The Fedwire Funds Service, which moves trillions of dollars daily, shifted to a new international standard last year, and real-time payments systems were already there, but gains remain elusive.
The international standard, known as ISO 20022, has been in use for decades, but U.S. financial institutions are just beginning to embrace it and build their technology around it so corporate clients can make more use of its attributes.
That was the subject of discussions at the first day of the Nacha Smarter Faster Payments conference on Sunday in San Diego. During exchanges among payments and bank industry professionals on two panels, there was general agreement that financial institutions and their customers have barely scratched the surface of the benefits that the standard offers.
“As a community, we aren't reaping the benefits yet, not across the board, but there's a lot of potential,” said Frank Van Driessche, who is head of the ISO 20022 practice at the Federal Reserve. Along with instant payments, Van Driessche called the new standard one of the “biggest and most important drivers” for future payments progress.
The Geneva-based International Organization for Standardization gave the world the ISO 20022 standard over two decades ago in an effort to push financial institutions to embrace a more modern messaging system. Some 70 countries have already adopted the standard, which allows for increased operational efficiencies, more data-sharing and less outdated batch-processing.
In particular, ISO 20022 allows all involved to share more data in conjunction with payments. Van Driessche pointed to that opportunity as one that is “underestimated and under-exploited” in the industry. It’s valuable for processing efficiency, compliance screening and product innovation, among other uses, he said.
Van Driessche was one of three speakers on a Nacha panel titled “Time to Start Reaping Returns on ISO 20022 Investments.” Tony Clark, who is Swift’s head of corporates in the Americas, and Jenny Lee, who is the head of U.S. wire product and global payment solutions for Bank of America, were also on the panel.
Some corporate treasurers have been reaping the benefits of the ISO standard on the receiving end for years, presumably given its use in some parts of the world, Clark noted. Among the data points that the ISO standard has allowed companies to attach to payments have been invoice numbers, tax IDs and purpose codes, among other items, he said. “Data is king,” Clark said.
Still, Van Driessche acknowledged the data quality isn’t optimal yet, with financial institutions and their customers still getting better acquainted with how to make use of the new technology. The banks have a ways to go, and what customers give them in terms of data will shape the payments flow.
The banks “are still doing certain things in exactly the same way that they were doing them in the past, because they hadn't made the necessary changes in back offices, in their core banking applications,” Van Driessche said. In essence, the banks “put another patch on” their systems to prepare for the ISO migration.
Some banks have built translation systems to bridge their legacy systems to the new ISO standard, but panelists seemed to agree that moving past those intermediary steps to create systems that use the new ISO standard from the get-go is preferable.
“Translating to and from the legacy and the new format is going to create more error, or more room for mistake,” said Lee, who moderated the panel. “If everything is being taken in as an ISO native format, then you can increase the interoperability with the other payment rails.”
The two real-time payments systems in the U.S. – the RTP network and the FedNow system – were built using the ISO 20022 standard from the start. As a result, those relatively young systems are already benefiting from that format as they grow.
Other industry professionals, speaking on the “Smarter AND Faster: Real-Time Payments Meet Intelligent Design” panel, also touched on the benefits of the new ISO standard adoption.
“More and more corporates are looking at adopting ISO, so then it becomes a competitive advantage, if we can position ourselves to be able to support our clients along the ISO journey,” said Stephanie Modar, director of the domestic payments team at Bank of New York Mellon.
The challenge for banks and corporate clients is masterminding how to get teams across the businesses to talk to each other about integrating their varied programs and technologies to support sourcing and using the increased data that can be carried by the new ISO standards.
“Probably all banks can say ‘our core payment systems are ISO-compliant,’ but then again, it's still about thinking holistically about the end-to-end journey, and having all of those related systems also be ISO-ready, so that you can fully take advantage of the rich data that comes along with ISO,” Modar said.
That data can inform more analytics and fraud monitoring as well, she noted.
“People who are thinking about ISO as a compliance exercise are missing the possibilities and how they can better leverage that richer data,” she said.
