Back in 2013, the U.S. Federal Reserve issued a “Public Consultation Paper” to address recent technical innovations in the payments industry and to seek input on gaps that had developed as a result of those innovations. Noting that the financial sectors were rapidly transforming en masse from paper-based to digital methods, the Reserve recognized that some aspects of those markets were still mired in outdated systems and programming.
In the intervening years and in response to comments received by the Reserve, NACHA introduced new rules to tighten the processes around digital transactions within U.S. jurisdictions. In late 2015, the group adopted rules regarding same-day transactions throughout almost every aspect of the electronic payments industry, with the exception of international ACH payments. The Reserve had identified International ACH payments as challenging because they were, in their words, “slow, inconvenient, costly and lack[ing] transparency regarding fees and timing.” Now, together with the Reserve, NACHA is encouraging adoption of ISO 20022 as the standard to follow when engaging in cross-border transactions with international financial networks.
The ISO 20022
The International Organization for Standardization has promoted worldwide standards for industrial and commercial activities since 1947. As of 2013, it was at work in 164 countries, setting standards for use by member countries regarding the dimensions and specifics of materials, devices, transactions, and products. The adoption of ISO standards across borders ensures that international commerce can proceed with all players engaging equally on the same playing field.
Standards controlling financial transactions vary widely around the world and are often very specific to the local community that created them. ISO 20022 was developed to establish a harmonized set of messaging standards for these international financial services. Its scope encompasses five financial business domains: payments, securities, trade services, cards, and foreign exchange (FX). Each of these domains uses its own language to communicate terms and agreements among the parties to a transaction. The ISO 20022 has created a dictionary of standard terminology to use within each domain that is adopted and used by members when engaging in international financial transactions.
As an open standard, ISO 20022 allows anyone to contribute input to its further development, so it is constantly being updated as technical and national activities and policies change. In 2014, the European Union’s (EU) Single Euro Payments Area (SEPA) implemented ISO 20022 across the continent, which propelled the standard into the forefront of the international financial community. The EU’s adoption of a single financial market language required its members to update and upgrade their legacy technology to accommodate the faster, more complex trading capacities. By doing so, centuries-old border barriers came down, and each separate EU member was able to facilitate cross-border transactions much more easily than they had ever had done before.
NACHA Allows Migration of Some ISO 20022 Standards Into NACHA’s Formats
NACHA formats for transactions were developed in 1974 and have a 94-character record length, with a remittance note capability of as many as 80 characters. Both character restrictions were reflections of the technology capacity at the time of their development, which included 80-column punch cards. While they remain a robust payment infrastructure, NACHA’s formats do not conform to the standards that were incorporated into ISO 20022. As the group moves toward ISO 20022 as an incorporated standard, however, NACHA has permitted use of the ISO 20022 message standards to be used for electronic payments and remittances without changing the NACHA formatting.
As international trade becomes more frequent, adoption of an internationally accepted messaging standard appears almost inevitable. Already functioning in over 100 countries, ISO 20022 has established parameters and conventions that support current international financial systems’ infrastructure. For U.S. financial institutions that access foreign financial markets, both NACHA and the U.S. Federal Reserve recommend adopting the messaging standards of the ISO 20022.