The role of ISO20022 in real-time payments

In the final blog in this series we explain the importance of the ISO 20022 messaging standard to the future development of real-time payment systems.

The need for a standard or common ‘language’ in the financial services industry is what led the Geneva- based International Organization for Standardization to launch its ISO 20022 messaging standard in 2004.

With over 70 countries having adopted it, ISO 20022 has become the preferred standard for interoperability between legacy payment systems and rich payment instruction mechanisms for sophisticated e-payment and mobile systems.

There are many innovative use cases and overlay services that demand a rich set of data and documents to be exchanged between payer and a payee. For example, in the case of invoice based payments, between transaction initiation and completion there can be multiple steps which may require a dialogue between payer and payee.

Enhanced format

Such complicated use cases can be easily offered via ISO 20022 messaging standards rather than the legacy ISO 8583 or Swift MT format since the newer standard can carry highly contextual and feature rich data as a payload in a transaction message.

At the heart of a real-time instant payment system lies the core transaction processing platform. To meet current and future requirements, central banks should choose a platform that supports format definition over ISO 20022 so that various use cases can be enabled easily through a user interface.

In addition to ISO 20022, these platforms should have support for ISO 8583, Swift MT/MX and proprietary format definition that suits a particular business use case. Subsequently, message transformation and mapping options should be available through the user interface where the scheme operator can map the incoming message field to the outgoing message field by selecting the appropriate mapping rule.

There are a number of services and applications that rely on ISO 20022, including request-to-pay, electronic direct debit authorities, and liquidity management.

Request-To-Pay

Request-to-pay is an innovative overlay service that enables payees to request funds from a payer. In other words, the payee can pull funds from the payer account after authorisation and authentication from the payer. The flexibility of this use case has the potential to replace all cash and card based payments.

The service basically opens up a dialogue between a payee and a payer, giving the later more control over the payment terms as they know who they are making the payment to, how much they are paying and when they want the payment to be sent out while informing the former of the amount they can expected to receive within the time frame agreed.

Request-to-pay overlay services have the potential to fast track the adoption of digital modes of payments.

Such contextually rich use cases require highly structured data to exchange between the participant and the central real-time payment system, which is made possible via the ISO 20022 messaging interface as it offers a highly structured, contextual and rich data set - something which is not possible (without a lot of effort and maintenance costs) via traditional card-based ISO 8583 interface specifications.

Digital collection

Corporate and SME collection is an area ripe for digitisation in emerging economies. Most of the digital modes of payment collection prevalent around the world are bilateral agreements between collector organisations and the payer (either an individual or a corporate).

However, such a set-up does not allow for scalability due to significant onboarding and integration efforts and lack of standardisation of instruction that needs to be processed by all the parties involved in the payment collection process.

Enabling payment collection via a centralised real-time payment system can address issues of standardisation and scalability for the corporate and retail segment.

A real-time payment system can offer electronic direct debit authority (e-mandate) management as an overlay service. Management of the e-mandate lifecycle is available via the creation/update/deactivate messages available through the standard ISO 20022 interface.

Cash management

Real-time payment systems need to have a sophisticated liquidity management feature to support the requirement of banks and non-banks to maintain their minimum liquidity in the settlement system and to allow settlement banks to manage and monitor the liquidity requirement of their non-bank participants.

Such functionality includes maintaining a hierarchy of clearing accounts that synchronise their balances with RTGS or settlement bank core banking systems on a periodic basis. The liquidity management process must ensure that the participants are advised in advance about their liquidity position so they can make decisions to increase or decrease the liquidity level.

APIs over the ISO 20022 interface and web portals exposed from the national payment scheme can enable participants to monitor their liquidity position and request top-ups or defunding of their balance.