Published:
May 31, 2024
May 31, 2024
Event:
News and Articles

Transforming Global Payments: Harnessing ISO 20022 and LEI Integration for Enhanced Interoperability

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Managing Local Requirements: Enhancing Interoperability through ISO 20022 and Legal Entity Identifier Integration

One of the key objectives of ISO 20022 is interoperability. This new syntax was designed to allow information to be carried with the payment message as it transits different payment systems. In this environment, the global reference data framework needs to allow for different local requirements to permit a seamless transition between different systems. National regulators have already begun taking advantage of the ISO 20022 standard’s capacity to carry more information in a structured format that allows for more efficient screening. The additional information requirements generally relate to legal entity information that can serve to reinforce the efficiency and reliability of KYC processes. 

The Bank of England has already announced that from November 2024 the use of the Legal Entity Identifier (“LEI”) will be mandatory for all payments between financial institutions using the CHAPS UK domestic payments system. The Reserve Bank of India has already mandated the use of the LEI for larger transactions (>500m INR ~ US $6k, since 2021) via the RTGS or NEFT systems.

However, it's important to note that implementation of entity data requirements in different countries may differ from international standards. For instance, the PesoNet payments system in the Philippines mandates the inclusion of the date of incorporation of any company originating a payment.

The Role of Correspondent Banks and Intermediaries in Global Payments Systems

Another important feature to consider is that correspondent banks do not only exist for cross-border transactions. In many domestic payments systems banks that are direct participants in the payments system will act as intermediaries for non-connected entities, sending and receiving payments on their behalf. In Fedwire, the US RTGS system, the “Bankers Banks” specialise in performing this function for smaller community banks as well as supporting payment activities for the credit unions. Thousands of community banks use banking intermediaries to connect to Fedwire. A few dozen specialist institutions provide this service to the majority of these indirect participants. 

This intermediary function features in many other payment systems which implies that a truly global, integrated system needs to maintain up-to-date information about the intermediaries involved in domestic payment routes as well as cross-border correspondents. 

The Growing Importance of Validating Payment Information and Adopting ISO 20022 Standards

With the increased focus on financial regulations and compliance, national authorities are implementing stricter guidelines and requirements for financial institutions to validate payment information. This is to prevent money laundering, terrorist financing, and other fraudulent activities. These guidelines are often based on global standards set by organisations such as the Financial Action Task Force (FATF) and the Society for Worldwide Interbank Financial Telecommunication (SWIFT). 

As a result, there will be a need for correspondent banks and Payment Service Providers (PSPs) to ensure that their payment information is accurate and can be easily traced across borders. In an interconnected world, where financial transactions are increasingly happening across borders, it is crucial for financial institutions to be able to validate payment information accurately and efficiently. This is where ISO 20022 enables interoperability, making it easier for financial institutions to exchange information and validate payment details, regardless of their location.

In addition, the use of ISO 20022 also supports real-time payments, which is becoming more prevalent in the financial industry. Real-time payments require quick and accurate validation of payment information in order to process transactions immediately. With the use of ISO 20022, financial institutions can ensure that all payment information is validated in real-time, reducing the risk of errors or delays in transactions. 

In conclusion, the need to validate payment information will become even greater in the future, as national authorities continue to implement stricter regulations and requirements. By leveraging the interoperability of ISO 20022 and ensuring the accuracy of payment reference data, correspondent banks and PSPs can effectively and efficiently validate payment information, supporting faster and more secure financial transactions in an interconnected world. 

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