting payment messages.The migration to ISO 20022 lays the foundation for vastly improved paymentprocessing efficiency and interoperability among HVPS. Its benefits arenumerous from a customer experience and compliance perspective, as well asproviding the capabilities to deliver new services.“It is probably themost impactfulpayments industryundertaking sincethe introductionof SEPA”This journey therefore has far-reaching implications for all banks, corporatesand other important financial stakeholders. It is probably the most impactfulpayments industry undertaking since the introduction of the Single EuroPayments Area (SEPA) more than a decade ago, and will require CEOcommitment, allocation of appropriate budgets, resources and projectteams given that a multitude of areas will be affected across institutions.Senior management teams could also use this as a basis for reassessingexisting business models; at the very least, they should consider redesigningsubstandard business processes.This is not simply “another IT project”. Our series of guides on this topic,produced in collaboration with PPI, aim to outline exactly what we can expectbetween now and 2025, creating awareness of its impact and sharing bestpractices on approaching a project of such magnitude.Christian Westerhaus,Head of Cash Products, Cash Management,Global Transaction Banking,Deutsche BankUltimate guide to ISO 20022 migration3

ForewordWhile ISO 20022 migration may at first appear tobe technical and abstract, it will have far-reachingimplications for banks’ payment systems and processesOf course, this is not the first initiative designed to further improve existingpayment systems. We have seen numerous regional initiatives related to bulkpayments: the introduction of SEPA or diverse instant payment schemes(whether in Australia or Asia), for instance. However, the migration to ISO20022 for cross-border and inter-bank payments of major central banks as wellas SWIFT, although driven by different regional infrastructures, can ultimatelybe considered global in scope.Banks’ payment systems will have to be adapted along with numerous processes.Additionally, during the course of this migration, a number of decisions will haveto be made pertaining to future business models. Schedules will be tight withresource requirements similar to other major projects in recent years. A wait-andsee approach is simply not an option for banks, as they will be completely cut offfrom international payment systems and access to central banks.Some of the central banks have already begun monitoring migration measures.Many other institutions are in the process of preparing schedules, securingresources, allocating budgets and informing senior management.Yet awareness and understanding about the forthcoming change appears to berelatively weak. In order to best prepare for a timely and successful migration,we have therefore compiled this paper together with Deutsche Bank. In thefirst of a series of guides, we outline the general challenges faced. In thefollowing editions, we will deep-dive into the individual aspects of the initiative,analysing the differing perspectives and opportunities of the migration to ISO20022 for both banks and corporates alike.We wish you a successful migration!Dr. Hubertus von Poser,Head of Consulting Payments,PPI AG4Ultimate guide to ISO 20022 migration

Contents1.Management summary62.The significance of ISO 20022 migration72.1What is ISO 20022 and why is it important?72.2Why now?92.3What are the opportunities?92.4Reaping the benefits3.4.10What does ISO 20022 mean for banks?113.1Operational considerations113.2.Infrastructure considerations13The migration of global market infrastructures144.1.Eurozone154.2.US dollar area184.3Sterling area194.4SWIFT205.Move first, move fast236.Future editions25References26Ultimate guide to ISO 20022 migration5

1Management summaryInternational payments is a global network business inwhich at least three (although usually more) parties areinvolved. It goes without saying that harmonised standardsand rules for the exchange of payment messages and dataare therefore of paramount importanceOver the years, there have been a number of initiatives and organisations thathave strived to achieve this standardisation – yet the decision by major centralbanks and SWIFT to migrate to ISO 20022 signifies the biggest breakthroughto date.With a globally-recognised standard, banks and their clients can effectpayments far more efficiently and economically, accompanied by morevoluminous and granular data. The result should be far greater customersatisfaction, improved digital fulfilment of compliance requirements, andfaster, more flexible implementation or deployment of new services orregulatory requirements.However, making the most of ISO 20022 requires a significant and complexmigration, affecting not just core payments processing, but many otherbanking systems and departments.A strategic review of all internal bank information flows is strongly recommendedin order to be best prepared for meeting the challenges of any future regulatoryrequirements. Moreover, individual characteristics of different regional ISO 20022migration projects also have to be taken into consideration.ISO 20022 migration is not mandatory from a regulatory perspective, but thosethat do not act now risk being excluded from international payment systems.That said, it should also be used as an opportunity for a robust and futureproofed standardisation strategy and, for some, a reassessment of marketpositioning and business models. Given this, it is crucial that ISO 200022 is onsenior management and board agendas.6Ultimate guide to ISO 20022 migration

The significance of ISO 20022 migration2.1 What is ISO 20022 and why is it important?The International Organization for Standardization (ISO) first published ISO20022, a global standard for payments messaging, in 2004. This standardcreates a common language for payments data across the globe, enablingfaster processing and improved reconciliation (see Figures 1 and 2 showingISO 20022 message structures).Figure 1: A simplified business information model for a payment transactionusing ISO nentCreditTransferDebtorAgentSource: SWIFT StandardsFigure 2: Part of the logical message structure for a credit transfer using ISO ainingmessageelementsBIC: nkSettlementAmount: USD 12500InterbankSettlementDate: : ACME ostalAddress{AddressLine: 344 AmstelTownName: AmsterdamCountry: NLSource: SWIFT StandardsUltimate guide to ISO 20022 migration7

