For most of the last 40 years, the payments industry has primarily relied on the ISO 8583 standard for processing payment transactions. More recently another standard, ISO 20022, has begun making appearances in certain payment applications in the U.S. ISO 20022 is a global standard for exchanging electronic financial messages of all sorts. While it may seem to many that 20022 is a new standard, it has actually been around for almost two decades being first published by ISO in 2004 and has been adopted in a number of countries around the globe. It was built such that it can be used for any kind of financial transaction. In a complex payments landscape that is ever evolving, the ISO 20022 standard seeks to build trust, improve financial transaction data quality, and enhance interoperability, accomplishing all this at or near real-time.
Before diving into 20022 and why it is likely to be the standard for payments in the future, let’s first take a look at ISO 8583 as it is the workhorse standard for card-based payment transactions. The 8583 protocol was specifically developed for card-originated transactions and is currently the most commonly used message standard for POS and ATM transactions. The transaction types supported include purchase, reversal, refund, deposit, withdrawal, and balance inquiry among others. Different standards are used for other types of financial transactions, such as real-time payments, foreign exchange, and securities transactions. Regardless of the limited number of use cases, several hundred million 8583 messages are bouncing between the payments acquiring and issuing communities every day making it one of the most commonly used standards in existence. Unfortunately, 8583 is not only one of the most used standards in the financial world, it is also one of the most customized and modified standards. This can create complexities and hinders innovation when implementing the protocol.
In a data-driven world, the 8583 standard struggles to keep up. ISO 20022, on the other hand, supports any type of financial message type including real time payments, cross-border and securities transactions, and allows for the communication of much richer data sets. This data can power innovations like real-time payments and analytics not possible with the data from an 8583 message. In many ways, ISO 20022 is more than just another message standard. It is a methodology for developing financial messages and part of the power of the 20022 methodology is how it overcomes two hurdles for any messaging system, syntax, and semantics. Syntax is the format of a message. Syntax can be thought of as the language of the message and without a common language it is virtually impossible for two people, or two systems, to communicate effectively. Semantics refers to the meaning of the message. Even when using the same language, or syntax, if the words or terms used have different meanings to the parties at each end of the message, effective communication is again stymied. To address these hurdles, the 20022 standard is built on three layers: business processes and concepts, logical data models, and the syntax. Defined business processes and concepts and the logical data models provide the meaning of the message separate from the syntax. Therefore, 20022 is “syntax-neutral.” So, while XML is the most widely used syntax for ISO 20022, another syntax could be used without impacting the message’s meaning. In this way, the structure of 20022 provides for improved communication between parties by using internationally agreed-upon logical messages and business semantics that are independent of syntax.
The adoption of ISO 20022 comes with many benefits. As mentioned earlier, the standard provides a much richer data set that can provide better analytics, better fraud detection, and foster innovation that creates new revenue streams. With XML being the predominant syntax, integrations will be streamlined with fewer manual interventions required. It is also an open standard that is not controlled by any single entity or interest. Anyone can contribute to its ongoing development. Currently, ISO 20022 is used by The Clearing House for their real-time payments platform. The Federal Reserve’s FedNowSM service is also built on 20022. Per Swift plans, Swift participants will be able to start sending 20022 messages for cross-border payments and reporting in March 2023. These are in addition to the over 70 countries that have adopted the standard in their payments systems.
While it is debatable whether ISO 20022 will ever replace 8583 for card-based payments, the number of use cases where 20022 has taken hold makes it impossible to ignore and begs the question, “Do you really want to support two standards for payments?” This is no doubt a topic we will certainly keep our eyes on.
This will certainly be something to keep our eyes on.