The ongoing push for digitization, transparency and automation in trade finance raises questions about the impact the Swift messaging migration from MT to the ISO 20022 standard (MX) will have on global trade finance operations.
The payments and cash management industry already knows there are benefits, challenges, and costs associated with this wholesale transition, so let’s look at these for trade finance.
profit
A key feature of ISO 20022 is the ability to reuse business and message components across all messages using XML syntax. This significantly improves data granularity compared to traditional MT formats. Naturally, richer data can improve accuracy, efficiency, and reporting.
The real benefit of increased granularity, which the payments industry is already experiencing, is fewer false hits in sanctions and compliance screening. Because these controls can be more specific in identifying the exact data elements.
Regulatory requirements in trade finance often go beyond the sanctions and compliance reviews typically associated with cross-border payments. Many banks require significant caution with trade finance transactions to prevent fraud and other financial crimes. Part of this process is flagging unusual transactions. In addition to spotting transactions that are inconsistent with a client’s regular business, some trade finance departments need to identify transactions that have little commercial significance or appear suspicious due to unusual pricing or vague descriptions of goods or services.
Some of the fields involved in issuing a letter of credit can consist of up to 800 lines of unstructured text, so verifying them manually is cumbersome and error-prone. Of course, it is possible to try to automate processes, but there are limits to how much these processes can be automated without a baseline of rich, granular data.
Migration to the ISO 20022 standard with more structured data presents a significant opportunity to streamline and automate trade finance operations, with the potential to deliver cost savings and improved customer satisfaction.
New initiatives in trade finance, such as AI, machine learning, digital documents, automated document verification, and increased use of APIs, can also benefit from more granular and structured data. It may be an ambitious idea, but ISO 20022 could be the long-awaited accelerator to truly digitize end-to-end trade finance processes.
Another advantage of trade finance adopting ISO 20022 is for consistency purposes. It makes sense to align with payments and cash management businesses, and ultimately the purpose of ISO 20022 is to introduce a common standards approach across all financial services.
For trade finance, this is more than consistency for consistency’s sake. An essential part of trade finance is settlement, and in most cases the settlement message must be generated by the bank’s trade finance system.
Given that the payments industry has already made the leap from MT to ISO 20022 (MX), trade finance systems will need to produce an inconsistent mix of legacy MT and ISO 20022 MX messages until trade finance messages are also included in the ISO 20022 standard. In practice, trade finance systems should (ideally) already produce ISO 20022 payment messages, and by November 2025, when the MT and MX coexistence period ends.
challenge
A balanced and cautious approach is always important when analyzing the impact of a new standard. For example, if you think about the concept of highly structured and detailed address data, the payment reality shows that many companies and financial institutions maintain address data in unstructured databases.
In fact, following a change request from the Payments Market Practice Group (PMPG), it looks like the original ISO 20022 CBPR+ vision of providing only rich structured data from 2025 will be adjusted to a more practical solution that accommodates semi-structured address options.
The trade finance ecosystem and product lifecycle is complex, involves multiple parties, and still relies heavily on paper-based documentation. Therefore, the trade finance sector can be expected to face greater challenges than the payments industry when adopting the ISO 20022 standard. A successful transition requires the involvement of industry experts from across the entire trade finance ecosystem.
costs
ISO 20022 promises many benefits, but its implementation comes with significant costs for the trade finance industry.
The significant adjustments to banks’ trade finance systems to send and receive interbank messages in the ISO 20022 format are just the tip of the iceberg. Additionally, data and business logic within trade finance applications will need to be hardened, and changes will be required to customer front-end systems, portals, APIs, master data management systems, and other internal and external systems. It will also have a significant impact on corporate trade finance systems and business-to-business (C2B) and bank-to-bank (B2C) trade finance messaging.
More research will be needed before estimating how much it will cost. However, considering that Celent and SEEBURGER estimate that total spending to implement ISO 20022 in the payments and cash management industry will exceed $2 trillion, it is clear that we are not talking about small numbers.
It remains to be seen whether the benefits of ISO 20022 will outweigh the costs and will vary from bank to bank. However, these expenditures can also be viewed as investments in more efficient and smoother global trade finance operations.
What are your future plans?
While the payments and cash management industry is bravely pioneering the ISO 20022 standard, trade finance professionals are wondering where they are next and when they can expect this to happen.
Despite the ISO 20022 messaging for demand guarantees and standby letters of credit already existing, Swift has not yet communicated a migration plan to ISO 20022 for trade finance.
In fact, the major changes made by Swift to existing MT messages for trade finance in 2018 and 2021 are expected to prolong the existence of MT messages and would probably not have been made had the migration to ISO 20022 been imminent.
However, this does not mean that banks in the trade finance space should sit back and do nothing.
What should banks do?
Some areas require immediate action, while others require banks to aim to be prepared.
Immediate actions relate to the end of the previously mentioned MT and MX coexistence period for the ISO 20022 migration of payments and cash management messages. Trade finance systems should be able to generate MX payment messages natively (without translation) by November 2025 at the latest. If your trade finance system is still generating MT payment messages (MT 103, MT 202 and MT 202 COV), immediate action is required to meet this deadline.
Preparations relate to the potential adoption of ISO 20022 for trade finance messaging. This should definitely be on banks’ radar for potential external market initiatives in their strategic plans and should be taken into account when upgrading and implementing new trade finance systems.
Trade finance systems must be flexible, business event-driven, and message format-agnostic, with an open, modern architecture. In our experience, systems with these characteristics are well-suited to handling major changes such as the adoption of ISO 20022. On the other hand, if banks typically have difficulty implementing changes to their trade finance systems, or if their system design fundamentally relies on MT messages, banks may begin a strenuous and costly migration to ISO 20022.
It could also be an advantage for banks to operate their trade finance systems with a single, common source code. In this model, suppliers can implement key changes once and deliver them to all user banks globally.
This approach is generally less resource-intensive, allowing suppliers to allocate their most experienced staff to the project and focus on quality of delivery. This allows complex changes, such as migration to ISO 20022, which require in-depth banking knowledge, to be implemented not only at low cost, but also seamlessly with a high level of automation.
Even if ISO 20022 is not implemented for trade finance in the near future, banks are better positioned to remain competitive in the ever-changing trade finance environment with a flexible and modern trade finance system. However, the implementation of ISO 20022 for trade finance actually appears to be a matter of when, not if.