In unveiling a long-awaited plan for adding corporate remittance information to wire transfers, the Federal Reserve Board also revealed a shift from its previous stance.
The Fed had indicated it would rewrite its format to add the capability to domestic transfers in the near term and eventually make them compatible with an international standard that is becoming widely used in Europe. The plan announced Tuesday calls for doing both by the end of 2010.
The change stems in large part from a Fed survey this year, which found that banks, especially big ones, were eager to add remittance details to international wires and were willing to wait longer than the Fed had expected.
Bankers said incorporating into wire payments a large data field, which could include invoice details, would bring the Fed in line with the Clearing House Interbank Payments System and the Society for Worldwide Interbank Financial Telecommunication's network and could open the door for banks to offer new electronic services to corporate clients.
"In the last six months, we realized that envelope could carry anything in it," said George Doolittle, a managing director at Wachovia Corp., who had worked with both the Fed and Chips on the remittance project. "Our job as financial institutions is to craft how that envelope will be used and to get solutions to the market that will be cost-effective for our corporate clients."
Ken Isaacson, an assistant vice president at the Federal Reserve Bank of New York, said the central bank recognized the "unambiguous corporate demand" for incorporating remittance information into the transfers.
Bankers have long said that letting customers include remittance details in wire transfers would make them more useful for business-to-business transactions, because the money would arrive with information describing its purpose, and would encourage companies to pay each other electronically instead of by check.
In 2006 the Fed and The Clearing House Payments Co. LLC, which operates Chips, said that wire transfer volume would increase 47% if only 2% of corporate check volume shifted to wires.
The Fed plans to add a 10,000-character data field to its wire format, which will be able to carry a wide variety of payment details.
Mr. Doolittle said this capability could transform the way wires are used. Besides simply paying each other, he said, banks could help corporate clients manage liquidity and working capital. Banks could also bundle personal remittances from immigrant workers and travelers into wires for immediate settlement.
The format change is "the beginning of the modernization of the financial infrastructure of the United States," Mr. Doolittle said.
Europe has committed to modernizing its payment system, and countries such as China and Singapore are adopting systems that leap ahead of what the United States has now, he said. "If we stood back and did nothing, we could be easily overwhelmed by the rest of the world modernizing their financial infrastructures."
Arlene S. Chapman, a technical consultant to the Association for Financial Professionals, said the data field would let companies identify as many as 25 or 30 invoices with their payments. Doing so would help companies move from paper checks to electronic payments, "which is the goal of straight-through processing, and this will allow it to happen for wire transfers."
Since at least 2004 the AFP had been urging the payment networks to incorporate remittance information. More than 90 of the corporate treasury trade group's members have signed an online petition committing to using the capability if the Fed provides it, Ms. Chapman said.
"We are very impatient, wanting for this to happen sooner rather than later," she said.
Henry C. Farrar, the senior vice president at The Clearing House who oversees Chips, said that for several years its transfers have contained a data field that could act as a highway for remittance information, but business have been reluctant to use it without the participation by the Fed and other market players.
With the new Fed road map in place, "the on-ramps and off-ramps are going to be a lot easier to get built now," he said.
Mr. Isaacson said the Fed was able to make the business case for developing the transfer format by piggybacking the issue on top of another one that has drawn banker complaints: adding cover payments for international wires. These payments often pass through multiple banks before reaching the ultimate beneficiaries, and as part of their efforts to fight money laundering and terrorism funding, the intermediaries need details on the sender and receiver.
In a survey conducted on its Web site from mid-February to mid-March, the Fed asked bankers to choose between two options. Both involved developing a single format to support cover payments with one originator and one beneficiary by November 2009, but one also would add the data field for remittance information and a second, more advanced cover payment format by the end of 2010.
Of the 366 respondents, 57% preferred the two-phase approach. More than 80% said they favored including corporate remittance information.
The respondents included 30 of the top 50 Fedwire users; 74% of those respondents favored the two-phase approach.
The issue of cover payments was not structurally related to the corporate remittance issue, Mr. Isaacson said, but because both would require revision of the wire formats, "we looked for the opportunity to take advantage of those intersections."
The issue of cover payments emerged last year, when The Clearing House and Wolfsberg Group, an group of 12 large international banking companies, made an unusual public appeal asking Swift to amend its cover payment formats, so banks could perform proper anti-laundering assessments on wire payments.
Swift announced in March that its members had approved a new cover payment format, which will take effect in November of next year, roughly the same time as the first phase of the Fed's cover payment format.
When the Fed and The Clearing House announced plans to evaluate methods for adding remittance details in 2006, they said they were considering using either STP 820, a format from The Clearing House for electronic data interchange, or ISO 20022, a format that European banks began using in January for cross-border automated clearing house transfers within the Single Euro Payment Area that uses extensible markup language.
Last month the Fed said it was leaning strongly toward STP 820, which would be easier to implement here because electronic data interchange is widely used by large companies.
Mr. Isaacson said the 10,000-character field would give corporations the flexibility to format wire remittance information using STP 820, ISO 20022, other proprietary formats, or human-readable forms.
"We've made global interoperability the cornerstone of our approach," he said.
