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While major PMIs in Europe and the USA are gearing up for the migration to ISO 20022 formats, those in Latin America are mostly keeping their powder dry for the time being. But though the continent’s domestic payment systems have yet to make the shift, banks in the region have every reason to begin taking proactive steps, argues Jeffrey Bisig, Americas Head Institutional Cash Sales and Client Management, Corporate Bank, Deutsche Bank.
The world’s primary payment market infrastructures (PMIs) are approaching a half-decade-long transformation. The adoption of ISO 20022 will lay the foundation for vastly improved payment processing efficiency and interoperability. A seismic undertaking, the migration will require sizable infrastructure upgrades for all banks wishing to retain access to central bank money and is fast becoming a significant consideration around the globe.
But as major banks in Western Europe and the USA gear up for the switch, what preparations are being made in Latin America? Currently, awareness, planning and action towards the transition is not yet widespread – a factor that quickly needs to change. From 2020 cross-border transactions involving the USA will all be carried out in the ISO 20022 format, with the euro zone following suit in 2021 and the UK in 2022.
If Latin American banks continue to take little or no action they risk being cut off from cross-border payments to and from these key markets. And with domestic systems in Latin America likely a long way from implementation, banks on the continent should start to take a proactive approach – or risk losing market share.
Already, Australia, the USA, Canada, and Singapore have adopted the standard for their instant payments market, while Japan, Switzerland and China have made the transition for high-value payment systems. Soon, major PMIs – including the Federal Reserve and The Clearing House (US), the Eurosystem and EBA Clearing (Eurozone) and the Bank of England’s RTGS in the UK – will simultaneously make the change, too.
So far, progress in Latin America has lagged behind. At present, Colombia is the only country on the continent live with ISO 20022 formats in the payments space. Its large-value payment system went live in 2007 and, by 2018, was used by a community of 160 participants in the Colombian financial system. Aside from this, ISO 20022 has been the standard format for securities settlement in Brazil since 2011, but there have been no plans announced for bringing the format over to high-value payments.
With Latin America’s domestic payments systems yet to plan for the transition, banks on the continent lack the immediate impetus to implement ISO 20022 formats. Despite this, however, banks in the region looking to maintain a share of cross-border transaction flows need to start thinking about preparing for the transition now, regardless of domestic considerations.
For a start, while migration roadmaps may not be in place yet, it is a matter of when, not if, they will be drawn up. Sooner or later, the transition will become mandatory. For a mid-sized bank, the migration may result in a high four-digit outlay in terms of “project working days†and will be even higher for larger banks. Getting ahead of the curve gives banks the opportunity to reassess their business models on a self-imposed timeline – ensuring the process is not rushed by mandated deadlines. Moving first could also result in a competitive advantage – realising the benefits of harmonised standards ahead of time, as well as amortising the required investment. What’s more, for banks wishing to continue sending and receiving cross-border payments to and from Europe and the US, upgrading to the new format is a critical step. The USA, the Eurozone and the UK go live with ISO 20022 in 2020, 2021 and 2022 respectively. Choosing to take no action will mean that Latin American banks will be unable to transact with banks in these key jurisdictions once they’ve migrated.
The reasons to migrate are not limited to the threat of disintermediation, however. Latin American banks who proactively implement the new format will also unlock a host of benefits. Compared to existing formats, ISO 20022 messages transfer far richer payment information. As a result, the transparency of payments is greatly increased – helping banks process the large amounts of data necessary to meet their anti-money-laundering and fraud prevention requirements. In addition, the improved visibility enables banks to improve their client services – facilitating straight-through processing for reconciliation, for instance.
Although the scale and scope of the challenge ahead may seem daunting, banks can take a number of steps to develop a clear migration strategy Banks must devise a timeline for the migration, choosing a step-by-step or “big bang†approach, working out how to adjust their architectures, and seek out and acquire any IT solutions needed for the implementation.
Implementing such a plan will by no means be easy. The migration will require banks to invest a significant amount of time, resources and budget to bring their systems up to the higher standard. As a result, it is understandable that some banks may seek a short-cut to migration – for example, by maintaining existing systems and simply convert their existing formats to ISO 20022 on the way out and converting messages already in the ISO 20022 format back to their legacy format on the way in. In doing so, however, banks risk losing data during the conversion process, as well as missing out on a clear opportunity to improve their services.
Regardless of their chosen approach, Latin American banks should be aware of the need for migration. To avoid the adverse effects of exclusion from ISO 20022 and cross-border transaction flows – and to reap the benefits brought by inclusion – dialogue and action must begin now.
