ISO 20022 based Straight through Processing

SEPA as a driver SEPA infrastructure (Bank-to-Bank clearing messages) is the first one in the world and in payment processing history that is using ISO 20022 standard framework as a transaction information delivery mechanism. This is a huge step forward compared to existing national local clearing mechanisms or SWIFT MT-message based international payment clearing based on fragmented and not so structured and universal standards. ISO 20022 (www.iso20022.org) is mandatory for the Bank-to-Bank messages in SEPA but it can be (and is highly recommended) used by the end-corporate customers also when exchanging payment initiation messages and their reporting with the banks.

STP model I illustrate here the Straight through Processing of Credit Transfer using ISO 20022 messages with the traditional four-corner model flow-chart with descriptions of each step.

1. Debtor buying services or goods

2. Invoice / remittance - Creditor delivering the invoice for the goods and/or services purchased

- Invoice is included with remittance information that can be invoice number, local creditor’s reference (KID, OCR etc) or later 2010 international creditor’s reference (ISO 11649)

3. Payment initiation / pain.001 - Debtor pays the invoice as a payment to its bank using ISO 20022 XML

pain.001 payment initiation message - Debtor includes into the message its own Accounts Payable (A/P)

identification to make later the reconciliation on debit side - Debtor also includes the remittance information that Creditor wanted to have

into its Accounts Receivable (A/R) reconciliation - In SEPA-transactions the EndToEndId is debtor initiated transaction level

unique id that will follow the transaction through the whole chain. It is not still used for reconciliation but tracking the transaction in possible investigations.

- Debtor bank immediately acknowledges the received pain.001 payment initiation message with pain.002 status report to inform Debtor of successful/unsuccessful payment processing.

4. Payment clearing and settlement - This part of the payment delivery and used standard varies per clearing

system / country not all end-corporate critical payment info cannot be delivered through clearing

- In SEPA-clearing the standard is also ISO 20022 and the message is pacs.008 bank-to-bank credit transfer

- Remittance information wanted by Creditor is delivered further to Creditor’s bank (if clearing system is capable to do that fully).

5. Reporting from debtor and creditor bank - Using ISO 20022 XML camt.053 statement message of camt.054 debit/credit

notification message (also camt.052 account report message will be available for intra-day reporting in liquidity visibility purposes)

- Debtor is interested to have back its A/P payment id to be able to reconcile paid payments (also other transactions are reported with valid statement / transaction ids like account statement number and transaction archiving codes given by the bank)

- Creditor is interested to have its remittance id to be able to do A/R reconciliation (also other transactions are reported with valid statement / transaction ids like account statement number and transaction archiving codes given by the bank).

6. Ultimate Parties (ultimate debtor and ultimate creditor) - In SEPA clearing mechanism from February 2009 (SEPA Credit Transfer

Rulebook 3.2) it has been possible to deliver also on behalf payment information identifying the ultimate parties by both name and unambiguous organisation id

- This enables Shared Service Centre and/or Financing services to be used and therefore is one further step to optimise bank account structure and liquidity positioning by using less bank accounts in corporate groups.

Ongoing SEPA-transition and corporate opportunity After SEPA-transition period will be over (I hope too to have clear European level SEPA end-date for all three SEPA-instruments) this infrastructure will be available in

16 EUR-countries locally and for all EUR-transactions in other SEPA-countries. It will replace EUR-countries’ local clearing systems and give all benefits to end-customers adapted to the new standards. The transition enables corporates to start using same accurate reconciliation processes to vast amount of originally cross-border transactions that are run according to SEPA-schemes. Some banks also provide Corporate-to-Bank and Bank-to-Corporate messaging for other than SEPA-transactions that again gives opportunity to corporates to start implementing more harmonised payment processing and reconciliation.

It is easy to predict the future The ISO 20022 standard model has raised interest in many non-SEPA countries too as it is totally universal and adaptable to whatever credit transfer transactions in the world. SEPA will push Europe to apply to the new infrastructure and standard faster but as international corporate customers with their Shared Service Centre setups are active also in non-SEPA areas, this push will continue further. There will be interesting initiatives on various local clearing mechanism development when the idea of ISO 20022 will be spreading.

Common Global Implementation support for today and future SWIFT has acted as a driver for a Common Global Implementation (CGI) group to start making international implementation guidelines for ISO 20022 messages. The group consist out of large international and regional banks, ERP-vendors and corporate customers. The work has started and practically finalised for payment initiation and their status report messages. Work is still ongoing for direct debit collection and Bank-to-Customer account reporting messages that also will have common implementation guidelines ready during year 2010. By doing this important part of the standardisation work the group ensures as standard interpretations of the messages as possible to avoid standard fragmentation in its practical usage. Harri Rantanen, Harri.rantanen@seb.fi Manager, Formats & Standards, SEB Merchant Banking