With the ISO 20022 migration now well underway, we consider how the standardisation of payment messages can complement the development of open banking and open finance.
Open banking has emerged as an important development within the world of payments, driven by regulatory and market action around the world. The underlying concept is simple: by leveraging application programming interfaces (APIs) to give third-party financial services providers access – with customer consent – to payment account data, open banking can encourage innovation and facilitate the development of new, more personalised financial products and services.
In Europe in particular, there is also now growing demand from various market participants –fuelled by ongoing discussions around the implementation of the third payment services directive (PSD3) – to take this trend one step further. Known as open finance, this expansion would involve taking the open banking approach and applying it to a much wider range of financial services data – such as investments, lending, or insurance – to support a range of new use cases for customers.
As the journey towards open banking continues – and as open finance continues to gain traction – several challenges remain. Open banking relies on third-party providers – whose core competencies often lie outside of the payments space – to not only seamlessly communicate with banks, but then utilise the payment account data they receive in a way that adds value for the end customer. Sharing this data efficiently is critical and requires a high level of standardisation. This is where ISO 20022 comes in.
ISO 20022 is an open global standard for financial information that provides consistent, rich and structured data that can be used for every kind of financial business transaction. In doing so, ISO 20022 can help to eliminate the jumble of incompatible data formats currently used for payments – ensuring that when information travels between different systems, it remains intact and understandable to each party involved.
Within the context of open banking, this has the potential to be a game changer. By its nature, open banking gives actors who were not previously included, access to a customer’s payment account data.
Without a global standard, third parties are required to deal with diverse data sets depending on the different banks or regions involved. This means that time and resource is often spent on deciphering the information, rather than creating value-added products. By leveraging the ISO 20022 standard, and the expansive and precise data dictionary it brings, the way data is received can be harmonised – levelling the playing field for third-party providers, and further accommodating innovation.
The richer, more structured data provided through ISO 20022 messages also provides clearer and more granular data as well – allowing for a better understanding of a customer’s financial behaviour. This can further enhance the possibilities of what a third-party provider can create for the bank’s end customers.
Inevitably getting to grips with the intricacies of ISO 20022 messages – and leveraging the information they contain – is not without its challenges. One major obstacle is that outside of the banking world, wider knowledge and understanding of ISO 200022 is severely lacking. As such, additional education efforts, focused on how the standardisation unlocked through ISO 20022 can act as a natural companion for open banking and open finance, will be a key enabler in unlocking the benefits.