Central bankers have made great strides toward improving national payment infrastructure over the last 10 years, including installing new payment rails and switching to ISO 20022 message schemes; as well as implementing regulatory controls and optimizing payment processes. All this serves to strengthen the strategic direction of national economies, accelerate monetary circulation, and boost the credibility of electronic transactions within markets.
Recent Advances in Central Banking
Over recent years, central banks have made considerable strides toward transitioning the market to ISO 20022 message schemes. Beginning with Automated Clearing Houses (ACHs) and Real-time Gross Settlements (RTGSs), Instant payments became part of low-value credit transactions as an instant payments rail; 24×7 transaction service hours enabled uninterrupted support of electronic commerce services while simultaneously expediting settlement between buyers and sellers.
Regulators in the industry have further improved the payment market infrastructure through additional supporting services that accommodate new transaction types, including electronic addressing for customers, consent and mandate management, electronic bills/Requests-to-Pay/eSalaries/Wages Protection Systems, etc. These enhancements include electronic addressing for customers as well as consent/mandate management as well as improving electronic address data for customer orders managing consent/mandate management processes for new mandates eBills Requests-to Pay as well as more.
Exploring Regional Payment Networks and Their Impact on Cross-Border Transactions
Central banks invest heavily in expanding regional payment schemes beyond national borders by creating regional economic and business unions and managing and settling these regional networks as an extension of domestic payment systems at a regional scale. Some examples of regional payment networks:
Target2 is a trans-European automated real-time gross settlement Express Transfer System serving the European Union and Buna is a cross-border system for real-time gross settlement transactions in Arab regions.
RTGS payments are supported by two systems; The Arabian Gulf System of Financial Automated Quick Transfers (AFAQ), part of the Gulf Cooperation Council; and Pan-African Payment and Settlement Systems, or PAPSSs for short. Each supports transactions within their region as needed for payments made between continents.
These payments employ domestic RTGS payment rails to initiate and process, yet have special characteristics like message formats, parameter maps, FX rates, purposes, and return reasons that set them apart from domestic RTGS and ACH transactions. Banks must be able to distinguish and process them separately.
Different Approaches to ISO 20022 Messaging
Migration towards ISO 20022 began initially at a national level due to central banks upgrading their RTGS/ACH systems to instant payment solutions and offering instantaneous payments. With such changes came unique challenges such as payment initiation/verification procedures and data mapping/processing issues as well as data truncation; temporary MT/MX conversions provided a temporary fix.
All payment schemes use ISO 20022 messages as their base format; however, each has its specific message types, flows, and data mapping procedures as well as process flows with purpose codes, return messages, and reasons that differ significantly between schemes. Banks must oversee each payment scheme individually to meet regulatory requirements, integrate backend systems, and map messages effectively.
Furthermore, they are expected to process payments while adhering to settlement Service Level Agreements (SLAs) and fulfill obligations under SLAs. Financial markets and banks must manage multiple payment rails within their country or region, each having similar features but also distinct rules, and business use cases that make managing them a complex undertaking.
Challenges and Strategies for Adopting ISO 20022 Payment Systems in Banking
As ISO 20022 payment systems emerged, many banks adopted message translators such as MT/MX Converters as an initial cost-effective way of meeting regulatory requirements. While this approach proved successful in meeting regulatory needs during migration from RTGS/ACH payments systems to ISO 20022, more detailed tracking features enabled by ISO 20022 messages necessitate enhanced domestic schemes and banks enhancing offerings to meet market needs more adequately.
Relying solely on message translators cannot be relied upon, as that could result in data loss, payment details being obscured, and businesses becoming incapable of adapting quickly enough to changing requirements and complying with compliance regulations.
Migration of an entire bank ecosystem to ISO 20022 may appear like the ideal solution; however, this long and costly process presents numerous hurdles and can disrupt banking services, delay responses to market needs, cause interruptions to service provisioning, and be disruptive to banking service provisioning.
Furthermore, as ISO 20022 message requirements continually expand or evolve into maintenance cycles that banks cannot sustain, banks must explore alternative strategies that adapt to market shifts without requiring extensive system overhauls.
A Future-Proof Payment Solutions
With market and regulatory dynamics constantly shifting, banks increasingly require payment platforms with advanced features capable of accommodating emerging challenges. They need solutions that not only allow seamless migration of backend systems but can also act as central orchestrator solutions.
The solution involves employing native ISO 20022 payment orchestrators as payment hub platforms. These orchestrators streamline payment validation, screening, and processing, then post transactions directly into core banking systems, restoring their traditional roles as pure General Ledgers and accounts management systems within banks. Payment hub platforms also support all payment types from domestic to cross-border internal to facilitate seamless migrations of ISO 20022 and guarantee continuity for ongoing projects while meeting both regulatory requirements as well as new business needs.
The Bottom Line!
The shift towards ISO 20022 represents a paradigmatic transformation in banking infrastructure, driving efficiency, transparency, and innovation across domestic and cross-border transactions. Central banks have made strides toward modernizing payment processes, including upgrading payment rails, real-time settlement systems, and enhanced regulatory frameworks, fostering economic growth while upholding financial credibility. However, this journey does not come without challenges.
Banks face the complex task of overseeing multiple payment schemes, integrating backend systems, and addressing data mapping/processing issues while complying with ever-evolving regulatory demands. Temporary solutions like message translators may offer temporary relief but robust and long-term platforms should be pursued for success.
Adopting native ISO 20022 payment orchestrators offers banks an effective and sustainable means of meeting market requirements, offering seamless migrations, central payment validation, and maintaining compliance adherence. By capitalizing on such advanced platforms banks can meet market requirements while improving customer experiences while remaining operationally agile in an ever-evolving financial ecosystem.
Do you want to enhance your business payment method?
Experience The Exzact Advantage Today!
Don’t let the complexities of payment processing hold your business back. Partner with Exzact Business Solutions and unlock the power of secure and seamless payment solutions. Contact us today to learn more about our services and discover why businesses trust us to handle their payment processing needs. Together, let’s build a future where payments are fast, secure, and hassle-free.
Remember, behind every successful transaction lies the expertise and dedication of Exzact Business Solutions—your trusted partner in navigating the world of payment processing. Join us on this journey and experience the difference firsthand!
