Standards – the DNA of the payments industry

Leading the way we pay

The DNA of the payments industry

Standards

2 Standards – the DNA of the payments industry

Introduction 3

What are industry standards? 4

Overview of existing standards landscape in the UK and international payments markets 4

Supporting interoperability, innovation and competition 5

Timeline of UK and international standards developments 5

Regulatory push for standards 6

What is ISO 20022? 6

How can the industry manage standards efficiently and effectively? 7

How does Payments UK engage in international standards? 9

Glossary of terms 10

Where to find more information 11

Contents

“Payments UK's work on standards is vital to maintain the UK's position on the global stage.”

Standards allow for greater simplicity, as well as facilitating interoperability and straight-through processing in banking and financial services. The paymentsinfrastructure is a network and standards are vital to ensure the usersof the network can interoperateand communicate in a common and understandable way.

Experiences from around the worldand across a variety of industrieshave shown that well-designedstandards for infrastructure-basedservices facilitate competition andserve the interests of all users.From defining the size of a shippingcontainer to agreeing a commonglobal messaging standard for thefinancial services industry, there isno doubt that standardisation hasbeen crucial for the development,and success of the global economy.

Payments UK provides a highly regarded centre of excellence thatactively engages in the developmentof national and international standards. We co-ordinate the UK’s payment standards activitieson behalf of the industry and the wider community to ensurestandardisation is driven by a clear business need and representsthe full range of views.

In the world of standards, fewthings prosper when there isn’t a cohesive partnership behind a common goal. Standards demanda level of deep collaboration to be effective. This collaborationtakes place in global or domestic standards-setting organisationssuch as the European Committeefor Standardisation (CEN) or the International Organisation for Standardisation (ISO).

However, these bodies do not implement standards, and it oftenfalls to the rest of us in the industryto drive the adoption forward. Forinstance, Payments UK has facilitatedthe development of the ISO 20022standard and led the developmentof the G20 endorsed standard forlegal entity identification. This helpsmaintain the UK’s position as aleader on the global stage.

It’s not just those inside the industrythat are vital in supporting thesestandards; stakeholders such as thecorporate community, governmentand regulators all play importantroles. Whilst financial institutionsthemselves may still struggle to getstandards discussions happening at the policy level, the issue is increasingly getting the attention it deserves amongst regulators.

HM Treasury sees them playing a crucial role in the stimulation ofthe start-up financial technologymarket and the Payment SystemsRegulator views standards as a keyfacilitator of its policy objective ofaccess to infrastructure.

There is a lot of important work goingon behind the scenes to ensure thatpayments services in the UK continueto operate securely, reliably and efficiently. Indeed the success ofthe industry’s – often invisible –work up until now means that whenconsumers make a payment theycan expect that it will be sent and received with minimum fuss, irrespective of the bank they use. It is up to us all to make sure thatcustomers can continue to dependon payments working and standardsare at the heart of continuing tosuccessfully achieve this.

Lauren Jones

Head of Standards, Payments UK

Standards – the DNA of the payments industry 3

Industry standards are at the heart of the payments infrastructure. They are thecommon language that make payments possible and allow payments systems tooperate smoothly. Although their contribution is largely invisible and often takenfor granted, without them the payments systems simply couldn’t function.

Introduction


What are industry standards?

Despite their importance, even amongst professionals working on standards there is no fully agreed definition of what a standard is.

One relatively broad definition is: “an agreed way of doing things”. (BSI Group, 2014).

Another definition, offered by the International Organisation for Standardisation, focuses on the documentation of standards:

“A standard is a document that provides requirements, specifications, guidelines or characteristics that canbe used consistently to ensure that materials, products, processes and services are fit for their purpose.”(International Organisation for Standardisation, 2014)

Standards can be technical, operational or business in nature. In the payments industry these standardsrange from financial messaging standards, such as Bacs Standard 18, through to identifier standards, suchas the IBAN, BIC or Currency Codes. In the broader financial services industry these also include encryptionand security standards as well as identification of market infrastructures and legal entities.

