What the ISO 20022 migration means for you

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Banks are now preparing for the ECB Target T2/T2S consolidation big-bang and ISO 20022 XML migration. How will this affect your organisation and what options do you have to minimise impact and hassle?

This 2-minute read explains how the ECB Target2/T2S consolidation, effective as of November 2021, will impact your bank and how you can respond.

Further adoption of ISO 20022 in the interbank space

In payments, ISO 20022 has become the global de facto XML messaging standard. It is used in over 70 countries and offers many benefits, such as richer and more structured data, better end-to-end interoperability, and flexibility and service innovation at lower costs. In Europe, SEPA adopted ISO 20022 from its inception. As a major next step in its adoption, interbank messages for cross border payments, now using the SWIFT MT standard, will migrate to ISO20022 starting November 2021. Furthermore, EBA Clearing and the European Central Bank (ECB) have also announced the adoption of ISO 20022 for the EURO 1 service and the Target2/T2S consolidation program. The latter has a significant impact on your bank. In line with ECB planning, your bank should be completing designs for the IT systems change as we speak.

Target consolidation program going live in November 2021, mandating ISO 20022 standard

The ECB is following suit. That is, they have chosen to mandate the use of ISO 20022 from November 2021 onwards when the Target2/T2S services consolidation goes live with a big-bang.

Besides adopting the ISO 20022 standard, the consolidation will bring about a major functional and technical overhaul. Its objective is improved efficiency, optimized liquidity management, enhancement of RTGS services, reduced operational costs and easier access to the services through a harmonized interface. This new and mandatory interface is called the Eurosystem Single Market Infrastructure Gateway (ESMIG). Based on a tender, two network providers, SWIFT and SIA-Colt, have been selected to offer future network services for ESMIG. Additionally, market parties are expected to offer ESMIG gateway connectivity as a service, including value adds, such as conversion services (from MT messages to ISO 20022 XML and vice versa).

ECB timelines are pressing banks to complete their internal IT system designs, start development and select network or gateway providers. Banks should be aware that these activities are interdependent, as their network or gateway provider choice, including value add options, has an impact on IT.

What the Target consolidation and the ISO20022 migration means for banks

First of all, banks will need to assess how they will use the consolidated Target services and their associated benefits. They need to understand the impact and define gap closing projects. From an IT and communication stance, it’s important for banks to ask themselves the following questions:

  • How will the bank interact with the new consolidated Target services? What functions will be operated manually (in User2Application mode, U2A) and which via automated message exchange with Target (Application2Application, A2A)? For example, the IT impact of U2A is smaller than the IT impact of A2A.
  • When exchanging messages with the new Target service, the bank must consider the following, among other things:
    • Can the back-office generate and process (all the required) ISO 20022 messages? If not, can/should the back-office be upgraded to be able to process ISO 20022 messages? Or, is conversion tooling a more efficient (temporary) solution? Should the bank develop its own conversion tooling or obtain it from a network or gateway provider? In some cases, conversion tooling can surely ease and limit the short term impact. But eventually, to take full advantage of ISO20022, the back-office should be fully ISO 20022 compliant, including transaction filtering and sanctions screening.
    • What network service provider should the bank choose, SIA-COLT or SWIFT? In both cases, current Target connectivity will change due to differences in process. For example, SWIFT Y-copy will become V-shape mode, as well as message management and security aspects.
    • How should the bank secure the required IT and network capabilities? Should the bank select a network provider and develop remaining system changes in-house? Or, is outsourcing (a significant part of the change) to a gateway provider, including conversion functionality, a more cost-efficient option that frees up internal capacity for more customer-focused tasks?

Using the new consolidated Target services, including the ESMIG gateway and ISO 20022-based message standards, are mandatory changes within a critical infrastructure. If a bank does not meet the key deadline of November 2021, they will not be able to settle their payments in euros as a direct participant. Therefore, Central Banks are closely monitoring banks’ progress.

The case for outsourcing SWIFTNet connectivity

Outsourcing SWIFTNet Connectivity is an alternative more and more banks are interested in to increase flexibility and reduce the burden of compliance and complexity. Banks realize that the gateway to SWIFT is a critical function, but it’s non-differentiating. And, with the transition to ISO 20022 and rising cybersecurity demands, managing the SWIFT link internally can be costly and burdensome. The migration itself is largely a compliance project and shifts the bank’s focus away from its core differentiators. We expect more and more banks, if they choose SWIFT as their Network Service Provider for ESMIG, to see the mandatory implementation and the ISO 20022 adoptions as a trigger to consider outsourcing their SWIFTNet connectivity and potentially the complete payments back-office.

Outsource the hassle insource the agility

Visma Connect’s SWIFTNet Connectivity Service lets banks outsource the hassle and insource the agility they need to stay competitive in the changing financial services landscape. Our SaaS-based service facilitates message entry, repair, authorization and validation. It covers the full payment life cycle and connectivity to SWIFT financial networks. We are a SWIFT-certified service bureau and GDPR compliant. Let us help you manage the migration so you can be ready in November 2021.

Contact us today

Contact Paul van der Valk or his colleagues by mail: vco.info@visma.com or call: +31(0)88-1161800. 

We’ll take over the hassle, so you can gain agility!