- Understanding the State of ISO 20022 Compliance Requirements
- Common Security Risks Involved with ISO 20022 Migration
- Things to Consider During ISO 20022 Migration
- Testing for ISO 20022 Compliance and Security
- Why Partner with Tx for ISO 20022 Compliance and Security Assessment?
- Summary
In 2018, the SWIFT community encouraged every finance institute to adopt ISO 20022 for managing and handling cross-border payments and reporting. Currently, this standard is being used across 70 countries, which will reach 80% by 2025 for clearing and settling high-value payments. Seeing this, financial institutes have mandated SWIFT to facilitate the transition to the new language of payments.
The payment industry is becoming increasingly diverse as the global data and economy are interconnected. With ISO 20022 set to become the universal language in the banking industry, complex payment systems will rely heavily on this common language to keep things steady. It is also an opportunity to enhance customer experience by reconciling invoices with richer data and reducing manual involvement while investigating or correcting payments with structured data. This would also enable banks to support customer profiling by leveraging automated data analysis to check the nature of payment processing.
Understanding the State of ISO 20022 Compliance Requirements
The migration to the ISO 20022 (MX) standard started in March 2023, allowing financial institutes to send messages in MX format by leveraging interoperability measures like Transaction Manager and in-flow translation.
Global banks are highly affected by the transformation caused by the new ISO 20022 compliance, which presents an opportunity to upscale their systems to leverage the benefits of enriched data and capture customer insights. By strategically investing in migration practices, finance institutions can support their transition to ISO 20022 globally and meet complex regulatory and compliance requirements, thus offering enhanced customer services.
Compared to global banks, mid-tier banks are less impacted by the updated ISO 20022 standard. Mid-tier banks are directly involved in the payment system but will follow minimum compliance requirements to avoid short-term running costs. They may also partner with FinTechs and third-party providers to avoid additional costs related to complete system transformation.
Local/regional banks are not directly involved in payment systems and will face minimal impact from updated ISO standards. Like mid-tier banks, they would only have to be concerned with short-term costs. They are more likely to adopt a wait-and-see approach to analyzing the situation with the new upgradation and migration once they get a clear picture of the impact of ISO 20022.
Common Security Risks Involved with ISO 20022 Migration
The ISO 20022 migration can expose users to new/increased security risks, including:
Data Quality and Privacy Constraints
ISO 20022’s primary benefits include the ability of financial institutes to exchange more structured and richer data and enable better automation, reporting, and reconciliation. This also means that data integrity and quality are critical to ISO 20022 compliance implementation. Poor data quality can cause errors, rejections, disputes, delays in SWIFT messages, and privacy concerns, which, conversely, would question the integrity of the security protocols. To handle this concern, SWIFT users must ensure their data is consistent, correct, and in sync with ISO 20022 standard requirements. They must also have a robust data governance and validation process.
Compliance and Security Risks
Handling compliance and security risks is one of the major pitfalls in migrating to ISO 20022. It is a fact that ISO 20022 will enhance security and compliance (especially for cross-border payments) by offering highly traceable and transparent financial transactions. It will also enable robust monitoring and screening of money laundering and financial fraud. On the other hand, it will expose stakeholders to new compliance and security risks like cyberattacks, regulatory changes, data privacy, and sanctions. Therefore, banks need to update their security and compliance policies/procedures to ensure they have the necessary measures to protect their systems/data from jeopardizing.
Legacy Systems Upgradation
One key issue in adopting a common payment language (ISO 20022) is upgrading the legacy MT format system, which lacks support for the new standard. Although replacing or updating legacy systems is now mandatory, upgrading multiple interconnected systems would be challenging as it would raise concerns about security integrity and budget constraints. Also, all stakeholders have to agree on this step.