Examples ofMessaging Standards: · ISO 20022· ISO 8583 · SWIFT MT· SWIFT MX· Bacs Standard 18

Examples ofSecurity Standards:· The Payment Card Industry Data Security Standard (PCI DSS)· Personal Identification Number (PIN) · Public Key Infrastructure (PKI)· Biometrics· Digital Signatures

Overview of existing standards landscape in the UK and international payments markets

Examples of Identifier Standards:· Business Identifier Code (BIC)· International Bank Account Number (IBAN)· Currency Codes· Legal Entity Identifier (LEI)· UK Account Number and Sort Code· Issuer Identifier Number (IIN)· Creditor Identifier (used in SEPA)· Primary Account Number (PAN)

• Any successful network business,and this is particularly true forpayments, depends on commonstandards. To create a strongnetwork effect the users must be able to communicate in astandardised way, which formsthe foundation for any service or innovation through which they interact. The collaborative payments and clearing infrastructure is a network business which is dependentupon technical and business interoperability.

• In a global economy of rapidlyemerging new technologies,standards help set the rules.They can provide a baseline that acts as a springboard for quick innovation and commercialisation, and can facilitate the industry’s capabilityand agility to implement continuouschange and innovation at lesscost and risk.

• If implemented well, standards canimprove industry interoperabilitybetween counterparties within aparticular jurisdiction as well ascross-border, both in other markets and currencies.

• A common approach taken bystandards-setting bodies is theconcept of Reasonable AndNon-Discriminatory (RAND),which is focused on good governance, transparency andopenness. Open and transparentprocesses are vital to maintain a balance of interests betweenindustry participants.

• Standardisation enables the UKto be truly global as standardsreduce technical barriers to better assist international trade.It also reduces the complexity,cost and risk of data manipulationand conversion in the inter-bankspace and between banks andtheir customers.

• Standards enable competitionand have been successfully usedas the basis for developing newproducts and entering new markets (both domestic andcross-border). Standards canfurther enable competition by reducing barriers to entry to infrastructure as they provide a common, level playing field for all participants.

• Standards support consistencyand harmonisation but not at theexpense of supporting flexibilityor regional diversity.


Supporting interoperability, innovation and competition

1968Launch of Bacs

1968Standard 18 adopted for Bacs

1978International Currency Code standard first published

1985Launch of C&CCC

1985Launch of LINK

1987BIC becomes an ISOstandard

19871st version of ISO8583 published

1995C&CCC start usingIBDE format

1996Launch of CHAPSbased on SWIFT MT messaging

1997International IBAN standard first published

1999UK version of IBAN standard published

20041st version of ISO20022 published

2008Launch of FPS based on ISO 8583messaging

2008Launch of SEPAbased on ISO 20022messaging

20132nd version of ISO20022 published

2014Payments Councilissue ISO 20022 policy for UK payments industry

Timeline of UK and international standards developments

1960s 1970s 1980s 1990s 2000s 2010s

We believe standards can help ensure that technologies work efficiently and reliably together, provide economies of scale, encourage innovation and reducebarriers to market entry.


Regulatory push for standards

Standards are increasingly beingseen as a facilitator of regulatoryand industry objectives, particularlyresilience, access and innovation.Market infrastructures (ACHs,RTGS, CSDs, stock exchanges, etc.*)are adopting and pushing developersto embrace standards for the benefitof their common customers. Manyregulatory initiatives such as MiFIDII, Basel III, PSD2 and FATF*,all look for open standards to supportharmonisation of business practices,and many see ISO 20022 as anideal formula. ISO 20022 is alreadyused in regulations such as SEPA,Target 2 and T2S*.

