ISO 20022 is the right way forward for standardisation in the financial industry

The ISO 20022¹ approach to standard setting is the answer to today's customer needs. ISO 20022 is not only a suite of message standards but a recipe proposed by ISO to develop message standards for all domains of the financial industry. The most innovative characteristic of ISO 20022 is its modeling methodology which decouples the business rules from the physical message formats. The models evolve with the business, while the formats evolve with the technology to benefit from the latest innovations. This results in the highest possible degree of automation, ease of implementation, openness and cost-efficiency. The ISO 20022 recipe, therefore, offers a more efficient and faster way of developing and implementing message standards that serve as the basis for long term financial services solutions.

ISO 20022 reflects the global nature of the financial services industry, bringing together diverse commercial and financial needs. ISO 20022 creates a level playing field empowering a broad group of stakeholders including end users, suppliers and IT service providers to express their interests in a common work product whilst ensuring maximum transparency in the process. This cooperative and inclusive approach furthermore avoids a situation where multiple standards are developed by different groups in response to the same business need that may materialise in different areas or domains across the globe. At the same time, ISO 20022 supports multiple languages and character sets.

ISO 20022 is based on modern tools for scheme creation, publication and use, allowing for even more efficient updates. The standard is aligned with internet technologies and targeted to address increasing industry requirements for application integration.

Last but not least, the standard offers the necessary flexibility to incorporate additional requirements as it will evolve reflecting market needs.

The ISO 20022 growing catalogue of financial services messaging standards: all about "e"

Among the first financial messages to be derived from the ISO 20022 standard were those from traditional business processes, such as the well-known customer credit transfer and direct debit. These are the messages deployed by the SEPA Credit Transfer and SEPA Direct Debit Schemes and adjacent Implementation Guidelines developed by the EPC. These Implementation Guidelines are MIGs (message implementation guidelines) in the ISO language and prescribe in detail how this subset of the ISO 20022 messages should be implemented. In recent years, the ISO 20022 message, which is used in the traditional payments chain, has been completed to allow end-to-end processing (customer-to-bank, bank-to-bank, bank-to-customer)² of credit transfer and direct debit transactions. In addition, the growing catalogue of ISO 20022 messages has been extended and diversified to address the increased requirements created by the evolution of new e-services in particular.

Bank Account Management

Old school bank account management (BAM) is a heavily administrative process for corporates. There are known instances where the actual opening of an account has taken up to two weeks. Replacing the traditional account opening process, which relies on papers and faxes, with an electronic process will greatly benefit all parties involved. Innovation in this area offers benefits including reduced expenses, and allows greater efficiencies to be achieved in less time. It also ensures that both parties (the account holder and the bank offering the bank account) can access the same information on the account structure.

The set of BAM messages included in the catalogue of ISO 20022 standards covers the full account management process, starting with the request to open an account, progressing through the maintenance of mandates on an account to the process of closing the account itself.

The ISO 20022-based BAM messages are the result of a pilot process embedded into a solution developed by SWIFT³: the Electronic Bank Account Management (EBAM). EBAM combines the use of ISO 20022 XML compliant standards with SWIFT's messaging platform. EBAM allows banks and corporates to streamline the process of bank account management and facilitates integration with back-office applications.

As Carola Van Limborgh, Cash Management Architect, Shell, stated on swift.com, "EBAM's standardised messaging will help us to improve our account management processes with our banks. It will save costs and effort, by eliminating large parts of the paper flow between ourselves and the banks. This is a tremendous benefit for companies with global treasury operations."

Invoice Financing Request and Financial Invoice

Whilst e-invoicing is outside the scope of the EPC, it is recognised that there is a strong linkage between e-invoicing and the SEPA programme. A key European Union objective is the fostering of intra-community trade for the benefit of all businesses and citizens. This policy has been increasingly successful. European economic integration has become a reality. Many businesses now routinely buy and sell goods and services from and to businesses and citizens in other EU Member States. For this reason the European Parliament and the European Council are strong supporters of the e-invoicing initiatives. These programmes help to remove legal and technical barriers and encourage new ways of working for the benefit of the European economy as a whole. E-invoicing is also a key factor linking the supply chain with payments.

ISO 20022 has developed four new messages under Trade Services Initiation to support e-invoicing. The "InvoiceFinancingRequest", "InvoiceFinancingRequestStatus" and "InvoiceFinancingCancellationRequest" are already approved by ISO 20022; the "FinancialInvoice" is at candidate status. The messages cater for the exchange of invoice information to request payment from the buyer. They also facilitate the initiation and management of invoice financing requests in the customer-to-bank space.

These messages fit within the "European Framework for e-Iinvoicing"⁴ and encourage interoperability through standardisation (a link to the European Commission's Expert Group Final Report on e-Invoicing is included below).

While the prime function of the ISO 20022 "FinancialInvoice" is a request from the seller to the buyer for payment, this message can also serve to evidence an invoice in support of a financial service including invoice factoring, letters of credit, and bank payment obligations. In addition, this message standard enables web based services such as electronic bill payment and presentment. It can also be used to transfer invoice information via third parties, including e-invoicing service providers. In some countries the invoice is a key document supporting a tax declaration, reclamation and cross-border customs declaration.

The transaction related information in these messages is harmonised with credit transfer and direct debit transaction messages as set out in the relevant ISO 20022 messages.