Things to Consider During ISO 20022 Migration
Regardless of the bank institution size and migration approach they implement, they should consider the following when initiating the ISO 20022 migration process:
Check for Payment System Readiness:
ISO 20022 migration is a complex process that would heavily impact bank systems’ functionality and downstream operations. It offers little room for free test fields, making it challenging for banks to move from legacy to the ISO 20022 standard. Also, the richness of ISO data creates large data volumes. The banks develop a detailed program plan and project management structure that includes the complexities of legacy to ISO 20022 mapping, its capacity to process high data volumes, and interoperability capabilities with new network infrastructure. They must have a tailored roadmap for migration, including multiple testing levels to validate the connection between in-house platforms and systems.
Check for Software Compatibility:
Legacy systems require updates/modifications to support ISO 20022’s compliance structured data formats, which involves a significant reprogramming process. Banks must verify that their legacy software systems are compatible with the new messaging standard. Assessing compatibility early will prevent costly delays and ensure a smoother transition across payment processing and data management systems.
Straight-through Processing (STP):
The banking process still involves multiple manual touchpoints to handle payment data, such as reconciling missing/incorrect data. ISO 20022 compliance facilitates enriched data to improve payment processing by implementing automated solutions. This would also offer a brief messaging structure that is easily readable by payment systems. However, to improve straight-through processing, banks must implement and test their payment mechanisms to offer smooth processing before releasing updated services. The key success metric here would be successful data processing, bringing cost-saving benefits by lowering processing costs and manual interventions.
Testing for ISO 20022 Compliance and Security
Assessing the encryption and security protocols for ISO 20022 message implementation is highly critical. This would ensure banks that their transition to ISO 20022 compliance is smooth and secure and will not cause operational disruptions and non-compliance issues. They must evaluate the implementation of security controls, such as authorization, encryption, and authentication, for ISO 20022 messaging. Verify all the sensitive data elements, like account numbers, account holder names, and transaction amounts, to check whether they are correctly encrypted and secure during storage and transmission.
Next, banking institutes must conduct vulnerability scanning to identify security loopholes and misconfigurations in the payment infrastructure/systems. Conducting penetration or pen testing would assist in assessing the system’s resilience against real-world security attacks, such as unauthorized access attempts and injection attacks. Also, the compliance level of payment systems with industry-specific regulatory requirements like AML/CFT (anti-money laundering/combating the financing of terrorism) and data protection regulations should be tested. Banks can validate their adherence to industry standards and ISO 20022 migration best practices, such as ISO 27001 (Information Security Management) and PCI-DSS.
Why Partner with Tx for ISO 20022 Compliance and Security Assessment?
TestingXperts (Tx) offers tailored compliance and security assessment services to ensure the bank’s smooth transition to the new ISO 20022 compliance and standards. We conduct rigorous compliance testing to verify that data structures, messaging formats, and transaction flows follow ISO 20022 requirements, minimizing regulatory risks. Our data testing experts implement advanced data validation techniques to ensure data accuracy, reliability, and consistency, which is essential for ISO 20022’s structured data requirements.
Our security experts perform comprehensive assessments to identify vulnerabilities within new transaction formats and protect your sensitive financial data from potential threats. By simulating real-world scenarios, Tx ensures compatibility between systems and standards for seamless data exchange between global financial institutions. We leverage our in-house test automation frameworks to execute repetitive and complex test cases much faster, reducing manual errors and ensuring compliance readiness.
Summary
The migration to ISO 20022 standards presents a significant compliance and security challenge, but financial institutes can overcome this hurdle with the right approach. By investing in compliance and security testing and implementing automation and continuous testing practices, banks can easily handle ISO 20022 test data complexities. Tx offers customized compliance and security assessment services to assist you in navigating these complexities, ensuring data accuracy, secure transactions, and regulatory adherence. Through advanced data validation, vulnerability assessments, and real-world testing simulations, Tx supports seamless, secure ISO 20022 compliance adoption. By leveraging automation and deep expertise in financial technology on payments domain and extensive knowledge of the ISO 20022 standard, Tx enables faster, more reliable testing, helping banks align with global standards and enhance operational efficiency.
