The U.S. likely didn't need an extra shove to adopt an international payment messaging standard vital to a faster payments network but, just in case, the U.K.'s Payments Council is making it easier to do so.
The Payments Council last week signaled international cooperation in agreeing to establish ISO 20022 as the standard for payment messaging, while forming a task force for continued study and written guidelines for the emerging standard for real-time payments.
ISO 20022 is a set of XML, or extensible markup language, messaging standards based on a shared data dictionary and business process model. The standard allows banks and merchants to transport far more data with a payment, informing where an invoice should be sent, what the transaction was specifically for, and the type of tax deductions that should be withheld.
More than 40 global financial institutions, international clearinghouses, payments associations, payment schemes and supply-side representatives met two months ago to put the agreement in motion.
Previously, it was common for countries to deploy different implementations of the standard. The group agreed that a new set of messaging standards is not needed, but instead a variation of ISO 20022 messages for common use for real-time payments needs to be delivered before the end of this summer.
As its push for faster payments in the U.S. has picked up steam over the past two years, the Federal Reserve Banks have often cited the need for adoption of the ISO 20022 standard to make it easier to communicate with international banks and to get on the same page with other countries more advanced in faster payments.
The Federal Reserve had representatives at the Payments Council meetings and will continue to participate in future meetings and initiatives, said Connie L. Theien, vice president of industry relations for Federal Reserve Financial Services at the Federal Reserve Bank of Chicago.
"We also, obviously, are looking at the standards as a key part of our faster payments task force, which we just kicked off," Theien said.
The Federal Reserve's task force will develop criteria for what would constitute an effective faster payments system in the U.S. "I fully expect standards to be a component of the criteria, and the prevailing opinion is that ISO 20022 is the best direction, given its emerging dominance around the world," Theien said.
The Federal Reserve already has strategy papers in place that specify implementation of ISO 20022 in the U.S. wire transfers and Automated Clearinghouse systems, Theien added.
ISO 20022 has become more than the "defacto standard" for real-time payments, said Gareth Lodge, a London-based industry analyst with Celent. "That just hides a wider insight, that it's becoming the de facto standard, period."
Canada has already committed to the messaging standard, and the Single Euro Payments Area of the Europe is already using the standard, Lodge said.
The Federal Reserve in the U.S. is being specific about pursuing use of the standard because it knows the country is falling behind others in a standard that represents the future of payments, Lodge added.
Without use of ISO 20022, the U.S. basically operates a more expensive and time-consuming system of handling remittance data and payment data separately. Up to this point, the U.S. banks have not felt pushed to adopt the standard because there is no regulatory pressure regarding the timeliness or auditing of remittance data.
But that may change quickly, said Angela Angelovska-Wilson, a financial services and banking lawyer at Reed Smith LLP.
"It's one of those things that needs to happen," Angelovska-Wilson said. "The U.S. is obviously trying to make strides to come in line with other countries, and this is just one more step."
There is virtually "no technological reason" why the U.S. can't adopt ISO 20022 and make its payments system faster in the process, Angelovska-Wilson added. "Many banks need to be brought up to speed in order to make it work, from regulatory framework to legal framework."
Adopting a well-recognized international standard would signal the U.S. is on its way to upgrading its wire transfer and ACH systems, which were "developed for older systems," Angelovska-Wilson said. "Let's be honest. Payments in the U.S. have to get faster and there is no more reason for the industry to kill the idea," she added.
Theien expects the Federal Reserve task force to release a document this year that proposes an implementation approach in the U.S. Prior to that, the group will obtain feedback from stakeholders through meetings, webinars and surveys.
Other countries can take a cue from the U.K. Payments Council in what it takes to move an international standard forward.
"Collaboration is often the key to success in the development of payment systems," Maurice Cleaves, interim chief executive of the Payments Council, said in a press release about the ISO 20022 agreement.
"The Payments Council team involved has made a major contribution to ISO 20022 and has been a driving force in the development of a more efficient and faster way of implementing message standards that will serve as the basis for long-term financial services solutions," Cleaves added.