ISO 20022: Getting ready for staggered implementation

November 2022 marks the point of migration for some of the top global payment infrastructures to ISO 20022, an international standard for exchanging electronic messages between financial institutions, covering cards, payments, securities, FX and trade.

Most banks, corporates and payments companies use SWIFT MT financial messaging for transactions, which will migrate over to the new system and eventually come to an end in 2025, reports financial services consultancy Projective, which is highlighting the key changes financial services face and ways to mitigate risks.

“The transition to ISO 20022 needs to happen – and fast – if the industry wants to reap the many benefits it provides,” says Jacob Rider, Co-Head of Projective’s Payment Practice.

“Payments have already become faster, more transparent and more trackable thanks to the widespread adoption of SWIFT gpi, but the current MT standard does not offer the quality of data needed in today’s digital world.

“With better customer experience, better compliance and better efficiency, ISO 20022 is good news for financial institutions, provided they manage this transition quickly and carefully.”

ISO 20022 will consist of over 11,000 interconnected financial institutions, support all currencies, and connect market infrastructures in more than 200 countries and territories; which Projective describes as a shift that provides the perfect opportunity to deliver payments automation and unlock data innovation across the payments industry.

But while Europe is set to lead the way, global adoption will lag behind – the UK’s clearing system CHAPS, Hong Kong’s CHATS and the US’ CHIPS and Fedwire aren’t expected to fully transition until 2023 at the earliest – and with SWIFT MT ending in four years’ time, different clearing houses and currencies may transition at different times. Firms navigating multiple markets will have to factor in compliance with existing standards and, at the same time, manage the conversion to ISO 20022.

With five months to go until the adoption of ISO 20022 in Europe, Rider has outlined what firms need to know and the actions to take for ensuring that their processes are ready for this transition.

1. The IT challenge

With the adoption of ISO 20022 occurring in Europe before the Bank of England adopts it in 2023, banks and financial services firms will have to tailor their payments by region. Organisations in the UK processing payments from Europe or Asia will have the added burden of navigating between ISO 20022 and the legacy structures.

This requires these institutions to properly configure the complex IT architecture of their portfolios and projects accordingly, adjusting either their own in-house systems or using the services of third-party vendors.

Firms are faced with the options of redesigning IT systems for a brief window at great expense or relying on the services of third-party vendors, which adds uncertainty and potential dependency to payment processes. Accurately assessing the firm’s capabilities to temporarily adapt

2. Mitigation for the short-term

While many banks in Europe using TARGET2 changed their messaging formats in a single day, UK firms undergoing the longer transition need to adapt their payment and IT processes to counteract the potential delays and data influxes due to the lack of standardisation until CHAPS follows suit.

The use of in-flow translation services will be vital in ensuring that the full datasets are received, and payments are completed smoothly. However, close management of these systems is also necessary. Senior leaders will have to consider the challenges to coordination that these translation services pose and the potential impact that may need to be made to the firm’s indirect network of partners.

Navigating this interim and how much resource is allocated in translation between languages before standardisation can be a potential drain. Ideally, firms would be focusing all their attention on the transition, but a middle ground will have to be struck so that legacy frameworks are catered for, and an optimal transition is handled by senior leaders.

3. Embracing ISO 20022 in the long run

November 2022 and April 2023 may mark the switch to a new language for Europe and the UK respectively, but it is the beginning of an evolution. The new framework will alter the way in which payments are received forever, unlocking the speed and transparency associated with low-value domestic payments, and connecting the financial world with far less friction.

Measures to optimise the firm’s internal processes for resilience during the interim period and then running with ISO 20022 over the long term are therefore crucial. Reengineering of IT structures and a short-term contingency plan may be required not just in the short-term, but in the medium-term to 2025 until SWIFT MT comes to an end.

Ensuring that their firm is prepared for all scenarios and has the resilience to deal with issues should be the priority for senior leaders in the short-term, while keeping an eye on the potential for further evolution in payment structures in the future. 

The Projective guide to ISO 20022, which captures the key benefits, can be accessed here.

Bank of England confirms fifth monthly base rate rise

The Bank of England (BoE) has confirmed its fifth consecutive monthly interest rate rise, increasing base rate by 0.25% to 1.25%. It refrained from a sharper hike in response to the US Federal Reserve’s 75 basis points lift on Wednesday, which was the biggest tightening since 1994.

Commenting on the Fed’s decision, chairman Jerome Powell said: “We at the Fed understand the hardship that high inflation is causing. It is essential to bring inflation down and we are moving expeditiously to do so. We have the tools we need to restore price stability on behalf of American households and businesses.”

He conceded that the 75-basis-point rise was “unusual” but insisted that it was needed to contain inflation expectations. The Fed had upgraded its consumer prices forecast, with inflation still above its 2% target in 2024.

“I don’t expect moves of this kind to be common,” Powell said, but indicated that a further rise of 50 basis points or 75 basis points was on the cards for the Fed rate setters’ next meeting on 26-27 July. “Inflation has surprised to the upside. Further surprises could be in store. We therefore need to be nimble in responding to incoming data,” he said.

