What will payments over the internet look like in 2030?
A revolution in finance and payments. That's what crypto-based platforms like Bitcoin, decentralized finance and stablecoins are attempting to do. But just because traditional money is centralized around monolithic central banks doesn't mean that it can't have a revolution of its own.
Over the next 10 years, a big bang will be unfolding in central bank land. ISO 20022, a new standard for communicating electronic payments instructions between financial institutions, will be taking over. This, combined with the emergence of real-time central bank retail payment systems, means that payments in 2030 are going to be much better than in 2020.
Anyone involved in anarchic finance may want to keep one eye on what the suits have planned for the next decade. Not everyone will be included in this centralized revolution. Decentralized options will be the go-to backup for many people.
We rarely notice standards, but they affect all parts of our daily life. Standards govern everything from screw thread spacing (ISO 68-1) to country codes (ISO 3166) to child seats (ISO 13216) to quality management (ISO 9000).
Settling on a uniform way of doing things makes life easier. Prior to the 1950s, for instance, international cargo shipping handling required a "Tetris-like" approach to dealing with diverse package sizes. It was expensive, dangerous and labor-intensive. Putting everything in a universal metal container made the cargo handling process go much more smoothly. The International Standards Organization, an international non-governmental technical body founded after World War II, helped the industry settle on a standard definition for shipping containers by creating ISO 338, ISO 790 and ISO 1897.
The principles that apply to shipping are equally applicable to payments and commerce. To avoid a cacophony of different payment requests and orders, it helps if everyone uses a common grammar. The payments community builds this grammar by agreeing ahead of time on a fixed way of formatting messages. Standard headers. Footers. Payee account number fields. Character limits.
Take the U.S. People usually pay their utility bills by making an automated clearinghouse (or ACH) payment. All parties to an ACH payment must agree to use the common grammar set out by the National Automated Clearing House Association, or NACHA, the not-for-profit organization that governs U.S. ACH systems. A typical NACHA message looks like this:
To the human eye, a NACHA-formatted message looks like gibberish. But there are many advantages to a standardized message format like this, including that it is readable by machines. And so all ACH payments can be automated from one end to the other. This reduces costs, processing times and errors. Without NACHA's standards, monetary chaos would result.
There are a number of local message standards in the U.S. The Federal Reserve, for instance, requires participants to use its own proprietary messaging format if they wish to make wire transfers via the Fedwire Funds Service. And so a U.S. bank, municipality, or corporation must be fluent in the financial grammars of both NACHA and the Fed.
This proliferation of messaging standards is a global phenomenon. The U.K.'s multiple payments systems each use a different one. The Faster Payments Service uses a modified version of ISO 8583, BACS (the U.K.'s ACH system) uses Standard-18, and CHAPS (its large value payment system) uses the SWIFT MT messaging format.
It is into this babel of standards that ISO 20022 is being ushered. The idea is to convert all existing payments systems from their own proprietary messaging standards over to ISO 20022. And so ISO 20022 will become the English of payments, a global lingua franca for transferring value electronically.
ISO 20022 isn't new. The ISO began to devise the standard in the early 2000s. In the 2010s, a few trailblazing nations shifted over to it from their domestic standards. The Chinese are the leaders, having converted their main payment systems to ISO 20022 in 2013.
But most countries have yet to make the shift. The U.S.' main large value payment system, Fedwire, was originally slated to start transitioning to ISO 20022 over a three-year period beginning in late 2020. But thanks in part to COVID-19, the start date has been pushed to at least 2022, which means that the final changeover won't be complete till 2025 or so. The European Central Bank's large value system, Target2, will start its transition in November 2022. The U.K. will switch in April 2022 in conjunction with a new real-time gross settlement system.
Probably the most important piece of financial infrastructure to make the shift will be the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. SWIFT operates the global messaging network that banks rely on for making international payments. It intends to begin the switch to ISO 20022 near the end of 2022. There will be a three year coexistence period in which ISO 20022 and SWIFT’s legacy MT messaging format can both be used. Only in November 2025 the legacy format will be turned off.
One of the big advantages of a universal payments language is that banks, businesses, governments and other actors can stop supporting multiple formats. Whether a payment is made in dollars over Fedwire, in renminbi via the People's Bank of China, or from euros to rand along SWIFT, a single unique payment standard will prevail. That's pretty neat.
When a payment gets passed on from one system to another, it has to get re-translated into that system's language. This means data loss. But with one universal standard, no data gets lost in translation.
ISO 20022 has some nice features of its own that other standards lack. To begin with, it can carry more data than other messaging standards. No more cramming information into the wrong fields and truncation of names and addresses. This means that fewer messages will be tagged by machines as requiring human intervention. With fewer repairs needed, the overall payment process will go faster, require less labour, and reduce costs.
ISO 20022 also allows for more precision. SWIFT asks us to imagine a payment sent to Cuba Sports Bar Grille in Louisiana. In the pre-ISO 20022 format, "Cuba" might mistakenly trip a sanctions filter. But with ISO 20022 the data is carefully structured such that the word Cuba is designated in the name field, and so won't get held up.
This standardization of global payments grammar is arriving at the same time that 24/7 instant retail payment systems are being introduced by central banks all over the world. Until recently, small payments to and from bank accounts were typically processed by central banks over a settlement window of two to three days. That central banks typically close at nights and on weekends only added to waiting time. Delays like this were fine in the 1950s, but modern consumers raised on a diet of instantaneous email and on-demand video expect much more from their bank accounts.
The U.K.'s Faster Payments scheme, introduced in 2007, was one of the first real-time retail payment systems. More upgrades came in the 2010s including Sweden's BiR, Singapore's FAST and India's IMPS. Canada's Real Time Rail will be in place in 2022 while the U.S.'s FedNow real-time system is slated to arrive in 2024.
By 2030, 24/7 real-time retail payments will be de rigueur not only in developed nations but also in developing nations in Africa, the Middle East and South America. And all of these blazing fast systems will have settled on one unified language, ISO 20022, which means lower costs, fewer errors and more automation. In short, centralized payments are going to get very, very good over the next few years.
Where do blockchains fit in all of this? In times past, blockchain advocates have pigeonholed centralized payments systems as archaic and clumsy. But tomorrow’s payments are unlikely to conform to these stereotypes.
Given this firming up of the center, blockchain-based platforms will have to find ways to innovate around the edges. In 2030, there will still be people who are excluded from the ISO 20022 real-time payments nirvana I’ve just described. There will be some who are frozen out because they are protesting their governments. This is happening in Belarus today. Or those selling legal, albeit controversial, products, say like sex workers who often face deplatforming. It will be tomorrow's unbanked who will be the natural customers of non-gated decentralized systems.
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