With the launch of SEPA, European banks were the first in the world to deployISO 20022 for mass payment transactions. Yet individual standards remaincommonplace in many markets, with SWIFT messaging established as thecommon standard for cross-border payments.Payments systems based on different standards means a lack ofinteroperability and poses a barrier to data automation capabilities. In manycases, payments are converted at payment gateways, often leading to the lossof relevant information. In instances where internal bank processing is notbased on data-rich formats, information often has to be truncated and, afterprocessing, once again enriched.The decision by major central banks as well as SWIFT to migrate to ISO 20022therefore marks a major breakthrough in standardisation efforts.* With theglobal introduction of ISO 20022 standards for cross-border payments, acommon basis will be introduced allowing data rich transmission which haspreviously not been possible under current message standards (see Figure 3for a comparison of MT and ISO 20022 message granularity).This promises a future where banks and their clients can effect payments farmore efficiently and economically. Information from payer to beneficiary willflow seamlessly with full data content, meaning greater customer satisfactionand an improved digital fulfilment of compliance requirements.Figure 3: Granularity of information in an MT103 vs ISO 20022 credit transferExample 1:Identification of thedebtor agentExample 2:Account number ofthe debtorMT 103pacs.008.001.02:52A:EXABNL2U DbtrAgt FinInstnld BIC EXABNL2U /BIC /FinInstnld /DbtrAgt :50K:/8754219990ACME NV.AMSTEL344AMSTERDAM,NETHERLANDSExample 3:Name and contactdetails of the debtor50K:/8754219990ACME NV.AMSTEL344AMSTERDAM,NETHERLANDS DbtrAcct ld Othr Id 8754219990 /ld /Othr /ld /DbtrAcct Dbtr Nm ACME NV. /Nm PstlAdr StrtNm Amstel /StrtNm BldgNb 344 /BldgNb TwnNm Amsterdam /TwnNm Ctry NL /Ctry /PstlAdr /Dbtr Source: SWIFT Standards*8SWIFT will also assume the role of Registration Authority, incorporating the administration andopening of a central ISO 20022 repository, in which the components of the messages, businessprocess models and the derived XML schemes are containedUltimate guide to ISO 20022 migration

2.2 Why now?Stephen Lindsay, Head of SWIFT Standards, remarked back in 2015 that “eventhe best designed standards only take off if they meet real and immediateneeds in the market. For ISO 20022, that moment has clearly arrived.”1While globalisation and the increasing need for interoperability of paymentflows has put the strain on differing standards, the tipping point has beenreached as a result of the banking industry’s relatively recent digitalisation,which is driving demand for faster payments from both retail and corporatebanking customers. For banks to keep up with this expectation for near instantpayments around the clock, a next-generation market infrastructure is neededthat can offer seamless and quicker payments processing in support of digitalbusiness models.Further, banks face regulatory challenges like at no other point in history –especially in the areas of anti-money-laundering (AML) compliance and fraudprevention – making the ability to rapidly process large amounts of data crucial.2.3 What are the opportunities?ISO 20022 migration is not regulatory mandated, yet it should be used as anopportunity to implement a robust and future-capable standardisation strategybenefitting all market participants (see Figure 4 overleaf, which also notessome inevitable challenges).First and foremost, ISO 20022 allows for the introduction of new datacomponents, meaning far richer information can be transmitted alongsidethe transaction in comparison to existing formats. This, in turn, increasestransparency of the payment and supports financial institutions with their taskof guaranteeing secure payments processing and conforming to complianceregulations. Further, it will allow banks to offer an enhanced customer service,with the provision of rich payment data allowing digital (straight-throughprocessing; STP) reconciliation.“Even the bestdesigned standardsonly take off ifthey meet real andimmediate needsin the market.For ISO 20022,that moment hasclearly arrived“Stephen Lindsay,SWIFTThis offers banks the opportunity to re-evaluate their business models andmarket positioning. This should be a positive development, although those thatare not ready to implement the necessary changes will have to reconsider theirparticipation in Clearing Systems for international payments and contemplatealternatives such as using a partner for their high-value payments.Corporates also stand to gain significantly from standardised formats andprocesses, while being able to integrate vendors more flexibly into their ownstructures. Standardised payment, reporting and exception handling messagesfacilitate end-to-end automation from invoicing to liquidity management,exception handling and reconciliation across the corporate’s banking ecosystem.The introduction of ISO 20022 in certain currency areas to date elucidates thepotential financial benefits: the European Commission suggests, for instance,that SEPA has resulted in 21.9bn cost-savings per annum.2 Even accountingfor the fact that SEPA migration encompassed more than just the migration toISO 20022, the savings associated with standardised messaging have likelybeen considerable.Ultimate guide to ISO 20022 migration9

