SWIFT
The likes of ISO 20022 can no longer be ignored, says SWIFT’s Stephen Lindsay
How important is standardisation in the payments industry?
It’s extremely important for things to be standardised, but it’s not only payments, it also applies to securities, treasury, cards, and much more. If you want systems to be dependable, reliable, easy to implement, with high rates of straight-through processing (STP), then standardisation is the way to go.
By standardising these things, firms can share and benefit from best practice—they can try something once, formalise what works, and extend that to other institutions. Equally, if there are multiple systems, for example, in the market infrastructure world, where there are many different high-value payment systems for different currencies, then if they all work in basically the same way, then global banks that have to connect to several of them will see a reduction in both cost and risk.
We’ve already been extremely successful in standardising international payments with the existing SWIFT standards, and those now embrace a lot of different lines of business as well, such as the post-trade space, securities, and trade finance. It allows banks, wherever they are in the world, to communicate with each other in a way that is reliable and unambiguous, allowing them to automate and process things in the most efficient way possible.
Now we’re seeing the roll-out of ISO 20022, which intends to provide a single standard for different business areas and different use cases. For example, payments can be international or domestic, high-value or low-value, and ISO 20022 covers all of those with the same basic set of messages. Again, it brings great economies of scale and scope for the industry at large, and particularly for the banks that implement those payments.
What kinds of cultural challenges come with cross-border messaging standards?
There are many cultural differences, and I think that the first thing to do is to acknowledge them. When we talk about standardisation, it’s tempting to think that one size fits all, but experience has shown us that it really doesn’t. One of the things that we’re trying to promote is the idea of global market practice. You can try to do as much as possible in the same way, while at the same time allowing for regional variations and differences.
For example, some countries require a purpose code for payments coming in, detailing exactly what that payment is for. Some countries have them, and some don’t, and those that do have them each have different ones, and those are things that we have to be able to accommodate. The challenge is to highlight those differences, make sure they are really clear and well understood, and to make sure that, where there aren’t differences in requirements, we do things the same way.
There is actually a lot of commonality, and where there are differences, we should try to understand the benefit they bring to that particular market.
It’s all part of the harmonisation initiative. We have brought together a number of different market infrastructures, which, for the benefit of the industry as a whole, need to collaborate with each other. Sharing information is at the heart of this. If one infrastructure is doing something, it can use our MyStandards common platform to share that information with its peers.
The second thing is this notion of global market practice and collaboration. We will provide the venue so they can have these discussions and share best practice, so no-one has to re-invent the wheel, and highlight the differences between markets, making sure they’re valid and justifiable, and finding ways to harmonise as far as possible.
It’s about making it easier for the global institutions that have to deal with infrastructures in a lot of different markets, which will mean a lower cost-base.
From a commercial point of view, does this collaborative effort go against the grain for banks? Have you seen any resistance?
Not resistance—it’s mutually beneficial so everyone wants to do it, in principle. It would be perverse for one entity to say it’s important to do things differently, but that’s not to say they don’t want to differentiate. They’re differentiating, but on a common basis, and in order to add value, rather than just to cause confusion.
Again, it’s important to have a base line which we all share, which is a kind of commodity part of the process, and which is going to be really straightforward to implement because it’s the same for everyone. That way, if one firm wants to add value on top, it can devote its energy entirely to that, rather than trying to do the same things differently.
They have to make their differences value-adding, rather than just inconveniences.
Can standardisation boost the effectiveness of regulations?
It depends on which regulation you’re talking about. A lot of regulation put in place post-crisis has required institutions to report data to some kind of central authority, the idea being that the authority has some insight in to what’s going on in the market, can identify patterns of systemic risk building up, and can take action to mitigate that risk.
That means there is an awful lot of data that’s having to be identified, captured, formalised, formatted, and transmitted to the regulatory infrastructures, trade repositories, and so on. When the first wave of regulation came out after the crisis, it was somewhat rushed, and the specification of that data was quite loose and informal.
The consequence of that was that different reporting institutions interpreted that data in different ways, and trade repositories, market infrastructures and oversight infrastructures interpreted it differently still.
When the regulators came to put it all together, they found it was difficult to analyse it and detect sources of risk. In some cases, the poor quality and inconsistency of the data made it impossible.
We have actually solved this problem, to an extent, with the exchange of meaningful and unambiguous data in the transaction processing world, and we’ve done it for payments and securities settlement, and various other things. We’ve got a whole battery of techniques and methodologies in the standards world, so why shouldn’t we use that experience so that, in the next wave of regulation, we can reuse some of those ideas in order to get better quality data, which is easier to prepare, easier to replicate, and that you can actually get some value out from.
It’s a win-win as the reporting institutions are already implementing some of these standards and structures in their infrastructure anyway, so they have the experience and the tools available already and they can re-use that for reporting. The regulator gets better quality data and the institutions get a system that they already know how to deal with.
ISO 20022 has been chosen in the draft technical specifications for reporting for the upcoming Markets in Financial Instruments Directive II and Markets in Financial Instruments Regulation, both for defining and exchanging the data. The European Central Bank (ECB) has launched a programme for reporting money-market statistics between the ECB, the regional central banks, and those larger banks in those jurisdictions. Again, rather than coming up with something brand new, or creating something completely custom-made, they’ve been talking about using ISO 20022 to make that a more efficient and effective process.
Institutions are reporting for various regulations and to various jurisdictions. Could ISO 20022 make this any more efficient?
In theory, yes. It’s not going to present and overnight solution to the problem, but as we start to see more standardised practices emerging, there will be a natural opportunity for those organisations to collaborate and to come together around some well-designed and shareable concepts that everyone can use. This is certainly one tool in the toolbox for addressing those problems, and one that is gaining traction.
What would you say to those people who think the ISO 20022 standard is unachievable?
It depends what we’re talking about, as the standard itself has already been achieved in many cases and there are many other implementations already live. You can’t say nothing can be done with it.
On the other hand, if we were talking about the notion of one standard that will override all other proprietary standards within the industry, then I would have to agree that that is unachievable. But that doesn’t mean that we can’t do some good things in the meantime. It’s a good thing and people shouldn’t make an enemy of it. Through harmonisation we can really save the industry money and improve regulatory outcomes.
If you’re in the banking industry, your institution is going to be touched by ISO 20022. The standard will be implemented somewhere in your shop, so no, it may not be the answer to everything, but it can certainly no longer be ignored.
