CBK directs financial institutions to switch to international electronic payment standard

The Central Bank of Kenya (CBK) has issued a circular to all chief executives of financial institutions urging them to comply without fail with the transition of the Kenya Electronic Payment and Settlement System (KEPSS) to the internationally recognized ISO 20022 standards. 

The CBK says the move to the new standard seeks to streamline Kenya’s National Payments System (NPS) and concurrently achieve the transmission of high-value, time-sensitive international and domestic payments.

World over, the IS0 20022 standard is touted as the magic bullet towards enabling all global electronic payments through financial institutions to be safe, secure and interoperable from one jurisdiction to another.

The deadline set by the Society for Worldwide Interbank Financial Telecommunications (SWIFT) is at the beginning of 2025.

The CBK has said, “The new standard will require significant planning, system configuration and testing to avoid the risk of payment or statement integration failure.”

Are non-banking financial institutions ready?

However, banks operating in Kenya are deemed ready to join the global payment community next year as they are ISO 20022 standard-ready.

This, the Kenya Bankers Association (KBA) said is courtesy of the upgraded Automated Clearing House (ACH), which is compatible with the global ISO 20022 standard.

Locally, this is good news, especially for clients who use electronic payments and make use of a variety of digital payment systems to transact. The ISO 20022 standard promises richer and more structured payment data and is designed to allow financial institutions to provide better digital solutions, increased automation and efficiencies, refined compliance capabilities and real-time end-to-end execution.

The KBA says its upgraded electronic payments platform will offer standardized messaging capable of being sent through chains of correspondent banks with pinpoint accuracy, all but eliminating delays and human error; this will ultimately result in deeper automation.

However, as the banks voice readiness and have since 2023 used their own upgraded ACH which is ISO 20022 standard compatible, little has been heard from the other local financial institutions’ readiness or the lack thereof.

What are the ISO 20022 standard’s benefits?

The flexibility of ISO 20022 will provide an opportunity for the development of new domestic financial messages, which will streamline electronic transactions and card-based payment messages for all financial networks.

An electronic financial transaction life-cycle is complex and has been in dire need of a simplified collaborative and unified protocol such as the Purpose of Payment (PoP) code employed in ISO 20022.

ISO 20022 flexibility also creates several benefits for financial institutions, and the means to improve transaction efficiency while reducing costs and exposure to risk.

ISO 20022 provides a standard across payments and card services, defining message specifications for each message type.  It transmits consistent, rich and structured data elements for every type of financial business transaction. 

The universal adoption of ISO 20022 is aimed at creating efficient payments experience with fewer rejections and exceptions, better reconciliations, increased security and risk management which would ultimately lead to reduced costs for the companies and jurisdictions that adopt it.

CBK: Banks ready for ISO 20022

In March 2023, commercial banks in Kenya under the auspices of the Kenya Bankers Association (KBA) held a function held to launch an upgrade of the Automated Clearing House (ACH) to the ISO 20022 standard.

During the event, the KBA said that local bank customers would be expected to access faster clearing services for cheques, direct debits and electronic funds transfers courtesy of the upgraded ACH.

It was established to facilitate the transfer of payments and conforms to the ISO 20022 digital payment standard that is now a global phenomenon and by the year 2025, a universal industry standard.

The Central Bank of Kenya (CBK) in a statement on the milestone by KBA, noted that the Standard will bring major improvements to customers and institutions in the ACH, noting that it is in line with the National Payments Strategy 2022 – 2025 that was launched in February 2022.

“The Strategy is anchored on the vision of a secure, fast, efficient and collaborative payments system that supports financial inclusion and innovations that benefit Kenyans,’’ said CBK.

Further, the CBK said that the upgrade of the ACH aims to have a standard across the world that will increase the consistency and richness of structured data for transactions, thereby enhancing the efficiency, effectiveness, and transparency of payment services.

The ISO 20022 upgrade is a global electronic payment sector milestone, which the local banking industry is now adopting to attain a fully international standard, enabling integration into any payment system in the world as the ISO 20022 standard will offer global interoperability.

The global adoption of the ISO 20022 standard will have an immense impact on financial institutions and other electronic payment platforms, corporations, and any business with a stake in financial services and the large value payments industry.

SWIFT and other major electronic payment stakeholders have said that ISO 20022 is the way of the future as it is the most comprehensive financial data standard in existence today.

By availing richer more detailed data, it can drastically reduce the incidence of fraud and cyber-crime throughout domestic, and international high-value payments.

However, the ISO 20022 standard is not only used for payments; It is set to become the leading messaging standard across the wide breadth of the global financial services industry, enabling a common understanding and interpretation in diverse areas including securities, trade services, Forex, card payments and related services.

ISO 20022 will help to reduce financial liability, throughout the global financial industry, every payment gateway, and multiple technology solutions.

Stringent application of the Standard could cause teething problems as it is rolled out to the chagrin of many legitimate customers.

It remains a delicate operation which with time many hope will run smoothly and indeed help banks and other financial institutions know their customers better.

Industry experts hope that it will ensure speed, stability and openness on all electronic payment platforms in financial institutions.

Globally, many countries and firms have already adopted the ISO 20022 standard by heavily investing in technology upgrades, but many industry challenges remain especially in jurisdictions that will take longer to domesticate the standard and where technology is still in its nascent stages.

However, it is hoped that a majority of countries will be onboard by the 2025 date.