Is Ripple already compliant with ISO 20022?

The global banking system operates all payment systems on the basis of the Society for Worldwide Interbank Financial Telecommunications, or SWIFT messages. The system allows banks to securely, accurately and quickly transmit information on transactions between each other across borders. But the system has had its shortcomings revealed over the years, especially in terms of speed and the capability of adjusting to the rapid scaling of the global financial system. 

As such, a new standard is being introduced that is intended to become the universal and de facto means of data transmission between banks worldwide. The new standard is being dubbed ISO 20022.

The Essence of ISO 20022 

According to the official ISO website, ISO 20022 is an emerging global and open standard for payments messaging. It is intended to create a common language and model for payments data worldwide that provides higher quality data than other standards. Essentially, the goal is to provide a higher standard of quality for payments across the financial spectrum.

ISO states that the new standard can adapt to new needs and new approaches and will not be controlled by a single entity, but rather used by anyone in the industry and implemented on any network.

The ISO organization has also stated that ISO 20022 will become the universal standard for high, or large-value payments systems of all reserve currencies by 2025. The standard is already being used within payment systems in over 70 countries and will support 80% of transaction volumes, and 87% of transaction value globally by the same deadline. In Europe, SWIFT and the European Central Bank have announced that ISO 20022 will be implemented by November 2022.

The core advantage of ISO 20022 that the organization is putting at the forefront is its ability to significantly improve the quality of data across the payments ecosystem by providing richer, structured, meaningful data that will enable new client experiences, while improving compliance and efficiency.

ISO 20022 Implementation

The ISO website has also stated that the new approach impacts SWIFT cross-border payments and cash management messages only. The introduction of the new standard is said not to have any effect on TARGET2, Eurosystem Market Infrastructure Gateway (ESMIG), Bank of England (new RTGS) and other Migration Initiatives.

The new capabilities of the ISO 20022 standard will allow to maintain complete information and data integrity in a centralized manner, relieving institutions in the payment processing chain of the obligation to pass on complete data. This approach will eliminate the problem that intermediaries may ‘break the chain’ and thus corrupt the integrity of the data.

More importantly, ISO highlights that the centralized manner of protocol and mediation services will allow banks and other institutions to continue using their own systems until they are ready to implement the ISO 20022 standard. All MT category 1, 2 and 9 messages used in cross-border and cash reporting payments will be decommissioned in November 2025, giving institutions sufficient time to make the transition smoothly. 

Key Benefits

ISO states that the core benefits of the ISO 20022 standard extend to providing a more structured and richer data format for payments messages.

More granular data included in each message means that there will be more transparency and banks will be able to transmit greater volumes of information. Ultimately, the ability to transmit more data in a single package means that it will be transmitted faster and a better customer experience will be achieved with a lower degree of manual intervention in the process.

From a more back-end approach, the new standard means a higher degree of quality for data analytics and better compliance with existing regulations. Higher resilience of the data to manipulation will also mean improved measures of fraud prevention and general security boosts. 

The use of new technologies and processing protocols in ISO 20022 means a higher level of automation and security. The modern XML technology used as the basic foundation of the standard can be integrated into virtually all existing systems, thus streamlining global adoption of the standard.

The Flipside 

While ISO 20022 reads and seems utopian, or at the very least promising, there are a number of pitfalls and loopholes that can be traced upon closer scrutiny.

The biggest stumbling block of the standard is the accuracy of the data being input into it for proper message transfer. Every character entered into the financial message must be foolproof and beyond error in alignment with the standard’s specifications. The format is strict and must be validated at both ends of the communication chain. The slightest mistake will result in rejection of the message and delays lasting days. More troubling is that all data is entered manually, meaning the risk of human error is still there.

Another challenge is the migration procedure that banks will have to live through, since the burden, both financial and labor-wise, rests on their shoulders. It will be extremely taxing for banks with older technological mainframes to make the transition and ensure proper message processing as receiving ends. The retraining of employees for using the new standard is also a factor, one vital for reducing the chance of error and putting into action the core benefits. 

Effects On Digital 

Banks and financial institutions are the sole beneficiaries of the ISO 20022 standard. Contrary to the hope of digital economy enthusiasts, the standard does not entail any impact on the digital currencies market and is unlikely to affect any available cryptocurrencies until such assets are adopted in a mainstream fashion by banks as accepted currencies. At present, no banks accept cryptocurrencies as deposits, only some allow the purchase of cryptocurrencies through trading desks, such as Goldman Sachs.

However, Ripple has given new hope to all expecting to see cryptocurrencies abiding by international financial standards. The management of the cryptocurrency has announced that that it has joined the ISO 20022 standards body and is working on the establishment of a new data standard for payments between financial institutions. The move has made Ripple the first member of the ISO organization focused on Distributed Ledger Technology (DLT).

The introduction of blockchain-based technologies into ISO standards, especially 20022 marks an entirely new stage for the development and adoption of cryptocurrencies by financial institutions. Should cryptocurrencies follow the new standard, as Ripple is striving to, it could mean a shift in the technological basis of the ISO standard’s application and its transition to more effective transaction processing.

Customers will be able to use the XRP to reape the advantages of blockchain-based transactions through RippleNet and its ISO 20022 membership, which will grant them access to a network of global financial institutions governed by rules and functional standards. Overall, the use of blockchain within the framework of the ISO 20022 standard will allow faster transaction processing and cross-border payments via a standardized API.

If all goes well, time may prove that blockchain technologies are a superior infrastructure for international financial information transmission and may be adopted, phasing out current frameworks.