Recently there has been much attention given to reference datastandards in financial markets, to a major extent driven by post-financial crisis regulatory initiatives.This has seen the creation of theglobal legal entity identifier system,which was endorsed by the G20.Underpinning this is an ISO standardrelated to legal entity identification –as a unique identification systemfor parties to financial transactions.

Regulators see this as a concrete wayof contributing to and facilitatingmany financial stability objectives.To date the primary application ofLEI has been in the implementationof the Dodd-Frank and EuropeanMarket Infrastructure Regulation requirements. The potential benefitsfrom the LEI* system are very large, both in terms of improvingefficiency (reducing costs) at financial institutions and supportingbetter quality data and informationfor risk management and regulatoryoversight.

HM Treasury has also called uponthe industry to develop an OpenBanking API standard for the UKbanking industry* to facilitatechoice and competition in the retailbanking market. Open APIs offeropportunities and challenges forthe industry and although thechanges involved go much widerthan payments, the payments sector is well placed to take a leading role in its development and implementation. Open APIsmay fundamentally impact the customer-bank relationship as

well as significantly altering thelandscape of players and providers.There will be a strong need forcommon data and security standardsfor this aspiration to be truly realised.

In April 2014, the Payments SystemsRegulator (PSR) was created as thenew economic regulator for the UK payments industry in the UK. Atthe heart of many of its objectivesis a requirement for increased standardisation, whether it be in itsmarket review into the ownershipand competitiveness of infrastructureprovision; simplifying access tomarket infrastructure; or increasingdata carrying capacity. The PaymentsStrategy Forum was created by thePSR to develop a strategy for theindustry. The Forum is working toidentify, prioritise and help deliverinitiatives where it is necessary forthe payments industry to work together. Standards play a centralrole in this process to deliver collaborative innovation; and they facilitate a number of theForum’s ultimate objectives.

What is ISO 20022?

ISO 20022 is an international standard developed to facilitate electronic data interchange between financial institutions. It supports interoperability between all parties in the payments process. ISO 20022 is a single, common ‘language’ for all financial communications – no matter where the business is based.It allows participants and systems in different markets to ‘talk’ to each other using consistent terminologyand formatting.

However, ISO 20022 is not only a group of message standards. It was created by the International Organisation for Standardisation (ISO) as a new way to develop message standards within the financial industry – a standard to develop standards, so to speak.

Financial institutions exchange massive amounts of information with their customers and amongst themselves in the course of delivering the services we all use every day. ISO 20022 offers a more efficientway of developing and implementing message standards that will serve as a basis for long-term solutions.

*see glossary on page 10


How can the industry manage standards efficientlyand effectively?

Increased effort of financial institutions to achieve automationand efficiency has no doubt led tothe continued development of standards. However, the diversity of existing and emerging standardscan lead to complexity that willneed to be accommodated for sometime to come. In the UK marketalone it is likely that a financial institution engaged in payments aswell as capital markets may need tosupport standards, such as BacsStandard 18, FPS ISO 8583, ISO20022, SWIFT MT’s, Visa ISO 8583,Mastercard ISO 8583, ISO 15022,FIX, FpML, XBRL (and that is justfrom a messaging perspective). If a financial institution operates inmultiple jurisdictions, this list increasesdramatically. As standards mature,older versions that may still be supported by some organisationswill need to coexist with newer versions until full integration hasbeen completed. Occasionally theneed for coexistence may be a protracted period of time.

The management and maintenance of these different standards is extremely important for all the organisations that rely upon them.

To achieve greater simplicity andefficiency for the industry, PaymentsUK has been developing the Standards Collaboration Framework.The aim of this new resource is to provide a structured, completecatalogue of all UK payments standards and beyond in both technical and business formats, as the foundation that underlies the whole industry.

