Understanding ISO 20022, FedNow and RTP: A Guide for Banking Executives

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Discover how ISO 20022, FedNow, and RTP are revolutionizing banking with real-time payments and enhanced data exchange. Learn the benefits, challenges, and compliance requirements for banking executives.

September 23, 2024

Understanding ISO 20022, FedNow, and RTP: A guide for banking executives

For financial markets that increasingly need to operate at the speed of light, legacy payment systems are an inconvenient burden with their long reconciliation times and high costs. The need for speed in banking has resulted in a trio of standards and services—ISO 20022, FedNow, and RTP—that promise to simplify digital transactions and smooth the path to real-time payments.

ISO 20022 is a common messaging platform aimed at breaking down the Tower of Babel that plagues cross-border financial transactions. Banks are required to comply with it by early 2025. The Federal Reserve’s FedNow and Clearing House’s Real-Time Payments (RTP) services are optional platforms that promise to make instant payments fast and convenient for consumers and businesses.

Banking executives must understand these technologies to achieve compliance and competitive advantage in a market that demands instant gratification. Here is a guide to each.

ISO 20022: A global messaging standard

ISO 20022 is an international standard for electronic data interchange between financial institutions. Developed by the International Organization for Standardization (ISO), it aims to provide a standard for developing financial messages using a modeling methodology and XML syntax. New data fields support richer transaction data in payment messages, enhance straight-through processing, and are expected to improve the customer experience.

The benefits

The standard enables superior interoperability among systems, protocols, and financial institutions to provide more efficient and seamless exchange of financial information. It covers a broad swath of transaction types, including credit transfers, direct debits, remittance information, securities trades, clearing and settlement, foreign exchange trades and confirmations, letters of credit, card transactions, derivatives trades, and reporting to regulatory authorities.

ISO 20022 supports richer and more granular data than many banks currently use, which should result in better reporting, analytics, and regulatory compliance. As a universal language for financial messaging, institutions worldwide can communicate effectively and consistently, reducing complexity and errors. The standard can also be adapted to accommodate new requirements, technologies, and business needs, guaranteeing its value far into the future.

The Federal Reserve Bank Fedwire Funds service will transition to ISO 20022 on March 10, 2025. Banks that need to complete wire transfers must comply with the new format by that date, and all banks must comply by November 2025.

The downsides

Meeting the deadline isn’t a trivial proposition for small institutions, in particular, as migrating to ISO 20022 can be expensive, requiring investments in technology, training, and system upgrades. Adoption can also be complex as the standard requires changes in existing systems and processes.

While ISO 20022 is expected to improve data quality, some people have also questioned whether the increasing amount of information being exchanged may introduce security vulnerabilities that will become evident until widespread adoption. While ISO 20022 will be widely accepted, rollout schedules will vary. A 2023 Seeburger study found that only 63% of institutions will likely meet the 2025 deadline. This irregular adoption could lead to compatibility issues and hinder the potential benefits of standardization in the short term.

Bottom line: ISO 20022 is an important step toward global financial standardization, offering numerous benefits regarding efficiency, data quality, and interoperability. However, it also presents cost, complexity, and data security challenges that could cause headaches during adoption.

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FedNow: Instant payments blessed by the Federal Reserve

FedNow is a promising tool for instant payments across the United States, with broad accessibility and significant operational adjustments.

Developed and operated by the Federal Reserve, FedNow allows consumers and businesses to send and receive payments instantly, 24 hours a day, 7 days a week, including holidays and weekends. The default transaction limit is $100,000, which can increase to $500,000 depending on the sender’s risk profile and business needs. There is no intermediary; payments come directly from bank accounts, a benefit that reduces costs and delays.

The benefits

Instant payments have many benefits over checks and wire transfers. Funds are available immediately, which allows for better cash flow management and reduces the risk of overdrafts and related charges. They’re more convenient because transactions can occur outside traditional banking hours.

