Banks face challenges ahead of Saturday's ISO 20022 deadline

• Key insights: ISO 20022 can reduce payment errors by adding more detailed information to transactions. 
• What's at stake: SWIFT will end support for older non-ISO 20022 payment messaging standards on Nov. 22.
• Forward look: The standard can improve payment accuracy, but requires banks to manage new technology. 

Failed payments cost banks money and hinder customer satisfaction. As more banks adopt the data-rich ISO 20022 standard, the problem could ease, but the transition will be challenging. 
SWIFT, which supports messaging for international payments, began migrating to the ISO 20022 standard for electronic data interchange between financial institutions in March 2023 and has been supporting both traditional and ISO 20022 messages. However, this co-existence is slated to end Saturday, at which point older generation payment message instructions will not be supported. SWIFT has, however, announced a yearlong contingency period designed to ensure business continuity, subject to additional SWIFT charges.

"The standard makes it much clearer what data goes in what field, improving the data. It mandates how address fields work, giving significant improvements in sanctions, AML and KYC scanning," Gareth Lodge, a senior analyst at Celent, told American Banker. "Knowing who a client is paying, when, and increasingly with more and more data in the payment itself, will provide a treasure trove of customer insight."

The ISO 20022 standard was introduced in 2004 and has been adopted by financial services organizations in more than 70 countries — with favorable results for those that have implemented the standards, Robin LoGiudice, a strategic advisor at Datos Insights, told American Banker. 

Countries that have already moved to the format have seen improvement in their failure rates, LoGiudice said. That's because the ISO 20022 format enables richer, better-structured and more granular data end-to-end to be carried in payments messages. For example, it contains structured fields to support longer names and specific address components, including a country code. This can reduce the risk of data loss and help with regulatory screening. 

As other payment rails migrate to ISO 20022, Nacha, which runs the ACH network, has created a mapping guide and tool designed "to easily and consistently translate ISO 20022 messages into ACH transactions."

Reducing payments failure

ISO 20022 should reduce payment failure rates, which have been a vexing problem for banks. A new report highlights the extent of the failed payments issue — and what's making the solution elusive.

A third of banks said 1% to 3% of their domestic payments incur charges from a banking partner due to payment failure, according to a recent report from Datos Insights. Twenty-four percent said 4% to 5% of these payments incur charges, and 11% said 6% to 8% of payments do so. 

Failed payments are an even more pronounced issue for cross-border transactions. A notable 23% of banks said 12% to 15% of their cross-border payments incur charges, and 18% of banks said this occurs more than 25% of the time, according to Datos Insights' third-quarter survey of 150 global financial institutions.

Payments fail for a variety of reasons, including incorrect routing numbers on domestic payments, misspelled names and erroneous account numbers, according to LoGiudice. However, these failures can be detrimental to banks' pocketbooks and the customer experience.

Fifty-seven percent of banks charge customers $5 or less for domestic payment repairs, while actual costs typically range between $6 and $10, according to Datos Insights. Forty-five percent of banks estimate that customer attrition due to failed payments costs them between $1 million and $5 million. Meanwhile, up to 5% of customers are a flight risk due to poor performance. "If they passed along the true cost, they'd probably lose more customers," LoGiudice said.

ISO 20022 in the U.S.

In the U.S., ISO 20022 migration has been underway for several years, with many banks focused on ensuring their wire payments, such as the Federal Reserve's FedWire and The Clearing House's CHIPS, as well as their cross-border payments through the SWIFT network, adhere to ISO 20022 standards.

Fedwire, the electronic funds-transfer service used by banks, businesses and government agencies, converted to this format earlier this year. "Adopting the ISO 20022 message standard should help the Federal Reserve Banks meet increasing customer demands for richer data, help customers more easily comply with evolving regulatory requirements, improve the Fedwire Funds Service's interoperability with other payment systems in the interconnected, global economy, and help customers enhance their client services," the Fed said in frequently asked questions on its website.

One of the biggest benefits of ISO 20022 is in reconciliation of accounts receivable, Aaron McPherson, principal at AFM Consulting, told American Banker. "You often get a payment that doesn't match up to a known invoice, either because the payer deducted some amount due to a problem with the shipment, or because they are paying multiple invoices at once," McPherson said. "Having the line-item detail would avoid the need to spend staff resources researching what happened to a particular invoice and would enable automation."

What's next for banks?

Despite the potential ISO 20022 offers, many banks continue to face transition-related challenges, LoGiudice told American Banker. That's because many of the systems within banks are old. "There's a disconnect between what ISO 20022 requires and what some of the banks' systems support," she said.

Banks need to ensure all their systems are updated to be ISO 20022 compliant, not just the payment systems; otherwise, they will see straight-through-processing rates drop and be required to do a significant amount of manual input, LoGiudice said. For example, there may be additional information that banks have never collected before. The payment system may be able to hold the information, but there has to be a field in the customer reporting system to accept it, she explained.

"Behind the scenes, it's not just about updating message formats. It's about completely replumbing the back office and replacing legacy infrastructure that has often been in place for decades," Grant Harper, financial services managing director at ITRS, said in an email. "Any time you touch core systems, the risk of disruption increases."

The potential for ISO 20022 to further reduce payment failures exists, LoGiudice said. Seventy-two percent of banks reported higher straight-through-processing rates due to fewer exceptions caused by missing or incomplete data, Datos Insights found. Additionally, 21% of banks attributed improved straight-through-processing performance to a reduction in manual processing.

However, 65% of banks still rely on manual processing, underscoring the need to focus more effort on existing gaps, LoGiudice said. "There's a lot of work for banks to do to accept all the data that's coming into these messages."

The added data may not entirely solve payments accuracy challenges, Jessica Pinkston, a senior director at Cornerstone Advisors, told American Banker. 

"As to whether the expanded fields provided by ISO 20022 will increase the accuracy of the wire data, I think it's a possibility but not a certainty," Pinkston said, adding the standardized data requirements and field names will dictate naming conventions in wire requests. That will improve consistency in where information is placed and allow for more complete information, which should lead to more accurate postings. 

"But neither standard fields or expanded field lengths will provide additional data matching capabilities," Pinkston said. "We will still rely on the accuracy of the information input into the wire request itself for accurate transmission and posting."
–John Adams contributed to this story