Payments

Simplified – From
Basics to
ISO20022
SANTOSH RAJAGOPALAN
Thank you all for Joining
Payments Introduction
What is a payment ??
It is the transfer of value from one party to another

How is it achieved ??
Through what is know as “Payment Instruments”. An instrument helps us achieve a
particular task. A payment instrument helps us in achieving the act of payments.

Examples : CASH, Online Account to Account Transfers, Cards (Debit/Credit),

Bitcoin.

Scope : The scope for this session in the online account to account transfers. For the
sake of simplicity we are going to call them ”Payments”
Payment Types
Ø Non-electronic Vs Electronic
Ø High Value Vs Low Value
Ø Domestic Vs International
Ø Customer Vs Bank
Ø Push Vs Pull

Example for some of the above

Ø There are several other classifications. There are a few other classifications.
Payments – A2A
A2A stands for Account-to-account transfer. In the modern era all of you must have
perform at least a few such payments in the past month.

We are going to understand the behind the scene action of what happens after we
click on ‘submit’

The world will come to a stop if we are unable to make payments. Now that the
technology is evolving at a rapid phase and the way we send and receiving
payments is evolving there is huge opportunity for professionals to get into this
industry and thrive.

We will touch upon the fundamental concepts related to payments

Payment System & Parties
Payment system are a set set of rules and standards that the parties must
adhere to for smooth flow of payment
Several payment systems exists through out the world. Even within a particular
country/region there might be more that one payments system each one
serving a different purpose.
Parties
1.Customers
2.Banks
3.Clearing and Settlement Mechanism
4.Third-Party Payment Solution Providers
5.Governing Bodies

Link 1 : https://www.paymentsdomain.com/2021/05/14/parties-in-a-payment-
system/
Accounts
Classification of accounts
• Customer accounts
• Bank’s internal account
• Clearing account
• Mirror clearing account
• Nostro/Vostro Accounts

Customer accounts : These are accounts that customers hold with the banks. Savings
and checking account are the most common.

Bank’s internal accounts : These are accounts that banks use for a variety of
purposes. Charge account, PL account, GL accounts.
Accounts
Clearing account: Banks open accounts with clearing houses. These accounts are
called clearing account.

Mirror clearing account : Banks open an account that mirrors the clearing account
mentioned above in their books. We will see “why ?” in the following slides.
Accounts - Contd
NOSTRO/VOSTRO: The most confusing among accounts. The one takeaway from
this session

Mirror Nostro: Same concept as that of mirror clearing

Domestic payments
Exchanged between two parties within the same country or region

Types of Domestic Payments:

1. High Value (RTGS)
2. Low Value (NEFT)
3. Instant (IMPS or UPI)
4. Direct Debits (ECS)

Characteristics:
Ø Comparatively Simple
Ø In a single currency
Ø Monitored/Overseen by the central banks
Ø Done though a CSM
A Sample Payment
Ø John wants to send TOM
10000 INR
Ø What details are required
Ø Details entered in bank’s
website or mobile app
Cross-border payments
Ø These are payments that are done from one country to another
Ø The purpose of these transaction may be to settle money for trade, foreign
remittance etc.
Ø Used heavily by corporates
Ø Comparatively complex as it involves FX, Cross Jurisdiction Compliance,
International sanction
These are also colloquially called ‘SWIFT’ payments or ‘wire’ transfers. The way in
which cross-border payments are achieved is called ‘Correspondent i.e. via
NOSTRO/VOSTRO accounts.

Money from a country never leaves its borders. If a bank from India wants to send
money to a bank in the USA then it must open an account with a US bank who will
act as its correspondent. They are the country. Only bank in USA deal in their local
currency USD.
Accounting Entries
Correspondent banking
Accounting Entries
Domestic
Direct Debits

A topic for self reading J In the interest of time

Will share some links for your reading
Payment Messages
They are the carriers of payment information from one party to another. They start
their journey from the ordering customer and ends with the Beneficiary Customer.
These message must have some standard format that all the parities in the payment
system can adhere to, so that every one speaks the same language.

On a high level these messages are of two types:

1. Customer to Bank / Bank to customer (aka. Customer to FI/FI to customer)
2. Bank to Bank (FI to FI)

Reading material (To be shared)

ISO20022
The world of payments is vast and is evolving continuously. There were several
attempts throughout the history of payments to come up with a one size fits all
kind of solutions to standardize payments communication.

These attempts have failed due to several reasons. Cost benefit, quality of the
standard, wide spread adoption were some of the reasons.