Banks that offer FedNow can market the service as a convenience for their customers, use it as a foundation for other on-demand payment services, and build it into new revenue streams like embedded banking. Transaction costs and administrative overhead are lower, and built-in fraud prevention tools reduce risks associated with third-party payment apps. The Federal Reserve’s endorsement enhances peace of mind.

The downsides

Like ISO 20022, the transition period will be bumpy. While 820 financial institutions had adopted the voluntary standard as of July 2024, that is just 9% of the 9,000 that do business in the United States. The Fed says it is working aggressively to bring others on board. Staff and customers will also need time to adapt to the new system and its features.

FedNow also currently supports domestic transactions within the United States. International transfers require that a US bank act as an intermediary. The Fed has yet to say whether it plans to make the service available globally.

Once completed, transactions cannot be reversed, which could be problematic if mistakes or fraudulent payments are made. The additional screening required to ensure that payments are correct and valid could require additional screening that negates some of FedNow’s speed benefits. As with any new technology, there may be unforeseen vulnerabilities that fraudsters could exploit.

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Bottom line: FedNow represents a significant advancement in the US payment infrastructure, offering numerous benefits for consumers and businesses. However, its success will depend on widespread adoption by financial institutions and effective management of the associated risks and challenges.

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Real-Time Payments: Pioneer in the US Market

RTP was developed by the venerable banking association and payments company The Clearing House. Launched in 2017, it was the first new core payments infrastructure introduced into the United States in more than 40 years. It was also the first real-time payment system. Like FedNow, it allows for the immediate transfer of funds between participating banks and the ability to send and receive detailed payment information.

RTP has grown steadily, with over 650 financial institution subscribers processing 82 million transactions totaling $55 billion in the second quarter of 2024. There are indications that RTP got a boost from the Federal Reserve’s announcement of FedNow. However, its status as an independent alternative makes it likely to be a FedNow alternative for the long term.

The benefits

RTP has the same benefits as FedNow but with a few minor differences. Like FedNow, RTP supports ISO 20022 messaging to enable rich data exchange with each transaction and all the benefits that accrue from that. RTP provides real-time payment confirmation and status updates, increasing transparency and reducing uncertainty for both sender and recipient.

Its $1 million threshold is considerably higher than FedNow’s, although limits vary by institution. The service has been operational for several years, so most privacy, security, and reliability concerns have been addressed. Adoption has been gradual and primarily through partnerships and direct integrations. In contrast, the Federal Reserve hopes to make FedNow universally available.

The downsides

As a private-sector service, RTP’s governance principles are somewhat more opaque than those of the Fed. The Clearing House sets pricing and may vary terms depending on the participating bank or financial institution. Costs can include fees for transactions, integration, and ongoing usage, which may vary by institution. In contrast, the Fed must provide transparency in rules and costs as a government agency.

Integrating RTP requires the same investments in infrastructure upgrades and potential adjustments to existing processes as FedNow. While many large institutions will support both networks, the competitive element could create fragmentation or redundancy in payment systems.

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Bottom line: RTP is a proven real-time payment solution with rich data capabilities, but its limited network may be a drawback. The Clearing House lacks the Fed’s bully pulpit, likely making it a smaller alternative to FedNow.

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Change mandate

As banking executives navigate the rapidly evolving landscape of real-time payments, understanding the distinct roles and benefits of ISO 20022, FedNow, and RTP is crucial. Each plays a vital role in modernizing payment infrastructures, enhancing efficiency, and meeting the growing demand for instant transactions. While ISO 20022 sets the global standard for financial messaging, FedNow and RTP offer complementary platforms for real-time payments in the United States, each with unique advantages and challenges. The successful adoption and integration of these technologies will be key to staying competitive in a market increasingly driven by speed, transparency, and customer convenience.

Iron Mountain can help banks successfully navigate the transition from rigid, paper-based processes to seamless digital workflows. Explore our Banking solutions to see how we’ve helped financial institutions streamline their operations—while reducing costs and keeping customers secure.

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