Fed's next move is key for ISO 20022 timing

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The use of data-rich messaging through the ISO 20022 standard has been at the core of nearly every Federal Reserve discussion about faster payments, as well as Swift's plans for its member banks.

As such, all eyes will once again be on the Federal Reserve Banks as they contemplate how, or whether to, adjust a planned three-phase migration of ISO 20022 to its Fedwire Funds Service.

ISO 20022 messaging has been viewed as a critical international standard because it allows more information about a transaction to be transmitted at the same time. It plays into the faster payments schemes because it eliminates any confusion or a slow-down in processes about what the payment is for. From a communications standpoint, Swift has called it part of its Harmonization Charter — or the desire for ISO 20022 as the preferred choice of messaging standard.

The banks announced last week that they were, for now, going to shelve a process that called for the first phase of the implementation to unfold in November of 2020. They made this decision based on feedback from the international banking community and the Payments Market Practice Group task force.

Because the payments task force proposed a same-day implementation when all banks were prepared for the enhanced messaging that is included with transaction routing, as opposed to a phased-in process, it isn't clear whether the Fed's assessment would result in an actual delay or if ISO 20022 integration would result sooner.

Swift informed its members banks it was targeting an ISO 20022 implementation by 2021, creating a gray area of sorts as to when Fedwire might be fully up to speed for all Swift banks. Ultimately, it's a matter of how the Fedwire and Swift timelines can match up to the benefit of banks globally.

"Perhaps there is some truth to this being the Fed's attempt to speed up implementation, but it seems likely that the delay would be even bigger without breaking the implementation up into phases," said Erika Baumann, senior wholesale banking analyst at Aite Group.

Generally, a call for a delay still signals a strategy of establishing "a project that 100% can't go on time" to instead be built into more manageable pieces, Baumann said.

Those calling for a delay in the implementation schedule for Fedwire expressed concerns about the increased risk during a phased-in rollout, as well as a longer period of time in which interoperability issues could arise at the financial institutions. Mostly, banks informed the Fed that if the ISO 20022 standard was not part of Fedwire services at the same time all Swift banks were ready, data in certain messages could be cut off or shortened.

"It's premature to announce an implementation timeline," Gina Russo, assistant vice president of wholesale product office at the Federal Reserve Bank of New York said when asked if she felt the delay could result in a faster implementation. "We need to complete our assessment first."

The Federal Reserve Banks assessment will "consider multiple implementation strategies, ranging from same-day implementation to maintaining our original three-phase implementation," Russo said.

There is no specific timeline for revealing a new plan. But, as with most Federal Reserve processes, the assessment will take into account that the Fed has been communicating with customers, payments stakeholders and industry groups on this topic since October of 2017 when the initial three-phase program was revealed. The Fed at that time announced its intent to replace the proprietary message format of the Fedwire Funds Service with ISO 20022.

"Swift announced its migration strategy and timeline in September 2018," Russo said. "In light of this development, we were not surprised to receive a formal request earlier this month from the Payments Market Practice Group to reconsider our phased migration strategy in favor of same-day implementation."

Swift declined to comment about the decision to delay the Fedwire implementation until the Fed clarifies its next steps. While it is a critical step for Swift to have all of its banks on board with ISO 20022 and be able to accept data-rich Fedwire transactions, there has been no indication the messaging standards provider had doubts about its own September 2021 timeline.

Meanwhile, Swift continues to connect banks using its Global Payments Initiative to domestic faster payments networks.

For its part, GPI has operated the past two years as a way for Swift banks to avoid entire legacy system overhauls by communicating with identical standards and processes and adding technologies as needed to move into faster, more secure and more accurate transaction flows.

The Fed says the decision to delay the ISO 20022 phase-one date of November 2020 has no connection to the FedNow same-day settlement service the banks revealed earlier this year as its hands-on entry into the faster payments schemes in the U.S. by 2024.

That said, the timing of the Fedwire announcement emphasizes that the Fed has been clear about its desire for ISO 20022 for the past five years. But the Fed was also delivering a message that it did not intend to go to market with a real-time payments service, preferring instead to leave that to the private market.

"Yet, here we are," Aite's Baumann said. "It's all speculation at this point, but the delay could be related, as I am sure all hands are on deck from a development perspective to handle this huge infrastructure undertaking."

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