SWIFT member banks must overcome major technology and business hurdles to upgrade their systems for ISO 20022 messaging requirements.

The upcoming November adoption of ISO 20022 — a widely accepted standard for sending digital payment messages and data between financial institutions — and the rapid approach of services like FedNow and an ISO 20022-integrated Fedwire are prompting U.S. banks to upgrade their systems. But challenges in making the shift are numerous, Benjamin Nestor, research associate at Aite-Novarica, told Bank Automation News.

“Banks have faced several hurdles in integrating ISO 20022,” Nestor said. “These include complexity and lack of understanding ISO 20022 at [financial institutions], lack of government regulatory standards, and technical capacities to receive and interpret large quantities of data.”

Modernizing legacy networks

Cloud payments fintech Volante Technologies last week announced a new ISO 20022 solution for banks. The service contains microservices-based application programming interfaces (APIs) for initiation, transformation and translation of ISO 20022 messages to and from legacy formats, according to a release. The solution is designed to simplify the ISO 20022 modernization process for banks and other financial institutions.

The dependence many banks have on legacy networks and technologies creates challenges in the push to upgrade for ISO 20022, Nihit Ahuja, global business head at Volante, told BAN.

“There hasn’t been a real push for moving to modern technology,” Ahuja said. “They’re running legacy technologies to modernize those legacy technologies. It’s hard. And then to get the people who can do that work is the second challenge.”

Banks also struggle with maintaining the effort required for what Ahuja called a “non-differentiated” technology investment, which does not create an advantage for banks. “The amount of effort they have to spend on non-differentiated stuff, so supporting the new message standards doesn’t weigh in on the benefits you get out of it,” Ahuja said.

Nestor added that ISO 20022 integrations involve significant technical transformations, which must align both existing systems and new forms of “data centralization, migration mapping, payment system alignment, data messaging interpretation capacities, and increased data storage.” This complexity, along with delays of ISO 20022 uptake in the past, have contributed to the stickiness of some banks to upgrade.

Data interoperability in legacy systems

The data-rich nature of ISO 20022 creates additional hurdles, Jack Baldwin, CEO at enterprise software provider BHMI, told BAN.

“The biggest hurdle is one of interoperability that will affect older financial services networks that have legacy carryover as they convert to ISO 20022,” Baldwin said.

Many older financial services networks lack a functional layer for converting internal messaging data into configurations appropriate for transaction partners. Legacy transaction codes may also fail to separate internal and external data, which Baldwin said “complicates” the adoption of ISO 20022. While ISO 20022 is designed to support legacy data standards, issues in transcribing and interpreting the data remain.

“Data elements from older standards will have counterparts within ISO 20022 but may not have the additional data attributes available in the older environment to take full advantage of ISO 20022 capabilities,” Baldwin added.

Ramifications of falling behind

Banks that fall behind in upgrading for ISO 20022 face significant ramifications, including higher costs, lower productivity, inability to provide new payment services and decreased data-reporting capabilities. A lack of integration with international settlement systems will impede cross-border transactions, and Aite-Novarica’s Nestor added that a failure to comply with ISO 20022 will be a “significant barrier” for banks looking to market to corporate customers and financial institutions.

The faster banks can move through a sometimes-laborious upgrade processes, the faster they can move into providing new services, Volante’s Ahuja said.

“Ultimately, everyone knows that they must move to it,” Ahuja said. “The quicker you move to it, you can start reaping the benefits, and you can start thinking of value-added offerings.”