Encoding in text file context (such as XML file) is a map between Binary code and Character.  For example character a is presented with same binary value in the common encodings as the table below shows:

Binary value Encoding Character
0110 0001 ISO 8859-1 a
0110 0001 ISO 8859-15 a
0110 0001 UTF-8 a
 110 0001 US-ASCII a


Problems can emerge when in different encodings same binary code represents different characters. As the table below shows the file might contain invalid binary values if actual encoding is something else than the one given in XML declaration.

Binary value Encoding Character
1010 0100 ISO 8859-1 ¤
1010 0100 ISO 8859-15
1010 0100 UTF-8 invalid sequence alone
1010 0100 US-ASCII invalid 



ISO 20022 has decided to restrict character set usage to only UTF-8 on the fact that it is the most efficient (length-wise) way to transport characters http://www.iso20022.org/FAQ.page.