The BoE’s Governor Andrew Bailey is tasked with balancing efforts to curb soaring inflation against the risk of an economic slowdown or recession. The UK’s consumer price index (CPI) rose to 9% in April from 7% the previous month, while GDP fell by -0.3% after a -0.1% decline in March.

The European Central Bank (ECB) has already indicated that it will announce the first increase since 2011 in its interest rates next month and a potentially bigger tightening in monetary policy in September.

DHL warns of continuing supply chain challenges

Global supply chain disruptions that have caused challenges for many companies since the advent of the Covid-19 pandemic are likely to continue for months to come, according to logistics group DHL, part of the Deutsche Post DHL Group.

Although bottlenecks should improve as new container vessels are delivered and demand from shippers eases from the spikes experienced over the past two years, neither factor will be enough to restore global supply-chain flows to pre-Covid conditions, warns the head of DHL’s freight-forwarding unit.

“While port congestion will start to ease in 2023, there won’t be a return to pre-Covid levels. It’s going to ease in 2023, but it’s not going to go back to 2019,” forecasts DHL’s Tim Scharwath, CEO Global Forwarding and Freight. “I don’t think we’re going to go back to this overcapacity situation where rates were very low. Infrastructure, especially in the US, isn’t going to get better overnight, because infrastructure developments take a long time”.

Severe backlogs across major supply chain hubs resulting from the pandemic have been exacerbated since late February by the invasion of Ukraine. Expectations that the world’s gradual transition back to “Covid-normal” would also see the crisis ease have not yet been borne out.

Last month the Federal Reserve Bank of New York introduced the Global Supply Chain Pressure Index (GSCPI), a monthly measure of global supply chain pressure that assesses factors such as backlogs, delivery times and freight costs. The Bank noted that for May “reveals global supply chain pressures have increased for the first time since December 2021, with the potential for heightened geopolitical tensions to stoke supply chain pressures in the near term.”

The banking research and advisory firm East & Partners recently published the Global Insight Report ‘Digitising and Greening Global Supply Chains’, with forecasts from the Top 100 corporates in eight countries globally as to how soon they expect disruptions to ease. A high degree of pessimism was expressed by CFOs and corporate treasurers, with many not expecting conditions to improve any earlier than 2025.

Separately, DHL announced this week that it will charge private customers more for parcel deliveries from 1 July 1 as labour and transport costs have made price increases unavoidable. The charge to ship a parcel abroad will rise by between €1 and €3.50, excluding those bound for the United States, which, depending on the parcel size, will nearly double in price.

“The company is only partially passing on to customers what are in some cases steep increases in airfares and the substantial rise in costs charged by delivery partners abroad to Deutsche Post DHL for delivering merchandise items,” a release by the group stated.

DHL added that even with the price increases, it would still be below average parcel prices in Europe, based on a comparison published by the network regulator in November 2021.

Crypto concerns extend to Three Arrow Capital

Singapore-based hedge fund Three Arrows Capital has taken to Twitter in an attempt to battle rumours that the company is insolvent following the recent sharp falls in the cryptocurrency market.

“We are in the process of communicating with relevant parties and fully committed to working this out,” said Su Zhu, the co-founder in a tweet, without offering further detail.

Three Arrows, also known as 3AC, was founded by Zhu and Kyle Davies in 2012and developed into one of the world’s most successful crypto hedge funds, known for its prescient trading calls. Unconfirmed reports claim that the firm may have missed a margin call and experienced a liquidation event due to the recent crypto market turbulence.

The firm reported a net asset value of US$18 billion (£14.9bn) in its last public statement. 3AC is known for taking large, highly leveraged stakes in crypto businesses and cryptocurrencies directly and holds positions in cryptocurrencies including bitcoin, Ethereum and Solana, as well as equity investments in companies such as the BlockFi exchange and options trading platform Deribit.

Rumours of 3AC’s possible issues first surfaced on crypto Twitter early on Tuesday and spread during the day. The hedge fund based in Singapore appeared to be dumping staked Ethereum (stETH) as quickly as possible. stETH is Lido-staked Ethereum, a project that is facing liquidity issues and recently deviated from its peg.

Cyber insurers hike rates but narrow coverage

The fallout from the invasion of Ukraine nearly four months ago has been the trigger for cyber insurers to raise rates for cyber insurance while narrowing the coverage they offer, reports Moody’s Investors Service.

The bond credit rating company says that the conflict has increased the risk of cyberattacks that could extend beyond the geographic bounds of the war. Although cyber events connected to the military conflict have not yet risen to the scale some had predicted at its start, cybersecurity experts and government officials have warned that further and larger-scale attacks remain a possibility.

