Enhancing the US Wire Transfer Systems: ISO 20022 or STP 820?
In 2006, The Federal Reserve Banks and The Clearing House Payments Company conducted research that concluded that the US dollar wire transfer systems – Fedwire and CHIPS – needed to be enhanced in order to be viable options for the migration of some business-to-business checks to wire transfer payments. The research clearly stated that the limited unstructured remittance information fields that exist today make it impossible for a company to automate the receipt of a wire transfer payment. Furthermore, if a company is receiving payments from a thousand trading partners, the remittance information may come in a thousand different ways.
There is little debate among the banks or the payments system operators that the systems require upgrades to increase automation for the initiation and receipt of the payments. They also agree that the systems need enhancements to carry structured remittance information to enable automated reconciliation and posting to accounts receivable systems. So what is the debate?
The banking industry is wrestling with which technical format to use, the XML-based ISO 20022 or the streamlined X.12 820 known as STP 820 developed by the Clearing House Payments Company. At a 30,000-foot level, ISO 20022, which is making its introduction as a potential global standard, would seem like the logical winner. That is until you evaluate and understand that there is no business case for the US to move to this standard in the near term (defined as less than 10 years).
The ISO format is driven by European Union regulation and will be the cornerstone of the single euro payments area (SEPA) for cross-border low value bulk payments within Europe. All banks that want to participate in a pan-European environment need to comply, including US banks that have a global presence. The ISO 20022 has not as yet been implemented, however full implementation is expected by 2010.
In 2001, the Federal Reserve conducted research that identified the business purpose of written checks. It concluded that in excess of 4 billion check payments were written for business-to-business, business-to-government, or government-to-business. A similar study will be conducted this year, but the results will show little change since numerous studies have shown only a slight increase in electronic payments over the past six years. Compare that to the cross-border or global international opportunity that exists with the major US trading partners – less than 85 million commercial payments in total. This figure comes from a 2006 International Payments Research Study, conducted for The Clearing House Payments Company by Global Concepts.
What is the next big opportunity for banks? They can play an instrumental role in assisting their business customers in the automation of wire transfer payments. True straight-through processing – the seamless flow of information from a company’s accounts payable system to their trading partner’s accounts receivable systems with limited or no human intervention – can be realized with significant benefits to both banks and their business customers. The enhanced capability will increase the use of wires by business customers and will provide a value-added service that will generate additional revenue for banks, as well as streamline the payments process for business customers.
The ISO 20022 format could be the global standard that will permit the seamless transmission of payment instructions cross-border from originator to beneficiary, first within Europe, then between the US and Europe and finally worldwide.
The major questions that need to be answered are: How much will it cost to convert the US payments systems to this standard? How long will it take? What is the return on investment for making this change when it is compared to the limited global opportunity?
The Federal Reserve has estimated that it would take six to seven years to redesign Fedwire for the ISO 20022. If the banking industry waits to upgrade the wire transfer systems for business-to-business payments until the ISO 20022 is ready for the US, they would lose the opportunity to capture any of the 4 billion business-to-business payments that exist domestically. Most of the payments that would have naturally migrated to the wire transfer system will have moved to the automated clearing house (ACH). The ACH already has more automation and the ability to carry structured remittance information.
Other major barriers are:
The wire transfer systems can implement this simplified 820 standard in a much shorter timeframe than the ISO 20022. The CHIPS system is already structured to carry remittance information and this data can be conveyed internationally using the SWIFT MT103 remit format. Fedwire would have to be enhanced to carry additional remittance information. While this is not a trivial task, it can be accomplished in a couple of years, versus the time that would be required to develop and test an entirely new system.
The benefits of using STP 820 standard over the development of a new standard or trying to use the ISO 20022 standard are significant:
Some have noted that the primary barrier of STP 820 is that it is purely a US standard. The global banks, if required to upgrade the wire transfer systems, would prefer to do it only once. Since they must implement the ISO 20022 for Europe, their position is why not use the standard in the US? Though it is a valid question, the standard should not be driven by a few large global banks for their own benefit. The impact on all US financial institutions, the network providers and companies need to be considered. It is interesting to note that the European real-time, high value systems (Target II and Euro I) have no plans at this time to implement the ISO 20022, and it is only being implemented for the bulk transfer low-value payments systems because it is mandated as part of SEPA.
The business community is looking for electronic payments solutions now, not 10 or more years from now. If the banking industry takes the right step and implements structured remittance information using the STP 820, it can be accomplished in two years. Banks that want to wait for a global standard to be implemented will be doing a disservice to their customers. I would suggest that their real goal is to do nothing under the guise of wanting the long-term strategic solution. The ISO 20022 may be the global standard for the future but that does not mean we should sit around and wait for all the payments systems worldwide to adopt it. We can make progress today and take steps to move forward.
A way to accommodate US domestic and the international needs is to use mapping. This technique has been used between the US large value systems and the international marketplace for almost 20 years. CHIPS and Fedwire have their own unique formats but they are field-for-field compatible, both in number of fields and field size with the SWIFT MT103 format. This field-for-field compatibility provides transparent mapping among the systems.
A compromise solution would be to ensure that the STP 820 and the ISO 20022 is field-for-field compatible, so they can be mapped to the other seamlessly. Mapping is a much lower cost alternative than implementing completely new payment systems for over 15,000 financial institutions and millions of business customers. A conversion to an ISO 20022 format would never be a big bang implementation, and mapping would still have to be implemented for those that are not on the same implementation schedule.
Another option is the SWIFT MT103 and CHIPS payment instructions can carry 9,000 characters of remittance information today, with three options, ANSI X12, UN/EDIFACT and user defined. A new designation could be added to include the XML ISO 20022. XML messages are known to be character intensive and use three to 10 times more characters than other computerized formats; however this would allow the ISO standard to be used for global payments. The XML based information would limit the number of invoices to be included to approximately 12.
Banks have demonstrated over the years that they will only act when forced to. They do not perform enough research; they do not listen to their customers very well; and have a reputation for milking a product until the bitter end. A prime example is the neglect of the wire transfer business. There has been very little improvement in the process that is, for the most part, entirely manual. In the past 35 years, the biggest improvement has been online payment initiation; however, there are many customers that still fax their instructions to the bank and the bank keys in the wire payments. The banking industry needs to move expeditiously to enhance this critical payment infrastructure for the benefit of its customers and itself.
The ultimate question is: Does the banking industry have the vision and leadership to move this endeavor to a successful conclusion or will it debate the topic endlessly until the opportunity passes it by? The corporate community is waiting for an answer.