Estimated reading time: 5 minutes
The coverage of the Asian Development Bank’s latest estimates of the global trade finance gap caught my attention. And, while I can’t promise a quick solution for a $2.5 trillion difference between the trade financing needed versus the financing available, I would like to call your awareness to a very important paragraph in the ADB report.
“Digitization of global trade can reduce the gap,” it states, “but it is held back by a lack of harmonized standards.”
As previously stated, I understand a problem like this doesn’t get fixed overnight or through one improvement. My expertise is in financial technology and messaging, which is where it intersects with trade finance.
It’s in this intersection that I can find at least part of the solution to this $2.5 trillion problem. I’m talking here about the ISO 20022 messaging format, which I will try to demystify here, as well as provide a few pointers/merits to adopting it.
ISO 20022: Popular, but not understood
Having recently returned from an international banking conference, I can tell you that the awareness of ISO 20022 is high, but understanding its potential impact is still a work in progress.
In the context of trade finance, understanding that impact could mean the difference between a deal won or lost or the difference between a secure or a fraudulent transaction. The ISO 20022 format is a set of data and messaging that is integrated into an instant payment or any other cross-border transaction.
It goes beyond just transferring funds. It carries along with it a narrative about why the transaction is happening, who’s involved, and under what terms and conditions. Before its advent, different countries and institutions had their own messaging formats, which led to confusion, inefficiencies, and errors.
Cross-border payments can ill afford any of that baggage, and with ISO 20022, there’s a unified, globally recognised standard and protocol that all institutions can follow.
What kind of data and narrative does this format contain? It starts with end-to-end identification and pre-validation of all parties in a transaction, as well as all intermediaries.
It also specifies the payment rails (e.g., SEPA-Inst, Swift), and contains a detailed breakdown of invoices or bill-related data, such as invoice numbers, dates, and specific line items. Additionally, a feature specifically relevant to trade finance could include references to Letters of Credit, Bills of Lading, or other essential documents. If a transaction can’t be processed, it contains details about the reason for return or rejection. This clearly provides harmony and transparency to what has been an opaque process.
Considering the advantages of ISO, it’s hard to believe that banks aren’t beating a digital path to the doors of any partner that would supply them with advice and execution of its adoption.
Many modern banking and financial technology solutions support ISO 20022 ‘out of the box’. Banks should consult with their software vendors to ensure their systems are compatible with or can be upgraded to support the standard. Swift has been a major proponent of ISO 20022 and is transitioning its messaging services to this standard.
But the reality is that ISO 20022 has been the subject of deadlines, mandates, and regulatory pressures. In fact, just this past 26 October, the scheduled 1 November deployment of SEPA payment schemes to the 2019 version of ISO 20022 was postponed by four months to March 2024 after the European Payments Council concluded that at least two countries within the SEPA network couldn’t meet the deadline.
In the UK, banks had to connect to ISO 20022 capability by March 2023 for Real Time Gross Settlement (RTGS) payments. They will need to send and receive ISO messages by November 2025, which matches the US deadline for ISO usage.
Three levels of ISO 20022 usage
This discussion of deadlines leads me to the three levels of ISO 20022 usage, which will also provide some advice on how banks can step up their use of ISO before they are mandated to do so. When I mention that UK banks had to connect to ISO messaging, that translates to the first and most basic usage level.
1. The connected level
At this “connected” level, there’s a technical connectivity part and a messaging connectivity element. The technical connectivity will require adaptations of core systems and payment gateways to accommodate ISO standards. IT teams will also need to adjust their architecture to change reconciliation protocols and sanctions screening. Then, there’s part two of the ISO-connected phase, messaging data.
This step is more complicated because banks must change the information they send and receive. ISO requires an entirely new set of comprehensive information.
2. The market-ready level
This is characterised by the completion of the upgraded infrastructure (phase one) to the point where it does not affect daily operations. Some gaps that may need addressing in this phase include introducing new network providers, new API options, new payment rails like instant payments, and overlay services like Request to Pay. You can send and receive ISO messages at this point, which is a huge step up in the digital migration that’s so urgent for banks.
3. The ISO native level
Here, all systems have the right architecture, the right data and the right format. Accessible elements for ISO native (outside of the obvious data volume and analytics) include real-time payments and real-time settlements, lower costs via better straight-through processing, improved cash positioning and real-time balance capabilities resulting in tighter monitoring and tracking of transactions, transparency to meet current and new regulations, and payments system stability improvements.
Achieving ISO native status is a challenging but essential journey for trade finance. Sooner rather than later, I urge any professional in this space to reach out to your fintech partner to either get started in advancing to the next level.
Accessing ISO 20022 messaging for trade finance banks combines technical implementation, partnerships, training, and ongoing engagement with the broader financial ecosystem. Given the benefits and the global shift towards this standard, it’s an investment that’s well worth making.