Take On Payments

I recently attended a panel discussion titled, "Overrated vs. Underrated Topics in Payments". There was lively debate over crypto use cases, instant payments, and AI, but what caught my attention was when a panelist said ISO 20022 was, in their opinion, the most underrated topic of 2024—and going forward, of 2025. Their rationale was that banks were losing potential revenue to competitors while continuing to pay for inefficient legacy systems ultimately leaving money on the table. Why are banks slow to implement the new global standard, and what does this mean for global payments?

ISO 20022 was introduced by the International Organization for Standardization (ISO) in 2004 as a global standard for financial messaging. It allows banks and business to send and receive payment messages in a standard format with tons of data. To put it another way, ISO 20022 is like a professional email while legacy payment systems are like texts to friends. In texts with your friends, you might use abbreviations, emojis or gifs to express your point. In a professional email, you would take your time to detail all relevant information in a structured manner, aiming to be clear and concise.

Email also allows you to automate your messages, letting colleagues know when you're out of office or will automatically direct responses to certain folders. The ISO 20022 structure also provides the added ability to automate. For example, if a payment involves a high-risk jurisdiction or an entity on a sanctions list, the data in an ISO 20022 message can trigger a compliance check. Rather than manual reviews, financial institutions can leverage AI and analytics to assess the risk level instantly, improving fraud detection.

For example, many older systems use open fields with character limits for address lines, allowing address information to appear anywhere within the lines. ISO 20022 syntax codes each element of the address separately in structured fields, as shown in the following table.

This structured approach makes it possible to gather and analyze more information about each transaction. For example, purpose codes which are contained within the ISO 20022 message structure, classify transactions based on their intent. Through purpose codes like salary payment, loan payment, trade settlement, banks gain deeper insights into customer transaction patterns, leading to more personalized services and offers. Compared to payment information in Standard Entry Class (SEC) codes for Automated Clearing House (ACH) or Merchant Category (MIC) codes for card, which classify transactions based on broad type or origin, ISO 20022 purpose codes provide the exact reason for the transaction, offering a richer dataset. Improved data quality also enhances fraud detection by providing detail that previously wasn't included in legacy systems.

A case study published by the Society for Worldwide Interbank Financial Telecommunications (SWIFT) reported that financial institutions that have implemented ISO 20022 are already seeing a decrease in transactions falsely flagged as potential fraud. Historically, 5 to 10 percent of all transactions are flagged as potentially fraudulent. When investigated, approximately 99 percent of those are false positives, leading to manual reviews that increase processing times and decrease customer satisfaction. ISO 20022 messaging enables approximately 84 percent of messages to be reviewed through automation while decreasing false positives. SWIFT estimates that financial institutions could reduce false positives 25 to 30 percent.

Twenty years later, why are banks lagging? A report by American Banker found that 40 percent of US banks are falling behind on their implementation plan with 10 percent stating they have no definitive timeline. Across North America and Europe, only 40 percent of banks felt "highly confident" with their readiness. A major obstacle has been upgrading legacy payment systems that cannot support ISO 20022. This is especially true with small to midsize banks, which may not have the capital to modernize their payment systems. Although adopting ISO 20022 is expected to increase efficiency, reduce fraud losses, and improve the client experience, the financial gains will most likely be realized over the long term. For many smaller institutions, that means delaying ISO 20022 deployment in favor of more urgent near-term plans.

By Tom Ciafone, payments expert, Atlanta Fed Payments Forum