Demystifying ISO 20022 (2024)

ISO 20022 is starting to move beyond the realm of payments tech-speak and into a relevant and helpful space for corporate treasury professionals. Soon it will be the standard format for both sending and receiving wire transfers, and it’s already governing messaging for the two new U.S. instant payment channels.

The emerging global payment message file format is designed to drive greater automation and efficiency in accounts payable and accounts receivable processes. And with growing adoption by banks, the standard is starting to cut costs and usher in long-term business benefits for the corporations embracing it.

A common payments language

The International Organization for Standardization (ISO) developed the ISO 20022 standard two decades ago to be a global, common language for financial communications in the payments, foreign exchange, trade finance and securities markets. In the payments arena, ISO 20022-compliant messages carry rich, structured data at each stage of the payments cycle, from payment initiation (business to bank communication) to interbank settlement (bank to bank) through to cash management and reporting (bank to business). The standard is both bank and country agnostic.

ISO 20022 finally moved into the forefront in 2018 when several global payment system operators announced they would adopt it, and since then all major high-value payment systems worldwide have committed to migrate to the common electronic language.

As of spring 2023, most banks were supporting ISO standard messages for incoming U.S. dollar and international wire transfers and related statements. And in March 2025, Fedwire payments are set to go live with the ISO format for both sending and receiving.

In the U.S., ISO 20022 already governs system messaging for instant payments through the RTP® network and the FedNow Service. For RTP, the ISO standard supports rich, flexible messaging, including the ability to request payment of a bill or invoice, and to ask for more information about a payment and acknowledge receipt of payment. Request for Payment (RfP) capabilities are being developed for FedNow as well.

An enabling tool

Ultimately, ISO 20022 will enable U.S. corporations to communicate information about all the payment types they are using in a common, structured, data-rich format.

“ISO 20022 is an enabling tool that promotes efficiency and optimization,” explains Anu Somani, senior vice president and head of global payables and embedded payments. “There are benefits that can be derived when you fundamentally improve the communication between systems in the payments process.”

Somani gives the example of a company whose core business involves transferring money from the U.S. to the U.K. and notes how the ISO standard can eliminate friction in those payments. “Without the existence of a common standard, money is likely to get stuck due to sanctions screening, anti-money laundering and other standardization requirements,” she says. “But when you create a simple, specified standard across the board, the money flows and each bank understands its part.”

Eliminating data translation and automating reconciliation

Communicating in a universal language has many benefits for corporate payment participants. For starters, using one standard for all electronic communications around both domestic and global payment transactions eliminates the need for costly data translation. That means, for instance, that a business can format payment instructions the same for all its banks, and banks don’t have to translate data to a different format before they send it to another bank or business in the payment chain.

In addition, because it’s a structured format, the ISO 20022 standard reduces costs by supporting automated payment reconciliation.

Businesses have traditionally struggled to reconcile their outstanding invoice information with received payments — mainly due to remittance data not being sent as part of payments data or in a structured format. The resulting manual work to reconcile payments data with invoice information adds to cost overhead.

For example, a business might receive a payment along with free-form remittance information representing multiple invoices, including one or more where a discount was applied. Digesting all that information within an ERP system and manually reconciling the payment to the addenda information can be extremely time-consuming and expensive.

In contrast, payments data formatted using the rich and structured ISO 20022 format supports automated reconciliation. When the payment flows, all the related data is tied together, allowing accounts receivable employees to understand what the payment is for, which invoices it represents, and how any negotiations or discounts have impacted the amount. The standard format also facilitates dialogue between payments participants about specific transactions to help resolve reconciliation issues.

Reducing compliance costs

The ISO 20022 messaging standard can also help businesses reduce regulatory compliance costs.

Domestic payments require data transfers between four parties — the remitter, the remitting bank, the beneficiary bank and the beneficiary. Cross-border payments necessitate handoffs between these parties plus the correspondent banks. In a traditional environment, where payment files must be translated at multiple handoffs, key data needed for compliance can be dropped or lost, leading to time-consuming research and costly payment delays.

The ISO standard can help meet this challenge. By eliminating the need for data translation, the standard ensures each party to the transaction receives a complete set of data. And, by providing data in a structured format, the standard allows for more targeted and efficient sanctions screening. For instance, if compliance requires a review of a beneficiary’s country information, the screening of an ISO 20022 formatted message can focus on the country field rather than cover the entire message.

Expanding to core payment channels

In the next couple of years, ISO 20022 message formatting will be migrating to the traditional core U.S. electronic payment channels. After Fedwire goes live with the ISO format for both sending and receiving in spring 2025, there will be another major development in the fall. November 2025 is when the longtime Swift MT messaging format goes away in favor of ISO 20022. The two standards currently co-exist.

Also on the horizon: Banks are working to integrate the ISO 20022 standard into Automated Clearing House (ACH) payment messaging. Nacha, which governs the ACH network, has developed an ISO 20022-to-ACH Mapping Guide & Tool to assist financial institutions in translating ISO 20022 instructions for their corporate customers into ACH transactions. The tool enables ACH users to translate ISO-to-ACH and ACH-to-ISO messages for ACH payment origination and remittance.

On the international front, ISO 20022 can move the industry toward the nirvana of cross-border real-time payments. “ISO opens the floodgate to allow banks to access new domestic clearing systems around the world that we previously didn’t have access to because they were in different file formats,” explains Dawn Hosmer, senior product manager, International Treasury.

How should you prepare for ISO 20022?

The ISO payment messaging standard offers some immediate benefits but is also a springboard for future innovative bank services and capabilities.

Important steps to take advantage of the new standard include asking your ERP software vendor about its plans for supporting ISO 20022 and upgrading to acquire ISO capabilities when the vendor makes them available.

“As clients are thinking holistically about process reengineering and digital transformation, they should reach out to us to learn more about the potential of this new format,” Somani recommends.

RTP^® is a registered service mark of The Clearing House Payments Company L.L.C. Eligibility requirements, other conditions and fees may apply. Services mentioned may be subject to credit approval. Deposit products offered by U.S.Bank National Association. Member FDIC. Eligibility requirements, restrictions and fees may apply.

Notice: Foreign-denominated funds are subject to foreign currency exchange risk. Customers are not protected against foreign currency exchange rate fluctuations by FDIC insurance or any other insurance or guaranty program. Deposit accounts with non-U.S. financial institutions offered through U.S.Bank are not deposits of U.S. Bank and are not insured by the FDIC. ©2024 CR-49846727