The Fedwire service continues to gain adherents and promises to transform payments.
And as ISO 20022, the data-rich messaging standard, moves through a staggered implementation schedule across the global stage, Laura Sullivan, senior product manager at Form3, said Fedwire is poised for its own transformation.
Fedwire operates as a real-time gross settlement system. Payments that flow through the system are settled immediately with a bank’s Federal Reserve account and are irrevocable.
“The single biggest thing that ISO 20022 will do for Fedwire is align it with many of the other payment systems around the world,” said Sullivan. She noted that “there is a fairly significant portion” of Fedwire volume that either originates, or ends up, overseas. Most of those payments flow through the SWIFT network. SWIFT, for the most part, now supports the ISO 20022 standard.
None of this is to say that there have not been some challenges. Sullivan recounted that when banks started the new SWIFT messages through ISO, there were some additional false declines because additional data (tied to address lines and other information) was triggering sanctions reviews.
By the end of 2025, the city and country will be required to be in precise fields — which, even as simple as it sounds, as Sullivan acknowledged, is a vast improvement over long-standing practices.
The migration “has really gone surprisingly smoothly, and the banks have handled it well,” said Sullivan.
“Being able to transport data without fear of ‘dropping’ that data or having to wedge it into fields that aren’t really fit for purpose” will benefit Fedwire, she said. In addition, the standardization of data flows will streamline messaging.
Historically, requests for payment (known as drawdowns in Fedwire terminology) or requests to have money returned might not have gotten a response, she said. But with ISO 20022 in place, there are specific message types that can be used to respond, “even if it’s just to say, ‘I got the request and am looking at it.’ That’s a huge difference for banks … you don’t have to continually send follow-up messages to ask what’s going on with a payment.”
Fedwire has also, traditionally, been limited in the number of parties that could be referenced in a payment, but those impediments are now no longer, well, impediments. In a hypothetical example, an investment firm would no longer have to strive to “figure out” who the money might be for based on reading a generic text reference field. The data is relayed through a structured field, and the application of funds is automated.
Asked by PYMNTS about the particular use cases that might benefit from the embrace of the new messaging standards, Sullivan said that “getting that invoice information to travel with the payment” can help even smaller companies save significant amounts of money as they reconcile their accounts receivable with payments received.
“We’ll start to see banks and FinTechs determine how to provide and make use of that data so that it streamlines reconciliation and error handling for their customers,” Sullivan predicted.
Looking ahead, said Sullivan, it’s likely that at least some payments volume will migrate from Fedwire to the FedNow® Service. One of the key distinctions between the instant payment systems and Fedwire is the dollar limit cap. The average Fedwire transaction is in the range of $5 million, and many of the payments are bank to bank. But as FedNow gains more acceptance and raises transaction limits, there will be a gradual shift of at least some Fedwire transactions to FedNow.