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There’s lots of talk in the banking world about ISO 20022. This is not surprising since the global adoption of ISO 20022 has already begun. But what is ISO 20222, how might it impact trade finance and what should banks be doing to prepare for it?

Introducing ISO 20022

ISO 20022 is defined by the International Organization for Standardization (ISO), as “a single standardisation approach (methodology, process, repository) to be used by all financial standards initiatives.” 

It is considered the next generation of financial messaging standards given its key characteristics of a common language with rich and structured data. Indeed, Swift (the world’s leading provider of secure financial messaging services) is already in the process of migrating payment and cash management messages from the legacy MT format to ISO 20022 standard (MX). 

In November 2025, when the current MT and MX coexistence period is set to end, all Swift traffic for cross-border payments and reporting (CBPR+) will be on an ISO 20022 standard.

ISO 20022 for trade finance: Benefits, challenges and costs

The Swift MT format has been the standard for trade finance messages since the 1980s. Fast forward to today, almost half a century later, processing power, bandwidth and storage capacity have greatly increased together with growing technological demands on the banking sector.

In trade finance, there is a continued push for digitisation, transparency and automation in an environment with increasing regulatory and compliance requirements.

What impact would a migration from MT to an ISO 20022 standard have on global trade finance operations? As the payments and cash management industry is finding out in real time, there are benefits, challenges and costs associated with such a wholesale transition.

Let’s take a closer look at these through a trade finance lens.

Benefits

At the very heart of ISO 20022 is the introduction of more structured data. A key feature of ISO 20022 is the ability to reuse business and message components across all messages using an XML syntax. This results in significant data granularity compared to the existing MT format. Naturally, richer data can improve accuracy, efficiency and reporting.

For example, a party’s address in ISO 20022 format has separate structured elements to clearly define each part of the address, whereas the name and address on an existing trade finance MT message are unstructured, bulked together and limited to just 4 lines of 35 characters. 

A tangible benefit of enhanced granularity, which the payments industry should already be experiencing, is fewer false hits in sanctions and compliance screening, since such controls can be more specific in which exact data elements are being checked.

Regulatory requirements in trade finance often go beyond the sanctions and compliance screening typically associated with cross-border payments. Many banks are required to perform significant due diligence on trade finance transactions to prevent fraud and other financial crime. 

Part of this process is flagging unusual transactions. As well as spotting transactions inconsistent with a client’s regular business, some trade finance departments must also identify transactions which appear to make little commercial sense or look suspicious due to unusual pricing or a vague description of goods or services.

Since transaction data is transported in an unstructured MT format, banks often need to manually check unstructured data to perform these important checks. For example, some fields relating to the issuance of a documentary credit can consist of up to 800 lines of unstructured text. 

Checking this manually is cumbersome and error-prone. Of course, attempts can be made to automate the process, but there is a limitation to the extent such processes can be automated without a baseline of rich and granular data.

This is just one example, but it is a fair assumption that if trade finance were on an ISO 20022 standard with more structured data there would be significant opportunities to streamline and automate trade finance operations, which in turn could lead to cost savings and increased customer satisfaction. 

New initiatives in trade finance such as AI, machine learning, digital documents, automated document checking and increasing usage of APIs should also benefit from more granular and structured data. Maybe it’s an ambitious thought, but perhaps ISO 20022 could be the long-awaited accelerator to truly digitise the end-to-end trade finance process.

Another benefit of trade finance adopting ISO 20022 is for consistency purposes. Alignment with the payments and cash management business makes sense, and after all, the very purpose of ISO 20022 is to introduce a common standard approach across all financial services. 

But, as far as trade finance is concerned, this is more than just consistency for consistency’s sake. An integral part of trade finance is the settlement, and in many cases, a payment message must be generated from a bank’s trade finance system.

Given the payment industry has already made the leap to ISO 20022, trade finance systems will need to generate an inconsistent mix of both legacy MT and ISO 20022 messages until trade finance messages are also on an ISO 20022 standard.

In fact, trade finance systems should (ideally) already be generating ISO 20022 payment messages and they must be by November 2025, at the end of the coexistence period.

Challenges

Whilst the adoption of ISO 20022 could lead to benefits for the trade finance industry, a balanced and cautious approach is often needed when analysing the impact of new standards.

In many cases, the devil is in the detail and what works in theory does not always work exactly how it is expected in practice. For example, as the payment industry has discovered, whilst the concept of highly structured and granular address data is appealing, reality shows that many corporates and financial institutions maintain address data in an unstructured database.

