Foreign Payments with ISO 20022

Required knowledge

• Basics of the correspondent banking system  
• In-depth knowledge of the Swift ecosystem

Foreign payments are transfers in cashless payment traffic where the paying party’s account is held in a country other than that of the beneficiary party. Such foreign payment orders are issued and processed via payment systems operating across borders. Most of these systems, especially the Swift network, have to date processed Swift MT messages dating back to the 1970s. As part of the global payments standardization process, the majority of these systems are converting to the new Swift MX messages, which comply with the international ISO 20022 standard. This is having a significant impact on internationally active commercial and correspondent banks, which will now have to convert their international payment systems to ISO 20022 at great expense.

The Role of the Correspondent Bank

Cross-border payments are usually processed by correspondent banks. Often this is done in a longer chain of correspondent banks with intermediaries in different countries.

A correspondent bank thus serves as a link between domestic and foreign financial institutions. It holds deposits in the possession of other banks, with which it provides payment and other services as an intermediary or agent. For example, it credits payments made by the initiating bank to the beneficiary party – if it is itself the account-holding bank – or forwards payments to the beneficiary party’s account-holding bank.

Domestic banks use the services of correspondent banks to access foreign financial markets and serve their international customers without having to open branches abroad. This allows them to process transactions that either originate or are completed abroad.

Cross-border payments are processed in correspondent banking relationships through loro or nostro accounts:

• Domestic correspondent banks maintain loro accounts in the domestic currency for their correspondent banks abroad.
• Correspondent banks located abroad maintain nostro accounts in the foreign currency for domestic banks.

Changeover from MT to ISO 20022 Messages

Correspondent banks have been exchanging MT messages via the Swift network for 50 years. Starting on 20 March 2023, a migration phase lasting almost three years will begin, during which both formats, i.e., existing MT messages and the new MX messages, will be permitted (Swift Co-Ex Phase). By November 2025, all of the 11,000 connected financial institutions must be able to receive, process and forward MX messages, as MT messages will no longer be supported for payments and account reporting.

The simplest cross-border correspondent transaction is a payment from a payer of the domestic bank to a beneficiary of the correspondent bank in another country.

When the payee maintains a direct bilateral account relationship with the correspondent bank, the transfer of payment information and settlement instructions between the banks occurs in an ISO 20022 message flow with a single pacs.008. In most cases, however, the paying party’s bank does not maintain a direct bilateral account relationship with the foreign beneficiary party’s bank. In this case, it is necessary to find a chain of one or more intermediary banks to transmit the funds to the recipient bank. There are two ways to route a correspondent bank transaction through the Swift network: the serial method and the cover method.

The Serial and the Cover Method

The serial method involves sending a pacs.008 message from the originating bank to the recipient bank through one or more intermediary banks. This method is just an extended chaining of simple transactions between two banks, with each pair maintaining a direct account relationship. The payment information and settlement instructions are transmitted together in the pacs.008 message, and there is a direct account relationship between each linked pair of banks in the payment chain.

The cover method decouples the payment information flow from the settlement of the payment. The pacs.008 message containing the payment information is sent directly via the Swift network from the originating bank to the recipient bank, while the settlement instruction (the cover payment) is sent through intermediary banks with correspondent banking relationships as a pacs.009 COV. In general, the cover method is considered faster. However, there are two separate streams that need to be reconciled.

To ensure that all 11,000 banks that need to switch from MT to MX messages have a common understanding of how to apply ISO 20022 across the Swift network, Swift, together with the CBPR+ working group, has set out a variety of use cases in the “CBPR+ User Handbook.”

Peter Ruoss
Product Owner Payment Software Partnerships, UBS Switzerland AG