The Standards CollaborationFramework offers the possibility ofa centralised, joined-up approachto standards. The backbone of thisis a modern, central standardsrepository available to the PaymentSystem Operators, and eventuallyindustry more widely, to managetheir technical, operational andbusiness standards-related documentation, in a more streamlined fashion. Whilst investingresources to create and governstandards in a homogenous andconsistent manner will add value,global standards are only the tip ofthe iceberg; the key to the proposalis to apply the same disciplineacross the board to all exchangeformats and identifier standards thatthe industry uses and implements.A single platform for all standardsinformation will reduce the effort, time and cost of standardsmanagement.


The Standards CollaborationFramework can help all industrystakeholders better understandwhat standards make up the system,the nature of the different types ofstandards, how new standards may be developed in the future and the impact this could have on legacy systems. Through ashared understanding of what currently exists, the industry will be able to ensure that new andmodified standards fit properly into the Framework and best servethe needs of its many users.

Greater industry dialogue and engagement on standards implementation will avoid duplication of effort, ensure convergence as well as enable lessons to be learnt from eachother.

A great example of this is the Common Global Implementation(CGI) initiative – a forum for banks, corporates and vendors todiscuss various corporate-to-bankimplementation topics related toISO 20022. It aims to simplify theimplementation of ISO 20022based messages to promote wideracceptance within the corporate-to-bank space. This forum includesglobal banks and large corporatesalready using ISO 20022.

Vendors can also play a role in supporting convergence betweenmarkets. In the past vendors havenot been actively involved. Thevendor community are important infacilitating the industry in adoptingstandards. At the ISO 20022 RealTime Payments Group* they haveplayed a crucial part in developinga set of market practices for use ofthe standard for real-time payments.

*see glossary on page 10

World Class Payments

Payments UK's World Class Payments work has taken an evidence-based approach to identify what the future of payments in the UKmight look like if built on customer needs. This work emphasises theneed for continued commitment to common, open and transparentstandards and highlights how they will enable a number of innovationsthat the industry is seeking to deliver over the coming years.


How does Payments UK engagein international standards?

Payments UK believes that toachieve the best outcome, not justfor the UK industry but globally, itrequires thorough engagement bothat home and abroad. Engaging internationally allows Payments UKto provide a strong voice into theinternational standards process.Payments UK’s relationship with theBritish Standards Institution (BSI)to manage the engagement andinput into international and European standards committees, allows forgreater influence over the contentof standards that are adopted bythe UK industry.

The Payments UK standards team participates in internationalstandardisation through the ISO located in Geneva, Switzerland.ISO’s standards are developedthrough Technical Committees andtheir designated subcommittees.One of ISO’s 200+ technical committees is responsible for developing global financial industrystandards. TC68 is the only fullydedicated ISO Technical Committeewith its sole mission being the creation of financial industry standards. Since 1948, members ofthe financial services industry havecollaborated under the InternationalOrganisation for Standardisation(ISO) banner to develop technicalstandards to use on a global basis. Payments UK manages theUK interface into ISO TC68 on behalf of the UK financial services industry. It also holds the Head of Delegation seat at ISO TC68 representing the UK and has seatson various committees and workinggroups at ISO level.

Payments UK convenes the ISO20022 Registration ManagementGroup (RMG) on behalf of the UK.The ISO 20022 RMG is made up ofsenior industry experts. The RMG isthe highest registration body andapproves business justifications for new messages or updates to existing messages. The RMG nowmanages standards evaluationsgroups in Payments, Securities,Trade Finance, Foreign Exchangeand Card and Retail areas. PaymentsUK holds the Head of Delegationseat at the ISO 20022 RMG for the UK. The ISO 20022 Real-TimePayments Group is an ad-hocgroup of the RMG, with the aim of harmonising around the use ofISO 20022 for real-time payments.Payments UK are also key facilitatorsin this group.

Payments UK also participates at aEuropean level and has a seat onthe EPC Scheme Evaluation andMaintenance Standards Task Force.This group is responsible for themaintenance of the SEPA CreditTransfer and Direct Debit SchemeImplementation Guidelines and hasdirect responsibility for relevantstandards issues that concern theCredit Transfer and Direct Debit payment instruments.


