The U.S. would be at a clear disadvantage if its financial institutions fail to adopt the ISO 20022 standard, which many other regions use to handle electronic payments, the Federal Reserve Banks say.
The International Standards Organization 20022 messaging standard allows the inclusion of remittance documents with cash, card, securities, trade or FX international payments in a language that all domestic and global financial institutions would share, says Terry Roth, vice president of the Federal Reserve Bank of Cleveland.
Without this capability, the U.S. operates a more expensive system of handling remittance data and payment data separately, Roth adds.
U.S. financial institutions have not felt any urgency to adopt this standard because there is no regulatory pressure on timeliness or auditing of remittance data, Roth says. But if efficiency translates to speed in a common payments system, the messaging standard would be vital.
"ISO 20022 brings automation to previously manual processes, enabling operational efficiencies, cost savings and staffing reductions," Roth says.
Roth and other Federal Reserve Financial Services members have been conducting a series of open meetings, hosted by the Federal Reserve Banks, to present possible approaches to a faster U.S. payments system.
ISO 20022 is a set of XML, or extensible markup language, messaging standards based on a shared data dictionary and business process model. Other countries use the standard to streamline payments because it allows room for additional payment-related information while addressing end-to-end communications from the remitter through the beneficiary.
XML is "self-describing" in that it tells users what is in each field of the coding, making for easier integration and sharing of information, says Nancy Atkinson, a wholesale banking expert and senior analyst with Aite Group.
"That's why XML is the big exciting thing in the IT world now and in places where people are trying to go with it [for transaction messaging]," Atkinson says. In short, there is mounting interest in ISO 20022 from financial institutions, corporations and financial application providers.
Past Fed studies and Aite research indicate that "there is a very real preference by the receiver to get remittance information with the payment if possible," Atkinson says.
The Federal Reserve Banks see adoption of the coding as a natural fit for all types of payments, if the industry is serious about moving toward a system that comes close to real-time.
"It allows interoperability, and upgrades have been completed in other markets as part of broader technology projects, regulatory mandates or new system developments," Roth says.
The Fed Banks would like the payments industry to implement ISO 20022 by first promoting the standard through education, and next developing a national strategy for adoption.
A second phase would enable ISO 20022 for cross-border wire payments, followed by cross-border Automated Clearing House payments. Ultimately, the U.S. would assess the value proposition of the standard and adopt it for domestic wire and ACH payments, in addition to using it as the standard messaging format for new products and services, Roth says.
Since the introduction of the ISO 20022 for payments in 2005, many in the payments industry have argued for the use of technology that can handle remittance information associated with payments, particularly in the business-to-business sphere.
Nacha, the electronic payments association, has been working the past few years to establish a faster electronic payment system in the U.S.
In 2013, Nacha launched its XML-ACH Remittance Program to establish conditions and rules for using ISO 20022 messages for B2B payment remittance information over the ACH network. In April 2014, the ISO 20022 standalone remittance messages were approved and published.
Swift, the global provider of secure financial messaging services, operates as the "guardian" and registration authority of the ISO 20022 standard.
But Swift's services are far more prevalent in Europe than in the U.S., where smaller banks generally don't see a need to register with Swift, Atkinson says.
Because the standard's benefits are considered qualitative and other markets are generally reluctant to share proprietary information, the Fed Banks say it is difficult to define a quantitative business case at this time.
As such, larger banks with clout would need to see a strong business case before shifting their wires and other services to ISO 20022, Atkinson says.
ISO 20022 would create a less expensive system if it were generally adopted for certain transactions, but existing systems would have to change to accommodate it and that will carry some expense, Atkinson adds.
In a world in which every transaction uses ISO 20022, businesses and banks would be able to communicate easily and automatically, Atkinson says. Under that scenario, all parties would save money.
"You'd save the cost of making that integration happen and speed up the period of time the businesses and banks can talk to each other," Atkinson adds. "If it comes in as straight-through processing, the recipient of the payment would no longer need staff there to manually post remittance information."
The Fed assessed the business case for moving to the ISO 20022 standards for wire transfer and ACH systems in the U.S., says Connie Theien, vice president of financial services industry relations for Federal Reserve Bank of Chicago.
"Today, each leverage their own proprietary standard," Theien says. "In ACH and wire both, there have been standards updates in recent years that enabled message components to align with ISO 20022 standards, but the overall message format standard is proprietary."
Ultimately, ISO 20022 is only a small part of the overall initiative to change the face of payments in the U.S. But it's a standard that can't be ignored because it offers a common financial language that eliminates repeated translation and conversion of data.
Banks not embracing this change will face future challenges from non-institutional competitors, Aite's Atkinson says.
"Banks have to really think about whether they really want to cede the payments business to non-banks," Atkinson says. "I don't think they do."