SWIFT Is About To Become Swifter: But Are You Ready For Mandatory ISO 20022?

Sumeet Puri | 8 November 2022

Sumeet Puri, Chief Technology Solutions Officer, Solace.

SWIFT is almost the de facto standard for international funds transfers, so its mandatory adoption of the ISO 20022 standard for cross-border payments in March 2023 will have a profound effect on banks and financial services institutions. The ISO standard has the potential to completely transform cross-border payment processes, which have traditionally been saddled with delays, high costs, and opacity due to a lack of standardization and a reliance on legacy systems. 

Sumeet Puri, Chief Technology Solutions Officer, Solace, explains how event-driven architecture (EDA) can fast track banking and financial services technology change to meet these ISO regulatory requirements, and at the same time open up new opportunities and capitalize on future industry changes.

Fast Track The Adoption Of The ISO Standard & Open Up A Wealth Of Business Opportunities Using Event-driven Architecture

In recent years, digital payments rapidly have become the de facto method for Asia’s financial services ecosystem. In part due to the COVID-19 pandemic, most of the Asia’s population have increasingly adopted digital payments and cut back on the use of cash. In fact, a recent Mastercard study revealed that 88% of Asia Pacific consumers have used technologies such as digital wallets, QR codes, and other innovative payment methods in the last 12 months – significantly higher than their North American or European counterparts. 

The region is also the largest contributor to the global payments revenue, generating over $900 billion in 2019, nearly half the global total. Banks, longstanding service providers, and fintech innovators all rely heavily on the existing digital payments ecosystem for cross-border activity, connected commerce, and a burgeoning cashless economy. 

Underpinning this adoption of digital payments is SWIFT, the world’s leading provider of secure financial messaging services and the primary method of international funds transfers. Used by a vast network of banks to exchange messages relating to money transfer instructions, SWIFT messages direct the transfer of nearly $5 trillion worldwide each day.

The widespread and mandatory adoption of the ISO 20022 standard by SWIFT will allow for improved payment transaction data quality and greater interoperability between international payment schemes, revolutionizing the way cross-border payments are transacted and managed, while reducing resource burden, simplifying processes, and allowing faster payment reconciliation.

In 2021, an average of 42 million payments and securities transactions were processed using its FIN (financial information) message service per day – underscoring SWIFT as the platform of choice for financial institutions worldwide and demonstrating its relevance to the future growth of the digital economy. So, with SWIFT making the adoption of ISO 20022 mandatory in March 2023, it is critical that financial institutions in Asia overhaul the way they send payment instruction messages. While many financial institutions are already in various degrees of adoption – some in planning, others deep in execution – fundamentally, this is no small undertaking.

Transforming Cross-border Payment Processes – The Timelines

All banks are on the countdown clock to make sure their message interface at least supports the receipt of ISO 20022-compliant messages. The migration of SWIFT and a range of Real-Time Gross Settlement (RTGS) systems will broadly take place over three years from November 2022 to November 2025.

SWIFT won’t completely retire existing message formats (MT and MX) or the FIN number system until 2025, but the new ISO 20022-based CBPR+ system became an option for early adopters in August and is generally available in November.

Banks struggle to keep pace with digital-first competition

Fintech start-ups have the advantage of being much younger and founded in the digital age. Their systems are often created in the cloud and have a modern architecture that gives them the agility to adapt to market trends and regulation, the flexibility to innovate, and the opportunity to maximize the customer experience – especially across digital touchpoints.

In contrast, the legacy nature of older banking institution IT systems means they generally encounter difficulties at the best of times when trying to adapt, particularly in terms of scalability, flexibility, reliability, and complexity. Banks still have numerous manual touch points when handling payments data, such as trying to reconcile missing data or incorrect data.

Multiple steps happen in each and every payment that can further complicate and stretch legacy architecture. First, there is the question of funding – without this we’re going nowhere. Does the institution have the money? Is the money there in the savings account? When you’re funding from a credit card account, can the funding occur within the credit limits? Then, currency validation happens, further complicated when tax considerations are raised. Finally, we’re through to clearing & settlement – where the exchange actually happens.

