The Federal Reserve Board is nearing a decision on how to incorporate remittance information into wire transfers.
It has been considering since 2006 a format based on the well-entrenched electronic data interchange, but in the meantime a format known as ISO 20022 has gained prominence in the world's payments systems.
And though the Fed's probable endorsement of the EDI-based format might seem out of step with the global payments industry, Fed executives characterized the choice as a small step on a path that could eventually lead to ISO 20022.
"We're taking baby steps right now, but it's a big step forward for us," Susan Valentine, the wholesale product officer at the New York Fed, said Tuesday at Swift Operations Forum Americas, a New York meeting involving 300 bankers.
During a panel discussion, Ms. Valentine stopped short of announcing that the Fed would promote the EDI-based remittance format — technically, EDI X12 STP 820. But she did say that the Fed would not support ISO 20022, the only competing format, at least in the short term.
And in the long term, she said, ISO 20022-compatibility is the goal. "We're not going to go off on our own path," she said. "The goal is convergence and interoperability."
Bankers have long said that adding remittance data would make wire transfers more useful for business-to-business transactions because the information would tell recipients the payment's purpose.
A spokesman for the Federal Reserve Bank of New York said Wednesday that the Fed would formally announe its decision in the next few weeks.
Ms. Valentine said would not say when remittance data features might be available, only that it would be "sooner rather than later."
She did give a sense of the Fed's timing in the context of "cover payments," which are used in international correspondent banking, where payments may pass through many hands before they settle. The cover payment is a nonpayment message sent by the originating bank to notify the ultimate beneficiary bank to expect a certain payment.
Today, a cover payment in Fedwire, the Fed's wire service, can include only one payment instruction, she said, but by 2010 the central bank expects to expand that message field to accommodate multiple payment instructions.
The Fed and the Clearing House Payments Co. LLC, the operators of the two U.S. wire-transfer networks, announced their plans for a joint strategy to incorporate remittance data in October 2006. In presentations that year at Swift's annual Sibos conference in Sydney and to the Association for Financial Professionals, a membership group for corporate treasury executives in the United States, they said the inclusion of invoice information was a service for which many corporate users would pay. It could also let recipients process payments using automated systems and reduce the manual entry of data into their accounting systems.
They originally had a six-month target for deciding between the data formats, a deadline that was bumped back to June 2007, then delayed again.
EDI is a long-established standard for large-scale corporate data sharing. The Clearing House introduced the STP 820 version in November 2004, including 10 data fields that are essential for payments, such as payment amount, customer's name, business account number, and bank account number.
ISO 20022, a dialect of extensible markup language, is considered more flexible and powerful, but it is largely untested in the market. European banks began transmitting cross-border automated clearing house transactions in January using the XML format.
One critical issue is that Fedwire lacks a data field big enough to hold a bulky XML message; The Clearing House and Swift systems can accommodate up to 9,000 characters of remittance data.
Though ISO 20022 is technically mandated only for automated clearing house transactions within Sepa — the Single Euro Payments Area — as a practical matter, banks and corporations worldwide are considering the standard as a way to automate transactions not only between banks but also between banks and their corporate clients, and for wires as well as ACH.
In a series of more than 30 meetings during the last two years, the Fed and Clearing House have worked not only with the large domestic banks that are the main handlers of high-value wire transfers but also with community banking groups and the vendors of both bank-wire systems and large corporate computer installations — known as enterprise resource planning systems — to devise a comprehensive wire-transfer strategy, Ms. Valentine said.
Priscilla Holland, the senior director of network development at Nacha, the U.S. rulemaker for ACH payments, said her organization is coordinating the development of a new group, the International Payments Framework, which would provide common worldwide standards for low-value bulk payments over the ACH network, and based on ISO 20022.
About 15 banks and other groups have joined the initiative, and the group is to vote April 18 whether to establish a formal organization, Ms. Holland said. "Our goal is to have payments flowing by the fourth quarter of 2009."
