At the heart of much of the push toward faster payments is ISO 20022 — the new messaging standard for financial institutions that standardizes the payments messaging scheme for payments, cards, foreign exchange and other transactions.
ISO 20022 has been vital to Europe’s Single Euro Payments Area efforts and is seen as critical to easing friction and accelerating cross-border payments. The U.S., however, has lagged in its adoption, due to what financial institutions in the country described as a lack of demand for the messaging scheme. The Federal Reserve banks have expressed weariness at its adoption, suggesting it would take years to implement.
As the Electronic Payments Association eyes how to progress its agenda, NACHA published a white paper this month, “Introduction to ISO 20022 for U.S. Financial Institutions,” in an effort to increase awareness and reduce skepticism among FIs resisting the messaging standard.
According to NACHA Managing Director of Network Development George Throckmorton, the paper aims to dispel some misconceptions about the initiative.
“The purpose of this whitepaper is to provide clarity regarding the promises, strategies, myths and roadblocks for ISO 20022 and payments,” he said in a statement. “Issuing the paper is part of NACHA’s ongoing efforts to meet the needs of the present by providing industry tools and solutions to assist with ISO 20022 ACH integration, while preparing for the future by continuing to monitor, explore and engage with market participants around the possibility of ISO 20022 ACH conversion.”
Knocking Down Misconceptions
A major aspect of NACHA’s recent paper is the dispelling of misconceptions of what ISO 20022 actually is. The messaging standard is not a SWIFT or SEPA standard, the group notes, and is not a standard only applicable for cross-border payments.
[bctt tweet=”ISO 20022 is not a SWIFT or SEPA standard.”]
But perhaps the biggest myth dispelled by the paper is that ISO 20022 integration will not lead to real-time payments.
“A misconception by some is that ISO 20022 has an impact on the speed of the payment,” NACHA stated, clarifying: “ISO 20022 as a standard is independent of the implementation architecture that will define speed of processing and settlement. Nor are all immediate payments market infrastructures built on ISO 20022.”
ISO 20022, however, can be a fixture of the faster payments movement as the standard that supports a commonality of real-time payment practices. As a business model, NACHA notes, the standard aligns business concepts between financial institutions, with transactions, including information about the types of parties involved, currency types, transaction amounts, remittance information and other key bits of data that, when standardized across all parties, lead to more streamlined payments.
Beyond Faster Payments
“There is immense potential associated with ISO 20022,” the paper declares, noting that while faster payments are certainly an impact of the messaging standard, benefits go beyond speed.
Standardizing payments messaging and having access to the information included in this standard means more transparent and streamlined regulatory reporting processes, for instance. And with ISO 20022’s ability to streamline the messaging process across jurisdictions, players can expand cross-border trade with the ability to speak the same payments “language,” so to speak.
And that goes for more than the major, multinational corporations, NACHA said.
“While ISO 20022 is often associated with the highly visible multinational corporations, the medium-sized businesses have also embraced the standards to an extent,” the report said. “It has allowed this demographic to look beyond their domestic borders and expand their business to other markets.”
[bctt tweet=”The medium-sized businesses have also embraced ISO 20022.”]
The group acknowledged the learning curve associated with the messaging standard, however, as well as other risks, like the excessive bandwidth, overpopulation of data and some existing gaps in the set of messages covered by the standard.
With these hurdles in mind, NACHA concluded its report by suggesting incremental adoption of ISO 20022 within the U.S.
“Even without a full modernization effort of the U.S. ACH Network, U.S. financial institutions and the payments ecosystem can take incremental steps to better support the evolving needs of the payments system users,” the association stated.