For Global ACH, Small Details Are a Big Issue

You say potayto, I say potahto.

U.S. banks that send automated clearing house transactions are called "ODFIs," but in Europe, such companies are known as "debtor agents," and they do not even have to be banks.

A wonky banking detail, perhaps, but payments executives around the world will need to settle such linguistic differences and a host of other nitty-gritty technical issues if they hope to make a widely anticipated new ACH format into an important tool for international transactions.

The IAT format for international ACH transactions is set to take effect next month, and bankers and regulators are hammering out now the final touches on a rulebook to make sure payments executives in different countries are all on the same page. The payoff, they hope, will be a new, inexpensive way for corporate customers to send money across borders.

"IAT lays the foundation for U.S. ACH to have a truly global face," said Elizabeth McQuerry, an assistant vice president in the Federal Reserve System's retail payments office. "We have spent a lot of time getting the format right. Now we are finalizing the rules."

McQuerry said Wednesday that testing is to begin next month on dollar-euro transactions, and the goal is to go live in the first quarter, using standards being finalized this week by the International Payments Framework Group, a team of bankers and regulators from four continents that has been tasked with making the IAT specifications easy to use.

Experts do not expect a surge of international money movement when the IAT format takes effect Sept. 18, but they do expect ACH transactions to eventually supplant checks for cross-border payments.

Bankers said in May of last year that they had mapped the IAT format to the data elements used for cross-border payments within the Single Euro Payments Area. Since then, committees within the IPF group have spent months working on the rulebook, a technical implementation guide, governance for the fledgling organization and a marketing plan, McQuerry said.

Along the way, the group wrestled with legal, technical and semantic issues to make a single format work with many different regional and national payments systems, McQuerry said, without "changing the local payment systems on either end."

For example, U.S. rules require a depository financial institution to be at each end of an ACH transaction, McQuerry said. The Federal Reserve Board, through its FedACH International Services unit, is working with a Dutch processor, Equens SE, to send and receive payments to Europe. Equens, is a bank-owned cooperative, but is not a bank, and to comply with U.S. rules, the IPF group had to make sure that Equens was allied with a bank. (She would not name the bank.)

The rulebook also has to clarify some key terms. For example, the person or company that originates an ACH payment in the United States corresponds to what Sepa calls a debtor, and the bank that handles the transaction here, the originating depository financial institution, corresponds to what Sepa calls a debtor agent. "We have some vocabulary lessons we've had to go through," McQuerry said.

James Wills, a senior business executive at Swift, the global cooperative that handles international payments, said the IPF also had to settle on such details as how many individual transactions a single message could contain — they chose 100,000 — and how many characters to put in the amount field — 17. That could be a sign of just how much volume the group expects the IAT format will eventually handle, though initially it "may be an issue if you're sending to Zimbabwe."

Swift (formally the Society for Worldwide Interbank Financial Telecommunication) is part of the IPF, and hosted the meeting this week at its New York offices. Backers of the IPF see it becoming something of an international counterpart to Nacha, the electronic payments association that administers the ACH rules in the United States.

Timothy Schmidt, a vice president in global treasury management at U.S. Bancorp of Minneapolis, said that the IAT format could be used to deliver payroll for an overseas division of a company, or payments to expatriates, who might receive money by check now. "There's a big opportunity for ACH to capture some of that volume," he said.

IAT was developed mainly for nonurgent, smaller-value payments, and bankers do not expect it to replace wires, Schmidt said. "Right now, the predominant channel for processing international payments is wire transfer. We see that continuing."

Schmidt said that laying careful groundwork now will pay off later on. "It's a huge technical advantage to have that IPF format," when banks want to establish electronic international payment systems to help their corporate customers send money abroad, he said. "For a commercial bank, it represents the ability to streamline that process."

Dan Miner, a principal at the Chicago consulting firm Treasury Strategies Inc., said IAT could become an important way to send money abroad. International payments were once the province of the biggest banks, but "now you're seeing the second tier of banks aggressively going after" the market. "U.S. companies and banks will ultimately embrace international ACH."

The Fed already offers international ACH payments, using a different format, to Canada, Mexico, Panama, the United Kingdom, the Netherlands, Switzerland, Austria and Germany, and banks also can send ACH transactions abroad using correspondent relationships.

Joaquim Kiyoshi Kavakama, the chief executive of the Brazilian Interbank Payment Clearinghouse, said the IPF's effort would make his organization more efficient.

For a banker working with a correspondent in another country, "he has to re-do everything again when he wants to tackle a new market," Kavakama said. "With IPF, it is more efficient, easier to have the same strategies in payments with these new countries."

Although the Brazilian real is unlikely to be a high priority for IPF implementation, there is still value for CIP to participate in the development of the organization and its standards, he said.

"With the IPF model, we need to have institutions that will be a gateway to the country," Kavakama said. "We will be better positioned than our competitors. That's why we're participating."

McQuerry said banks, regulators and network operators in Europe, Africa and North and South America are all involved with IPF, but the Asia-Pacific region is not represented.

Beyond the planned dollar-euro test, the IPF would not discuss when any other currencies might be added, or which ones are at the top of the list. "Let's do first things first, and let's be sure we get this first thing right," Wills said.

By the first quarter, the Fed expects to be able to handle IAT payments using the IPF standards to and from the 22 countries that accept euros, and later this year, the Fed expects to open 12 new countries in Latin America to ACH transfers, using a single provider and focusing on account-to-unbanked consumers under a program that the Fed announced in April.

Outside the euro zone, the Fed initially plans to use the IAT format, but not the IPF framework, McQuerry said. "We're hoping it will be universally global over time."