Unifying Payment Systems: Embracing ISO 20022 for Global Interoperability

In recent years, the world of payments has been undergoing a significant transformation. Historically, international payments were dominated by major players like SWIFT, VISA, MasterCard, and a handful of large international banks. However, this landscape is rapidly evolving due to the rise of new payment rails, Open and Embedded Banking, and the growing influence of global Big Tech companies entering the payment space.

This evolution has resulted in an even more complex web of different payment methods, rails, and market infrastructure players. Coupled with the increasing speed of payments (with instant payments becoming the standard), heightened customer expectations (demanding faster payments, higher quality, more transparency and lower costs), and rising transaction volumes (driven by the digitalization of cash), this creates the perfect storm for a major transformation in the banking sector.

Interoperability among these diverse payment rails poses a significant challenge, particularly as end-customers often do not understand the complexities involved in transferring from one rail to another. Fortunately, nearly every payment rail worldwide is transitioning to the common standard of ISO 20022. This standard for payments and other financial messages is designed to enable a common language across different payment systems.

However, in practice, each payment system adopting ISO 20022 tends to create its own rulebook to accommodate the specific rules and limitations of the system and to comply with country-specific laws (such as requirements for KYC/AML checks). These variations or "dialects" complicate interoperability. An ISO 20022 message received from one payment system may not necessarily be retransmittable without issues on another system, even if both systems have adopted ISO 20022.

Understanding these dialects is crucial for addressing interoperability issues. Most of these dialects are subsets of the general ISO 20022 standard. This means the general ISO 20022 schema can interpret all these dialects, but a message generated using the general ISO 20022 schema is not necessarily compliant with the rulebook of a specific payment system.

Examples of subset limitations in these dialects include:

Unused fields: Fields not supported by a specific payment rail will be omitted.
Reduced cardinality: Restricting the number of allowed elements for n-cardinality objects. E.g. ISO 20022 allows multiple payments in a PACS.008 message, but most Market Infrastructures (MIs) only allow one payment per PACS.008 message.
Mandatory fields: Fields that are optional in the general ISO 20022 standard may be mandatory in certain dialects. For instance, the IBAN is mandatory in the SEPA scheme, and the "Purpose code" is becoming mandatory in the domestic US and UK schemes for compliance reasons.
Restricted enumerated fields: The allowed values for particular fields might be restricted to only certain values. E.g. the SEPA scheme only allows payments in EUR.
Field-specific restrictions: There may be additional limitations on the data type of certain fields, e.g. maximum restrictions on the amount or a tighter restrictions on the number of characters in certain text fields.

While the creation of these dialects makes sense when considering each payment rail individually, on a global scale, it presents significant challenges for banks. If a bank receives a message that cannot be forwarded to another payment rail (with both rails being ISO 20022 compliant) due to specific restrictions, the bank must take action to allow the message to be submitted. This action may be automated, but often it requires recontacting the original sender to obtain missing information.

Despite these challenges, the global adoption of ISO 20022 brings considerable benefits in terms of payment efficiency and quality. This transition paves the way for faster, cheaper, and more reliable payments. Additionally, the richer and better-structured information (e.g. better structured address information) in ISO 20022 messages facilitates improved compliance checks, such as fraud and AML monitoring, and enables the development of valuable new services.

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