Consequently, following a change request from the Payments Market Practice Group (PMPG), it looks like the original ISO 20022 CBPR+ vision of only rich structured data from 2025 will be adjusted to a more pragmatic solution accommodating a semi-structured address option.

The trade finance ecosystem and product lifecycle are complex, involve multiple parties and still rely heavily on paper-based documents. It could therefore be expected that the trade finance space encounters greater challenges than the payments industry when adopting an ISO 20022 standard.

It is imperative that ISO 20022 standards address the intricacies associated with trade finance. Industry experts across the whole trade finance ecosystem must be engaged for the transition to be successful.

Costs

There’s no such thing as a free lunch. Whilst an ISO 20022 standard could promise benefits to trade finance, how much work would a migration to ISO20022 entail for the trade finance industry and what would it cost?

The impact on trade finance systems and operations would be huge. Considerable adjustments to banks’ trade finance systems to send and receive interbank messages in an ISO 20022 format are just the tip of the iceberg. 

In addition, it could also be expected that data and business logic within trade finance applications needs to be enhanced, and changes need to be made to customer front-end systems, portals, APIs, master data management systems and other internal and external systems used in trade finance processing. There would also be a large impact on corporates’ trade finance systems and corporate-to-bank (C2B) and bank-to-corporate (B2C) trade finance messaging.

More research would be needed before estimating how much this could cost. However, to give some perspective, a survey by Celent and SEEBURGER estimated that the total expenditure for implementing ISO 20022 in the payments and cash management industry will exceed $2 trillion.

It’s unclear at this stage whether this is an accurate estimate or a relevant enough comparison for the trade finance industry, but at least it should be clear that we are not talking about small numbers.

With that said, the benefits of ISO 20022 are expected to reduce the costs of trade finance processing. Whether the benefits will outweigh the costs remains to be seen and will vary from bank to bank. Perhaps therefore cost is not entirely the right term to use in this discussion.

The expenditure could also be seen as an investment into more efficient and frictionless global trade finance operations.

What’s next?

Whilst the payments and cash management industry is bravely pioneering an ISO 20022 standard, trade finance professionals are standing on the sideline wondering if they’re next. Having come this far in the article hopefully, you have a good idea of what kind of benefits, challenges and costs might be associated with trade finance on an ISO 20022 standard, but when might we expect this to happen?

Even though ISO 20022 messages for demand guarantees and standby letters of credit already exist, Swift has not yet communicated any plans for migration to ISO 20022 for trade finance.

Swift made major changes to the existing MT messages for trade finance in both 2018 and 2021. Such an overhaul is expected to prolong the existence of MT messages and presumably would not have been made if an imminent migration to ISO 20022 is just round the corner.

Does this mean that banks in trade finance should sit back and do nothing in relation to ISO 20022? Absolutely not.

What should banks be doing?

The key message from this article to banks falls into two parts, a call for immediate action and a call to be prepared.

A call for immediate action relates to the previously mentioned end of the MT and MX coexistence period for the ISO 20022 migration of payment 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 a trade finance system is still generating MT payment messages (MT 103, MT 202 and MT 202 COV) then immediate action is needed to meet this deadline.

A call to be prepared relates to the potential adoption of ISO 20022 for trade finance messaging. How should banks prepare for this?

1. Firstly, it should be on banks’ radar of potential external market initiatives in strategic planning.
2. It should be taken into consideration when upgrading and implementing new trade finance systems. A trade finance system should be flexible, business-event driven, and message-format agnostic with open and modern architecture. As a rule of thumb, systems with these characteristics are well placed to handle wholesale changes such as the adoption of ISO 20022. On the other hand, if a bank generally has difficulties implementing changes in their trade finance system or the system design is fundamentally reliant on MT messages, then the bank might be in for a turbulent and expensive migration to ISO 20022.

It can also be an advantage if a bank is running a trade finance system with a single common source code. Under this model, the vendor only has to implement the core changes once and can deliver them to all user banks globally.

Since this approach is typically less resource-intensive, the vendor can allocate its most experienced staff to the project and focus on the quality of delivery. This can ensure that complex changes such as a migration to ISO 20022 which require deep banking knowledge are not only implemented at a lower cost, but also seamlessly and with high levels of automation.

A final word

Even if ISO 20022 is not implemented for trade finance in the foreseeable future, banks are still better positioned to remain competitive in an ever-changing trade finance landscape with a flexible and modern trade finance system. However, implementation of ISO 20022 for trade finance does indeed seem like a matter of when, not if.