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November 27, 2022 • Issue 22:11:02

Now is the time for FIs to seize the ISO 20022 moment

By Sumeet Puri

Event-driven architecture can drive business opportunities for financial institutions (FIs) way beyond just another ISO standard adoption. In effect, SWIFT has become the official standard for international payments, and it’s set to transform how banks and financial services organizations process cross-border payments.

Mandatory adoption of ISO 20022 standard comes into force this month, with the aim of solving traditional industry pinch points of delays, high costs and a lack of standardization. This article explores how FIs can use event-driven architecture to not only reach ISO regulatory requirements, but to unlock new business opportunities for the future.

An average of 42 million payments and securities transactions were processed per day in 2021, via SWIFT’s FIN (financial information) message service. Widely used by a substantial network of banks to share money transfer instructions, SWIFT messages orchestrate the transfer of nearly $5 trillion worldwide each day—it’s no wonder SWIFT has become the world’s leading provider of secure financial messaging services and primary method of international funds transfers.

As a result, the mandatory November 2022 adoption of the ISO 20022 standard by SWIFT will have a profound effect on financial institutions across the globe. Each and every FI will need to rethink how it sends payment instruction messages, while juggling a competitive market in various stages of adoption.

The task is no simple venture, but the benefits of doing so are huge and will pave the way for revolutionized cross-border payment methods—from reducing resource burden to a simplified and faster payment process.

The countdown has begun, save the date for compliance

All banks are on the countdown clock to make sure their message interface at least supports the receipt of ISO 20022-compliant messages (www.swift.com/iso20022readiness). 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 have their work cut out to stay relevant in the fintech space

Fintech startups 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 and settlement—where the exchange actually happens.

Seize the moment – but don’t run before you can walk

A recent EY report, How to unlock the power of enhanced data post ISO 20022, (https://go.ey.com/3Ehhlh5) zeroes 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," the report states. "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 its technical debt and 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?

Success lies in a compliant, modernized system

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 also 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, a 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 that 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 metadata 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.

And now for the tech and business benefits

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 by Solace on the EDA migration (https://solace.com/eda-survey/) 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 percent), 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.

Keep up with the banking and financial services evolution

The need to distribute information swiftly and easily internally and externally has never been so important, and the mandated ISO 2022 standard only highlights this. As the deadline looms, financial institutions must consider how an event-driven approach can help not only reach compliance but also place themselves in a strong position to adapt and succeed in a volatile marketplace. end of article

Sumeet Puri, is chief technology solutions officer at Solace, https://solace.com, which helps enterprises adopt, manage and leverage event-driven architecture, with a complete event streaming and management platform. Contact him via LinkedIn at linkedin.com/in/sumeetpuri.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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