“The heightened cyber threat level comes at a time when cyber insurance – which helps companies defray costs and manage through attacks on their networks (including ransomware payments) — has become more expensive and insurers have sought to narrow coverage, as ransomware attacks have driven insured losses higher and weakened the product’s profitability,” says Moody’s

“Stringent sanctions the US and allied governments placed on Russia following its invasion…have increased the likelihood that both Russian government and nongovernment actors will attempt cyberattacks on entities across sectors and regions as an illicit means of raising funds. The most likely targets are banks, cryptocurrency platforms and corporate intellectual property assets. The military conflict has also increased risks of cyberattacks against critical infrastructure in Ukraine and beyond.”

Moody’s adds that strong cybersecurity practices will be key to mitigating the risk of cyberattacks and its own surveys indicate that basic cybersecurity management is an area of relative strength for the financial services and defence industries, among critical infrastructure sectors. However, cybersecurity management practices of regional and local governments and other types of public entities lag in comparison.

Lack of standard, battle-tested definitions in cyber policies makes litigation more likely Cyber insurance is a relatively young segment of property and casualty insurance, dating to around the year 2000. Cyber policy language and key terms and conditions have not yet been standardised across insurance companies and insured sectors.

Traditional insurance policies typically exclude coverage for losses caused by or arising out of war or warlike actions, in clauses known as “war exclusions.” War-related losses are usually uninsurable because of the potential for aggregation of risk and catastrophic losses. Some specialty insurance lines such as political risk and trade credit insurance cover certain war-related risks.

West Virginia hits back over fossil fuel “boycotts”

Six of the biggest US financial firms have been told that they will be denied access to state contracts in West Virginia as its Republican leaders continue their pushback on what they claim is bias against the fossil fuel industry.

BlackRock, Wells Fargo, JP Morgan Chase, Morgan Stanley, Goldman Sachs Group and US Bancorp are due to be placed on West Virginia’s Restricted Financial Institution List within 45 days, according to letters sent to the companies by state Treasurer Riley Moore on 10 June.

Moore sent letters warning each of the six groups that they face a prohibition on state banking business, after his office determined they were “engaged in a boycott of energy companies” based on public information.

The threat from West Virginia, where coal is a major industry, reflects increasing friction between banks and Republican-led states. Republican policymakers are threatening to curtail access to state business over industry policies they believe unfairly discriminate against certain industries, like fossil fuels and firearms.

The pushback is part of a broader controversy over environmental, social and corporate governance (ESG) issues, which the financial industry have adopted in response to investor demand despite claims by critics that it could limit credit to legal industries.

West Virginia is one of several states, including Texas, to adopt or consider new laws aimed at punishing banks they believe to be discriminating against such industries via ESG policies. Moore has the authority to bar banks from state business under a new state law he backed, which the legislature passed in March.

Moore said as the law was passed: “At a time when energy demand is skyrocketing and consumers are bearing the brunt of generationally high inflation, it makes absolutely no sense for financial institutions to cut off capital and financing to these legal, profitable industries simply because they don’t align with their radical social and political agendas.

“This law now puts the banking sector on notice: If you refuse to do business with our people, we won’t give you our people’s business.”

Some finance leaders have disputed claims of bias. BlackRock CEO Larry Fink contended that his company is not pursuing a blanket divestment policy but is urging investors to consider climate risk and cut their emissions.

Singapore’s Trade Finance Registry to launch before year-end

The Association of Banks in Singapore (ABS) has selected fintechs MonetaGo and GUUD to deliver the Trade Finance Registry (TFR) an interoperable industry utility that will bridge information silos between banks to prevent duplicate financing and fraud. The Registry is scheduled to go live in the fourth quarter of 2022.

“The effect shall be greater confidence among banks in the integrity of their clients and trade financing transactions,” a statement confirming the launch added.

“We are pleased to have selected MonetaGo to develop the TFR, taking advantage of their experience in this niche area and the use of their global hash registry to detect fraud across national borders. TFR will be handed over to ABS and its appointed operator after go-live,” says Ong Ai Boon, director, ABS.

The new system aims to provide a secure database for records of trade transactions financed across foreign and local banking institutions in Singapore, as well as connect to trusted sources of information for validation checks on trade data.

The TFR has been in the pipeline since 2020, when Standard Chartered and DBS, with the support of 12 other banks, initiated a project that said it would use a blockchain network to register trade finance transactions.

Qashio pioneers the UAE’s first corporate expense management card

Dubai-based fintech company Qashio has launched what it calls the United Arab Emirates’ (UAE) first corporate expense management card and software for business transactions, offering companies new levels of control over spending.

“The enterprise-grade expense management platform enables business owners and finance leaders full visibility and advanced control of all expenses,” stated its release. “The fintech has become the first in the region to launch UAE-issued corporate debit cards for business transactions.”

Qashio cites reports that suggest 82% of businesses fail because of a lack of proper cash flow management, with smaller companies that are starting out with a limited budget for their business particularly vulnerable.

“Qashio’s mission is to help make expense management completely seamless,” the company adds. “Its corporate cards can be issued instantly, and companies can decide if they want a virtual-only card or an accompanying physical card. The software also allows for a range of controls to be applied to the card including setting budgets by day, week or month, restricting vendor or category usage, restricting ATM withdrawals, setting a card suspension date and controlling the status of the card.”