ISO20022 has succeeded in this attempt (To a certain degree). Today we will
see why ISO20022 is so successful and is adopted or being adopted by all
major payments systems.
What ISO20022 is ?
Ø It is a global standard
Ø It is like a dictionary that has the words of a language
Ø It is like the high school language grammar book that defines how the messages are to be used
Ø It is open source
Ø It covers many parts of the financial world including cards, Trade Finance, Forex, etc.
Ø It is a framework that different financial systems can make use of
Ø It is technology independent
Ø It is Proven, robust, and is like a universal language that all the Financial systems can
understand
Ø It is a standard for standards
Ø It is/will soon be used by different payments systems
Ø It is a standard to which anyone can contribute
Ø It is evolving and will continue to do so
What ISO20022 is NOT
Ø It is not a message type
Ø It is not a payment system
Ø It is not just XML
Ø It is not just SWIFT MT to MX
Ø It is not just for SEPA/SWIFT
Ø It is not just for payments
Ø Most importantly... It is not new... It is older than teenagers
Ø It is not just about the mapping. In fact the mapping is not one of the not so difficult parts of a
ISO20022 adoption. Mapping is an issue only where there is a co-existence
When it began
Standing in 2022/23, we clearly see that ISO20022 is the future of Global Financial Messaging
Standards but it took several years to achieve this. If ISO20022 was a person then it can legally
drink alcohol(In some countries)

Interesting Fact : ISO20022 was supposed to be called as ISO15022 2nd Edition

Here is a timeline of how financial messaging standards has evolved

Proprietary
ISO7775 ISO 15022 ISO 20022
MT

Payments, Treasury Securities only Securities only First edition

& Trade 1973 1984 1999 2004
Adoption of ISO20022
ISO20022 can be adopted by both CSM and correspondent banking.

1. SEPA
2. Target 2
3. SWIFT
4. Lynx (Canadian Payments)
5. CHAPS
6. Fedwire
7. AusPay
Why ISO20022 ?
• Interoperability : When message moves from one payment system to another, it will work well
together.
• Rich Data: ISO20022 has rich an better quality structured data
• High STP : “Cuba the Country” example
• Better compliance

Ok but how is ISO20022 relate to MX ? What the heck is CBPR+ ? What is HVPS+ ?? There are
three layers .

1. ISO20022
2. Usage Guidelines
3. Actual adoption
ISO20022 Structure
ISO20022

CBPR+ HVPS+ CGI-MP

SWIFT MX EURO 1 Corporate Banking

Usage Guidelines
1. CBPR+ - For cross-border payments
2. HVPS+ - For high value payment market infrastructures
3. CGI-MP – Customer to bank

CBPR+ and HVPS+ are adopted in the interbank space

CGI-MP is adopted in the customer to bank space.

All the 3 have to comply with the rules laid out in ISO20022
ISO20022 message name
ISO20022 message walkthrough
The transfer of data has many layers. We are going to focus on what is called as the request
payload

This has 2 different parts

1. Application Header
2. Business Document
ISO20022 message flow
Important Links
Multilateral Clearing : https://www.paiementor.com//clearing-and-settlement-mechanisms-
multilateral-clearing/
Settlement : https://www.paiementor.com/clearing-and-settlement-mechanisms-settlement/
Payment System Models: https://www.paiementor.com/payment-systems-models/
Payment Engines: https://www.paymentsdomain.com/2021/06/05/payment-engines/
Parties : https://www.paymentsdomain.com/2021/05/14/parties-in-a-payment-system/
Payment Messages: https://www.paymentsdomain.com/2021/05/22/messages/
Direct Debits: https://www.paiementor.com/category/direct-debits/
Cross border payment: https://www.paiementor.com/category/x-border-payments/
Payments Accounting : https://www.paymentsdomain.com/2021/05/22/messages/
SEPA : https://www.paymentsdomain.com/category/sepa/
SWIFT : https://www.paymentsdomain.com/category/swift/
ISO20022 Official site : https://www.iso20022.org/
SWIFT MX: https://www2.swift.com/knowledgecentre/products/Standards%20MX
ISO20022 Tutorial: https://corporates.db.com/in-focus/Focus-topics/iso20022/tutorials
Sharp Talents Course : https://sharptalents.com/course/payments-fundamentals-2/
Important Links
Citi ISO20022 Mini Series : https://www.citibank.com/tts/sa/flippingbook/2021/ISO-20022-Citi-
Mini-Series-Reference-Guide-Part-3/2/
ISO20022 for Dummies (e book): https://www.swift.com/campaign/iso-20022/iso-20022-
dummies
MT to MX mapping (Old rough guideline for reference only) :
https://www.bundesbank.de/resource/blob/603426/2357d10f4efa187e3f3fb56c004fbf71/mL/sp
ecification-iso-20022-migration-with-remarks-data.pdf
Feedback
Questions
Thank you !!