The Questions That Must Be Answered Before You Start

A recent EY report zeros in on the technology change required to meet ISO 20022 standards: “Setting up the right technology and infrastructure to benefit from this will be a key measure of success, as it is likely to bring notable cost savings. We expect banks to be increasingly focusing on this throughout 2022.”

There is a real opportunity here for banking organizations to build a tech stack that offers many more benefits and a richer environment than simply meeting ISO 20022 requirements.

Every bank has a different journey ahead based on their technical debt and their strategy. Software architects face decisions when moving forward with their infrastructure – do they build their own tech stack to meet ISO 20022 and further modernize their payment process, or do they look to third-party vendors, and/or opt for complex integrations?

For the software architect there are more questions:  Are they going to use cloud for certain workloads, while staying on premise for others? Are they going to need real-time analytics, insights, and fraud management? How are they going to deal with bursts, lowering value and cost, and increasing volumes of transactions?

The Future Of Modernized Payments And Banking – All Roads Lead To EDA And An Event Mesh

This is where an event-driven architecture (EDA) and an event mesh can address not just the immediate need to comply with new ISO 20022 standards, but the pressing need to modernize banking and payments as a whole. Event-driven architecture is a design pattern that has been adopted by digital leaders across industries reliant on real-time data dissemination, such as capital markets, retail and aviation.

The core of EDA is the business “event”, where something occurs – for instance, as payment transaction – that drives the immediate distribution of information about that event so systems and people across the enterprise can react to it. The fundamental building block of EDA is the event broker – an intermediary that routes data between systems that publish event information and those that subscribe to this information.

Events are published on “topics”, which are like addresses on courier boxes. They consist of a noun, verb and some meta data. For example, ‘payment’ being the noun, ‘settled’ being the verb, and ‘SGD, Internet Banking, Hong Kong’ being the meta data, collectively giving us a topic like ‘pay/settled/sgd/ib/hk.’ Once published, events can be subscribed to by various applications, for example, ‘pay/settled/>’ will generate all payments which have been settled, while ‘pay/*/sgd/ib/>’ will give you all internet banking payments in Singapore. These event topics can then be mapped to the meta data in the ISO2022 standard for easy event routing.

Now, enter the event mesh. This is a network of event brokers that dynamically distributes information about events from one application to any other application, no matter where they’re deployed – cloud, private cloud, public cloud, or any combination. This non-restrictive approach provides banks and financial institutions with the flexibility to consume whatever events they want, with no complex integrations. Even if they want to consume these events in a cloud or at another site – the event mesh takes care of making the right event stream available wherever they want.

Not Just Payment Processing: EDA Comes With Tech And Business Benefits – And Traceability

An event mesh built with a network of event brokers dynamically routes events across the payment ecosystem for faster and more efficient transaction completions. Yes, there are technical benefits – such as the ability to unlock legacy assets; leverage best-of-breed technologies; prepare for open banking; and simplify governance. 

The business benefits are equally significant – reducing cost per transaction; accelerating payments; sharing institutional knowledge; and streamlining partnerships so that banks can offer products through other businesses and payment providers without causing IT headaches.

There are also noteworthy traceability and end-to-end observability benefits across a payment ecosystem underpinned by EDA. Embedding distributed tracing into an event mesh emits trace events in OpenTelemetry format so banks can collect, visualize and analyze them in any compatible tool, empowering them to not only confirm that a given message was published, but easily understand exactly when and by whom, where it went, down to individual hops, who received it and when…or why not.

Recent research validates a growing appetite in financial services for event-driven architecture. Specifically, the study shows that financial services was the most advanced sector exploring EDA, with more than a quarter, (27%), of financial services companies having a central team promoting EDA within the organization and looking at using the technology platform to better detect and react to opportunities or threats in a timely manner.

Move With The Constant Evolution Of Banking And Financial Services

A mandated ISO 20022 standard underlines the importance of being able to move information quickly and efficiently inside and outside of banking organizations – and highlights how changes are required in banking tech stacks to accommodate this. Migrating towards EDA is a proven approach to help Asian banks and financial services companies not only deliver on ISO 20022, but position themselves to adopt and manage new and shifting industry standards for the foreseeable future.