Clean data is key to instant payments, real-time settlement, open banking initiatives and blockchain technology — but such details are often lost or garbled when sent between parties. To better preserve this data, the U.S. financial services industry is turning to the ISO 20022 messaging standard.
Essentially, ISO 20022 allows banks and corporations to handle cross-border payments that can carry extensive information in standardized data fields, taking much of the mystery out of each transaction and allowing banks to streamline other operations because of this added clarity.
"It's a change that is coming," said Rossana Thomas, vice president of product management for the enterprise payments platform at Fiserv. "Any bank that has started using the [Clearing House RTP network], they are also using ISO 20022. And any bank that wants to do instant payments through FedNow in the future is going to have to be on the ISO format."
Real-time payments will drive the standard's adoption in the U.S. over the next two years, as FedNow, the Federal Reserve's real-time payment settlement platform, remains on a timeline for full rollout in late 2023.
The FedWire service will use ISO 20022 in the near future as well, meaning any bank using that service will have to comply.
"Some may not like [adopting ISO 20022] and would maybe see a lot of cost without much benefit, but it is a compliance change," Thomas said. "I stress how they can now leverage this compliance change because the data is really critical. More data is going to allow better business decisions for themselves and also how to enable that data for clients through different types of products."
If it's fast, ISO makes it so
The use of ISO 20022 became the
ISO 20022 had its beginnings as an international standard a decade ago when the European Union began moving to the Single Euro Payments Area as a way for the continent to handle cross-border payments in the same manner.
Its success in Europe led to many global corporations touting ISO 20022 as a standard that rationalized their cross-border payments — and it led to more questions about how banks could make it a global standard.
Institutions handling high-value payments were fairly quick to get on board, and in the U.S the conversation became whether the ACH process should move to an ISO format. Initially, there was no business case for it.
Nacha, which oversees the Automated Clearing House, had taken a different approach to ISO 20022, reasoning that many businesses weren't interested in waiting on others globally to adopt the standard. Instead, they could utilize it immediately for ACH transactions.
Nacha set up a system in which global customers could take an ISO format and map it to a Nacha format, and vice versa, so they could handle the ISO part of an ACH payment. But it came with a caveat that would ensure the standard would have global reach.
"The agreement for Nacha was that anything new in instant clearings technology in Europe or Asia all had to be based on the ISO standard for globalization," Thomas said. "It was consistent for customers and more efficient with cross-border payments."
A corporate treasurer, in most cases, would say the data information is almost as important, if not more important, than the actual payment, Thomas added. "If a payment isn't applied correctly, that doesn't help them in being efficient or facilitating what that payment is supposed to be for. A standard that allows data richness is really important for them."
How much data is there?
With approximately 70 countries using the ISO format, the number of data fields used generally depends on the country. Overall, there are more than 1,000 data fields available as part of the standard.
"Historically, it used to be that two different technologies had to merge with one another," said Cliff Gray, senior associate with The Strawhecker Group. "It would be using EDI (Electronic Data Interchange) format and then baking in some payments stuff into that EDI framework, or if you did payments already, you would bring in some EDI for the extra data and information."
ISO 20022 is simply a more modern option, making it much easier for users to read the attached data while providing as much information as needed, Gray added.
"A lot of transactions might use 15 or 20 fields, but if you are talking that it wants to support the EDI information, one transaction can have hundreds or thousands of data elements," Gray noted.
If a company like Home Depot is buying from a supplier, it would provide a whole container of details in the payment — essentially the same purpose that EDI was developed for, Gray said. "But in both technology and integration, ISO 20022 is much easier, because it combines all of the EDI and payment data in one place."
Beyond the basics of identifying who is paying whom, what the payment is for and how much it is, or what taxes would be, the ISO 20022 data fields can provide more structure to information about the parties involved and the remittances. This is especially true when more information is needed to satisfy regulatory requirements.
Ultimately, the ISO 20022 standard is about making it easier to electronically move money and eliminate the use of checks or cash. It will take on different use cases with The Clearing House RTP, FedNow or Same-Day ACH, as compared to how it might work with the bank-supported Zelle P2P network or within small-business operations.
"At Fiserv, we can't see any reason that parties couldn't identify what they want to use when it comes to the data fields in the ISO standard," Fiserv's Thomas said.
It comes down to taking all of the data fields currently in legacy systems and determining how to map them out in the ISO format.
"We take the specification and do a compliance upgrade to our clearing (network)," Thomas said of Fiserv's approach to helping banks add ISO messaging. "We take the formatting requirements and re-coded solution and work with banks on giving them the software in a number of different versions, to help them start to do their own testing."
Changes in the ISO format might be needed for back-office processing and interactions with fraud prevention and other data systems.
"I do see an uptick in adoption coming," Strawhecker's Gray said. "From the pure payments space, unless you are a Fiserv person or a serious IT person, you may not have heard of it yet."
It's likely that independent sales organizations and acquirers don't know about ISO 20022, much less care about it, Gray added.
Bank executives have known for years that they need to collaborate on building guidelines for cross-border payments and clarifying the role ISO 20022. Swift created a working group of international payments experts two years ago to dive deeper into the process.
Ultimately, with all of the complexities aside, bank systems and apps will have to handle more data when adopting ISO 20022. "There are a lot of downstream impacts with the ISO conversion," Thomas said.