Figure 4: Why ISO 20022?Benefits identified by the industry Efficiency gainsIncreased efficiencies from a standardisedand harmonised format of financialmessaging, increased STP rates Cost savingsPotential simplification of costintensive processes such aspayment processing, investigations,data analytics, reporting etc. Digital compliance Automated analytics for variouscompliance purposes (i.e. sanctionsscreening) based on structured information New and improved servicesEnhanced customer satisfaction from improvedservices for corporate clients, addressingbiggest pain points (e.g. reconciliation)Challenges identified by the industryData truncation Potential data truncation during the coexistence periodcomes with a risk for all agents and frustration for thebeneficiary. Intermediary service providers must beamongst the first movers to ensure fulldata delivery end-to-endImplementation costs- Significant investments andresources required until itreleases anticipated benefitsNew operation mode Operating model to change to theV-shape communication method (SWIFTY-copy service will no longer be used)Industry-wide effort Industry-wide consensus (globally)of market requirements andstandards requiredSource: Deutsche Bank2.4 Reaping the benefitsReaping the benefits of ISO 20022 will require a significant and complexmigration process, comparable to those completed for SEPA or theintroduction of the euro.The impact extends beyond just “core payments” processing, touchingeverything from booking systems to embargo and know-your-customer (KYC)systems, through to electronic banking, liquidity management or archiving.In addition to impacting IT and payments, numerous other areas – suchas securities, trade finance, global markets and treasury – will also have toprocess the contained information and apply it elsewhere. This wide-rangingimpact means it is crucial that ISO 20022 is firmly on board-level agendas.Due to the richness of the information, a simple conversion – while a tacticalsolution – is not recommended as a long-term strategy. Instead, best practicewould be to strategically restructure internal bank information flows in order tobe equipped to fulfil the challenges of any upcoming regulations, and to accountfor differences in regional ISO 20022 migration projects (see more in Section 4).10Ultimate guide to ISO 20022 migration“A simpleconversion is notrecommended as along-term strategy“

3What does ISO 20022 mean for banks?Significant and complex internal changes are on thehorizon for banks. It is crucial, therefore, that seniormanagement are aware of the magnitude of the projectin terms of resources and budget, as well as the needto secure appropriate prioritisation with existingexternal vendorsTo plan their migrations, banks should assess: The overall business implications beyond payment transactions; The number of transactions impacted; The bank’s own participation in affected market infrastructures (direct/indirect); Whether the bank has its own indirect participants; Whether the bank offers correspondent banking services and If external providers are to be used as part of the service delivery.Not undertaking any action is, in most cases, simply not an option – and wouldrisk losing access to the central bank money, affecting liquidity managementand the fulfilment of minimum reserve requirements.3.1 Operational considerationsFrom an operational perspective, there are several different aspects toconsider, not all of which may be immediately apparent.The migration to ISO 20022 not only affects IT systems, for instance, but alsobusiness rules and process workflows. Here, special attention should be paidto individual business and operating models, as there are different implicationsfor banks that are direct clearing participants as opposed to those that processpayments via correspondent banking. These include communication methodsand ISO 20022 usage guidelines, but also coverage to accommodate newoperating hours.The IT migration will have an impact that goes far beyond core paymentsprocessing, affecting peripheral systems such as anti-financial-crimeapplications (especially embargo/sanctions screening as well as AML systems),liquidity management, billing, account reporting, nostro reconciliation andarchive systems.Ultimate guide to ISO 20022 migration11

This is therefore not just a cash management product challenge; everyonefrom top management to operations to human resources will need to beinvolved. The following areas of an organisation will be typically impacted: Top Management; Transaction Banking (Payments and Securities); Treasury; IT (Process Management, IT infrastructure, etc.); Sales / Relationship Management; Vendor Management; Operations; Service; Risk Management and Legal.“This is not just acash managementproduct challenge“Figure 5 outlines the payments architecture of a bank, clearly showing howcomprehensive the impact will be.Figure 5: Impact of moving to ISO 20022 XML Delivery:EmbargoEmbargoAMLFraudEnrichmentof nalBookingSWIFTTechnicalAcceptanceEBICSFunctional& TechnicalVerificationEBankingSWIFTPreparation ofCharging/billingData of StatementAccountPreparation ofFormatInternalSystemsRoutingCreation ofBulkFilePaymentStatic DataSource: PPI AGUltimate guide to ISO 20022 migrationAccountNumber / IBANExternalBookingTechnicalDeliveryPreparation ofFormatStatistical Data:Impacted of /billing Statement tems

3.2 Infrastructure considerationsISO 20022 contains substantially more data than conventional legacy formats(two or three times the amount). Bank infrastructure (systems, databases, linesetc.) will need to be capable of processing these larger data volumes – andalso at faster speeds for real-time payments, intraday liquidity manag

Deutsche Bank Global Transaction Banking. Ultimate guide to ISO 20022 migration 3 Foreword This is the watershed moment for the industry. Over the next five years, the world’s primary payment market infrastructures (PMIs) will undergo huge transformational change in response to demands for

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