To complement the ISO 20022 messaging standards applicable to e-invoicing, SWIFT is exploring options to provide for the exchange of e-invoice messages over its network. The aim is to establish an interoperable ecosystem for e-invoicing among service providers.

Electronic invoicing is growing fast at around 40 per cent per annum. It has yet to expand beyond the range of 5-10 per cent of total invoices, and as such, paper invoices still form the majority by number. Commentators however, are convinced that e-invoicing will continue to grow rapidly in view of the very substantial cost savings and other efficiency benefits involved.

Mandates

As with all existing direct debit systems, under the SEPA Direct Debit Scheme developed by the EPC, a payer completes a mandate to authorise a biller to collect payments. At the same time, the SEPA Direct Debit mandate authorises the payer's bank to pay these collections. The SEPA mandate can be issued on paper. In addition, the SEPA Direct Debit includes the option to create mandates through the use of electronic channels - called e-mandates.

SWIFT developed the messages required to process e-mandates for the EPC, with the global market place in mind. This ensures that these messages can be used universally and are network independent. The corresponding ISO 20022 mandate message allows for the fully automated end-to-end processing of direct debit mandates and is fully compatible with other existing payment messages.

It is expected that the implementation of the SEPA Direct Debit Scheme will significantly boost the use of e-mandates.

e-Payments

In response to the rapidly increasing volume of e-commerce, the EPC committed to provide a framework outlining the specific rules and standards relating to e-payment schemes making use of the SEPA Credit Transfer. The first deliverable is envisaged to be the SEPA e-Payments Framework, which facilitates online payments with a payment-guarantee for web-retailers followed by a SEPA Credit Transfer. The EPC is therefore planning to submit a proposal for a payment message and a proposal for payment guarantee message for inclusion in the ISO 20022 catalogue. In keeping with the EPC e-Payments Framework and the ISO 20022 philosophy, these messages will be open and reusable by other communities.

These global messages are also designed to support the objective of the EPC to facilitate interoperability between existing e-payment schemes and provide a standard model for any future scheme developments.

SEPA and ISO 20022: the perfect combination

Re-engineering financial services based on the global ISO 20022 message standards drives forward standardisation, automation and dematerialisation. Upgrading the payment architecture to comply with ISO 20022 also allows banks and their customers such as businesses and public administrations to realise the efficiency gains resulting from the implementation of the SEPA Credit Transfer and SEPA Direct Debit Schemes. So, the only question at this point is: what are you waiting for?

Jolanda Schekermans is Senior Business Analyst, SWIFT Standards.

Related link:

www.iso20022.org (this link also gives access to the ISO 20022 Newsletter)

Related articles in this issue:

Searching for Enlightenment? The new book 'ISO 20022 For Dummies' has all the answers!

Facing Up to the IT Challenge. Choosing the right IT strategy for SEPA compliance

Related articles in previous issues:

Have it Your Way! The EPC e-Mandate option: a secure way to authorise a SEPA Direct Debit payment (EPC Newsletter, Issue 6, April 2010)

Gaining Momentum. A progress report on e-Invoicing (EPC Newsletter, Issue 7, July 2010)

Food for Thought. The EC Expert Group on e-Invoicing Final Report (EPC Newsletter, Issue 5, January 2010)

The big Picture. Dematerialisation of business processes - in payments and beyond (EPC Newsletter, Issue 5, January 2010)

Improving the Bottom Line. ISO 20022 meets key corporate expectations (EPC Newsletter, Issue 3, July 2009)

The silent Revolution. The impact of ISO 20022 on payments services in general and SEPA in particular (EPC Newsletter, Issue 3, July 2009)

Take Payments to the next Level. Benefits of ISO 20022 for bank customers: optimised control and increased efficiency (EPC Newsletter, Issue 3, July 2009)

¹ The International Organisation for Standardization (ISO) is a global organisation of national standards bodies. ISO 20022 aims to give the financial industry a standard platform for the development of messages. See also link to the ISO 20022 web site under 'Related Links'.

² In the context of the SEPA Credit Transfer and SEPA Direct Debit Schemes, the data formats based on the ISO 20022 message standards are binding for the exchange of SEPA payments between Scheme Participants (payment service providers offering SEPA services that have formally adhered to the SEPA Payment Schemes developed by the EPC). Implementation of the SEPA data formats in the customer-to-bank and bank-to-customer communication is not mandatory, but strongly recommended.

³ SWIFT is a member-owned cooperative that provides the communications platform, products and services to connect more than 9,500 banking organisations, securities institutions and corporate customers in 209 countries. SWIFT enables its users to exchange automated, standardised financial information securely and reliably, thereby lowering costs, reducing operational risk and eliminating operational inefficiencies. SWIFT also brings the financial community together to work collaboratively to shape market practice, define standards and debate issues of mutual interest. www.swift.com

⁴ At the end of 2009, the European Commission Expert Group on e-invoicing (EG) published its Final Report. The Expert Group concluded that it made sense to define the European Framework for e-Invoicing (EEIF) as its final report, containing as it does a set of actionable recommendations and proposals. It is organised as a series of layers, which all interrelate on a coherent basis. It is not itself a formal scheme or contractual framework to which entities or persons are expected to formally adhere such as a payments scheme or framework agreement. The EEIF is however a set of practical recommendations which are designed to promote the uptake of e-Invoicing.