The ISO 20022 message standards in the context
In the world of payments processing, the role of the data format used to exchange information between the parties involved in a payment transaction can be compared to the role of language in communication between people. Today, dozens of different data formats are in place to process payments across different national and European clearing systems in the European Union. Whereas ninety per cent of the content of these legacy data formats are similar, the main differences relate to formatting, usage rules, the use of free format text fields, the length of data fields and specific characteristics developed in individual domestic markets.
The realisation of the Single Euro Payments Area ( ) requires agreement on a common set of data to be exchanged in a common syntax when exchanging euro payments between accounts located anywhere in the 32 countries. The Data Formats as specified by the European Payments Council ( ) for the exchange of Credit Transfers and Direct Debits represent such a common data set.
It is important to note that the Data Formats do not constitute an exclusive European standard. Rather, the Data Formats are based on the global ISO 20022 message standards. This standard provides a methodology for defining business processes and the related data elements. In the ISO process, business requirements are defined for all markets globally. Different markets may have different data needs. This means that each community needs to define its own implementation guideline of the global standard, specific to its own situation. In this respect, the ISO messages and the Implementation Guidelines have been adjusted to meet the euro papyments requirements for .
The Data Formats are a valid subset of the ISO 20022 message standards
The role of the in defining the Data Formats therefore consists in identifying the necessary data elements for making payments as defined in the Rulebooks within the global ISO standard. These "core" data elements are indicated by "yellow shading" in the Implementation Guidelines released by the with respect to the Credit Transfer Scheme and the Direct Debit Schemes. Links to the Customer-to-Bank Implementation Guidelines are provided below.
To allow communities of banks participating in the schemes to provide additional optional services (AOS) based on the schemes, the has also identified data elements within the global standard that can be used for this purpose*. These data elements are indicated by "white shading" in the Implementation Guidelines.
The Data Formats therefore are a valid subset of the global ISO 20022 standard.
ISO 20022 message standards improve internal controls and minimise errors
Implementation of the ISO 20022 message standards, e.g. the Data Formats, allows banks and their customers such as businesses and public administrations to fully benefit from the introduction of the new euro payment instruments.
From a business point of view, one of the most important elements in need of further standardisation is the rem ittance information travelling with the payment message. The remittance information allows reconciliation of the payment with outstanding invoices on the side of the party receiving the payment. Typically, related data were stored in free format text fields of legacy data formats thus making automated processing of reference information difficult. Instead, the data received with the remittance information were manually retyped and reconciled at various stages of the life cycle (such as the purchase to pay cycle). Each manual intervention introduces the risk of errors. Furthermore, to reduce cost of processing, a single payment was often used to pay multiple invoices, further complicating reconciliation.
The Credit Transfer permits the end-to-end carrying of remittance data on a structured or unstructured basis appropriate to the nature of the payment. The length of the remittance information is now fixed at a standard length of 140 characters and banks are obliged to pass on this remittance information from customer to customer.
The will also support a proposal developed by the European Association of Corporate Treasurers (EACT), which allows companies to agree on a specified structure for remittance information. Banks can then carry information structured in this way unaltered throughout the process chain.
To accommodate further requirements, the following additional elements were incorporated into the Data Formats: separate data elements for an originator and a beneficiary reference party enabling the initiation and receipt of payments "on behalf of" other parties. In addition, the introduced payment reasons ("category purpose" and "purpose") to enable the identification of payment types such as salaries or taxes, for example, allowing the originator bank or the beneficiary to apply special processing rules.
Last but not least, the introduction of ISO 20022 message standards supports the correct interpretation of data fields, which will further contribute to a reduction in errors and improved control.
Migration to ISO 20022 message standards
The introduction of new payment processes and messages cannot happen overnight and will take some time to gain acceptance. For a limited period of time, the existing and new payment schemes will operate side by side. The real benefits with regard to improved control and reduction in errors will only be achieved as soon as the new schemes are fully adopted by the larger part of the organisations that generate significant payment volumes; e.g. the business community and the public sector. Of course, putting a deadline on the decommissioning of existing national payment systems will be a key driver as well. In the mid-term, organisations therefore need to prepare for the necessary upgrade of their payment processes to comply with the new Schemes and the ISO 20022 message standards.
Actions required by bank customers
An organisation planning to implement the Data Formats needs to take into consideration the following aspects:
- As part of the decision to adopt the ISO 20022 message standards, determine whether or not your external system providers (e.g. ERP, accounting) offer solutions
- Ensure that the interfaces to deliver data elements from your internal systems to your ISO 20022 message as sent to your bank utilises the full benefits of the standard format.
- Conduct tests with your payments services provider and your main business counterparts before going live to ensure a smooth transition.
- The integrity of static data that are used to automate the process needs to be ensured.
- Communication with commercial counterparts is crucial to achieve a well controlled, highly automated process.
Re-engineering payment processes based on innovative end-to-end solutions will generate substantial efficiency gains and drive forward the trend towards standardisation, automation and centralisation. Implementing the new schemes and standards will pay off.
Steven Hartjes is a partner with Ernst & Young Accountants LLP.
* The Credit Transfer Rulebook and the Direct Debit Rulebooks released by the provide detailed information on Additional Optional Services. The Rulebooks are available at www.europeanpaymentscouncil.eu.
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