How Will the Swift ISO Migration Impact STP Rates for Cross Border Payments?
Will Payment Exceptions Increase or Decrease?
The SWIFT network is one of, if not the key Cross Border Payment execution options available to financial institutions around the world. It has underpinned the correspondent banking industry for 40+ years, and in spite of many challenges, as well as challengers, over those 40+ years, it continues to provide the premium, secure, and most pervasive method for transferring funds around the world, especially high value, mission-critical payments.
Understandably, because of this pervasive and business critical use, a huge industry has evolved around the network in providing and operating the systems and infrastructure to send, receive, and process the payments and data flows on the network. From connectivity, to integration, to messaging, to orchestration, to validation, to enrichment, to reporting, to sanction screening, to reconciling, etc. The list of systems, and vendors, and in-house solutions, and combinations of all three, involved in SWIFT payment flows can seem endless at times.
However, one key theme pervades them all, and that is the goal of ever increased levels of automation and efficiencies. For many years the industry has been rightly obsessed with Straight- Through-Processing (STP) rates. The higher the STP rate, the lower the processing costs. Any need for manual intervention adds time and money to the process, leading to higher costs but also the damaging spectre of lower levels of customer servicing and satisfaction.
Each bank, each actor on the network, endeavours to ensure that an outgoing payment, destined for processing at a correspondent in a foreign land, has all of the correct beneficiary and supporting information for a successful, efficient, straight through process at the destination bank. For any destination bank, receiving such instructions, they need to have the appropriate systems in place to automate the identification and routing of the payment to the correct account, be it ‘on-us’ or ‘off-us’, which will require the generation of the relevant local payment to a different domestic bank in their country.
As of now, every one of these processes are based on the SWIFT MT message standards and data model. However, come November 2022, those standards and that data model are set for a radical overhaul. An overhaul that adds new validations, new process flows, and many more fields within an expanded data set.
Consequently, the Big Question We Are Asking Is – How Will Current STP Rates Be Impacted by This Significant Change?
The strongly held belief in the market is that they will be improved. In fact, this expected improvement in STP rates is one of the key motivations and selling points of this major market initiative. The new ISO 20022 CBPR+ data set, along with the new processing rules, are built to improve automation. The new data model introduces an increased reliance on structured data, thus removing the troublesome use of free format fields and messaging.
The new standards support greater granularity which is set to improve automation in exception management. Therefore, when an error occurs, it can be managed with greater efficiency, removing the vast majority of the manual interventions that currently take place.
Should We Believe the Proposition? Is It Realistic or Is It Hype?
At Temenos, we’re not so sure whether it’s one or the other. For many years we have provided a specific solution that automates the repair of SWIFT based cross border payments, be they outgoing or incoming. Temenos Payments Repair uses a combination of pre-defined and configurable business rules with a large lexicon of over 50,000 Temenos maintained data points which enable the automated enrichment and ‘fixing’ of payment messages to increase a bank’s STP rates.
Used by some of the largest banks in the world, this technology has enabled these banks to increase STP rates into the high 90th percentiles, thus saving each organization millions of dollars in exception management fees and removing the detrimental effect of poor customer servicing.
In analysing the impact of the new SWIFT ISO 20022 data set, we have seen an explosion in the number of fields that may require the application of our automated repair facilities. The SWIFT MT data set required the monitoring and possible adjustment of data in 8-10 fields. For SWIFT MX, the number of fields requiring monitoring and possible adjustment explodes to more than 100!
Even though these fields have been created for greater granularity and more focused validations, are we sure that every player, every system in the processing chain will be populating these fields with the correct data? After all, our experience is that of current systems populating the wrong data, such as beneficiary details, and routings, into existing fields, be they free format or otherwise.
The data input into the fields may conform to syntax and basic semantic validations, but the actual information may be incorrect, just like it is now for the MT world. Except now there are many more fields that can go wrong, that can introduce data that will cause exceptions and incorrect routings and/or postings. All very costly in both time and money to any processing organization.
Do we think that everyone will be populating the new MX data set correctly from the initial go live in November 2022? What about those existing market players who will migrate to MX over the 3 year transition period from November 2022 to November 2025? Will they enter the new MX world populating all fields with the appropriate information?
It appears to us that there is a distinct risk to our current STP rates, even if it only relates to the initial teething problems of such a major change, teething problems that are bound to last the entire 3 year migration period until everyone is on SWIFT MX.
However, even after this migration period, and the bedding in of updated processing, will every system and the new standards deliver the envisaged nirvana of exception-free automation?
Is it cynicism, experience, or a cautious nature that leads me to question an expectation of STP Nirvana? Maybe it’s all three that has driven our increased investment in our Payments Repair technology to make sure we’re ready to keep STP rates high in the brave new world that is SWIFT Cross Border ISO.
So what are you doing to mitigate the risk of lower STP rates following your migration to SWIFT ISO based processing?