ACHAutomated Clearing House, an electronic network for financial transactions.

API An application program interface(API) is a set of routines, protocols,and tools for building software applications.

Basel IIIA global, voluntary regulatoryframework on bank capital adequacy, stress testing, and market liquidity risk.

BICBusiness Identifier Code, a uniquecode to identify any business.

BSI British Standards Institution.

CEN European Committee for Standardisation.

CSDCentral Securities Depository. A CSD is a specialist financial organisation holding securities such as shares either in certificatedor uncertificated form so that ownership can be easily transferredthrough a book entry rather thanthe transfer of physical certificates.

FATF Financial Action Task Force (onMoney Laundering). It is an inter-governmental organisation foundedin 1989 on the initiative of the G7 to develop policies to combatmoney laundering. The FATF's primary policies are the Forty Recommendations on moneylaundering from 1990 and the 9Special Recommendations (SR) on Terrorism Financing (TF).

Together they set the internationalstandard for anti-money launderingmeasures and combating the financingof terrorism and terrorist acts.

G20Group of Twenty of the world’smost economically powerful countries.

IBANInternational Bank Account Number.

ISOInternational Organisation for Standardisation.

LEILegal Entity Identifier. Endorsed bythe G20, this is a reference code touniquely identify a legally distinctentity that engages in a financialtransaction, aimed at increasingtransparency of counterparty risk.

MifID IIMarkets in Financial Instruments Directive II. The Directive is the EUlegislation regulating firms providingservices to clients linked to 'financialinstruments' (shares, bonds, units incollective investment schemes andderivatives), and the venues wherethose instruments are traded.

Open Banking API StandardA Framework developed by the UK banking industry highlightingthe necessary provisions for the development of an ecosystem thatwill make it possible for bankingdata to be shared and used securelyvia an API.

PSD 2Payment Services Directive 2.

RTGSReal-time gross settlement systems(RTGS) are specialist transfer systems where transfer of moneyor securities takes place from onebank to another on a "real time"and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period.

SEPA Single Euro Payments Area (SEPA) is a payment-integrationinitiative of the European Union for simplification of bank transfersdenominated in euro. It mandatedthe use of ISO 20022 for CreditTransfer and Direct Debit in Euro.

Target 2 An interbank payment system for the real-time processing ofcross-border transfers throughoutthe European Union.

T2S (TARGET2-Securities) A European securities settlementengine which aims to offer centralised delivery-versus-payment (DvP) settlement in central bank funds across all European securities markets.

Glossary of terms


International Organisation for Standardisation: www.iso.org

European Committee for Standardisation: www.cen.eu

British Standards Institution:www.bsigroup.com

ISO 20022: www.iso20022.org

The Open Banking Standard:www.theodi.org/open-banking-standard

Payments UK, Standards Collaboration Report: www.paymentsuk.org.uk/industry-information/reports

Payments UK, World Class Payments Reports: www.paymentsuk.org.uk/industry-information/reports

Where to find more information

For more information about Payments UK's work on industrystandards, please contact:

Lauren Jones, Head of Standards

[email protected]

Payments UK2 Thomas More Square London E1W 1YN

T: 020 3217 8200E: [email protected]

Payments UK is the trade association launched in June 2015 to support the rapidly evolving payments

industry. Payments UK brings its members and wider stakeholders together to make the UK’s payment

services better for customers and to ensure UK payment services remain world class.

Once a quiet corner of the financial world, thepayments industry is transforming like neverbefore. Technological advances, new playersto the market, fresh regulation coupled with UKcustomers’ appetite for more convenient andimproved services mean that change is inevitableand there is enormous potential for the UKpayment markets to continue to lead the way.

Documents

Standards – the DNA of the payments industry