As of March 10, 2025, ISO 20022 will become the messaging standard for financial services in the United States. Yet adoption continues to be slow among large and small banks, with only about a quarter of American banks already using the new protocol. As some have put it, it’s like waiting until the last minute to do your Christmas shopping.
Are financial institutions ready for this conversion? In a recent Payments Journal podcast, Laura Sullivan, Senior Product Manager at Form3, spoke with James Wester, Co-Head of Payments at Javelin Strategy & Research, about the challenges and benefits banks are facing. The upshot: It’s up to the banks to determine how they can best take advantage of the new protocol.
The anecdotal evidence is that many U.S. financial institutions are ready for ISO 20022. The roughly 7,000 banks that already use Fedwire should be prepared. CHIPS (Clearing House Interbank System) migrated to ISO 20022 in April 2023, so the 30 or so banks using that protocol should be ready, That still leaves a significant number of banks that have work to do.
The Missing Killer App
One thing that will move the process forward significantly is some sort of “killer app” that will significantly benefit customers while also making use of ISO 200022. “I was on a call today with some experts who were saying that customers need to drive banks to develop products for them, and I think that’s a tall order,” Sullivan said. ”Maybe the problem is payments aren’t sexy enough. Maybe the young people who are out creating killer apps don’t find payments interesting and don’t want to create these kinds of apps and delve into the minutiae of ISO 20022.”
Many industry people have been waiting for customers to indicate what kind of use cases would get them more excited about ISO 20022. But more realistically, it is incumbent on banks and fintechs to come up with these solutions.
There are two versions of successful integrations to ISO 20022. The first step is, can you continue to send and receive messages? Many of the organizations that can say yes to that may think they have completed adoption, but they may still be a long way from utilizing the format to its fullest capability.
Adopting the new standard can be the first step toward payment modernization. Many of the systems that support wire transfer today are fairly long in the tooth and not capable of running on the most modern platforms. Some organizations have done the minimum and patched their existing systems to make the ISO conversion. By building on that small step, they can devote more resources to modernizing and ultimately break down some of the silos that exist today in payment processing.
For example, API options work for a wide variety of platforms. “Rather than having discrete operations areas, discrete exception handling, and discrete interfaces to all of your back-office systems, you can leverage a product like the API we offer at Form3 that will work for all of those platforms,” Sullivan said. “It’s agnostic to the particular platform. Then we can help you route the payment to a particular rail based on the characteristics.”
Organizations can further sharpen their efforts by asking if the bank is the receiving institution on FedNow or the RTP network. Then they can utilize more customer-focused metrics to better gauge how they want the payment to flow.
One area where ISO 20022 can present immediate benefits is for customers receiving data from multiple banks. ISO standardizes that process so the institutions aren’t getting a different format for their data from every bank. They will receive and be able to understand the ISO format without having to develop specific code for it.
“Imagine the efficiency gains there,” Wester said. “The corporation no longer has those resources dedicated to just doing stuff like ingesting data from their financial institutions. Those resources and the cost associated can now run their business instead of having to pay attention to data file formats.”
Reducing Sanctions
Many banks have seen their false positive rates on sanctions scanning increase, because they are including additional address data. But as senders move to truly structured addresses, the data will be in specific places, which should be able to vastly improve the checks on sanctions.
Example: If a payment was going to Cuba, Kansas, in the United States, under older protocols that would be all in one line of address. And it would be stopped by a sanctions check on the lookout for “Cuba.” But now, people can tell their sanctions system not to halt the payment if Cuba is in the city line. Those are the kinds of areas where ISO 20022 can really help banks improve their sanction scanning on the customer side and avoid such mistakes and slowdowns.
A simpler example is that there are many implementations by which the creditor on a payment is not the final beneficiary. That has always been a problem, because that data got inserted into some sort of “details of payment” field. This could even help the customers improve their relationships with their counterparties by exchanging this data.
Whatever the impetus for adopting ISO 20022, it’s important to move away from the idea that customers are going to somehow drive product development t. The fact of the matter is that payers and payees don’t really care about such details. They’re never going to come up with a use for a messaging standard to create a new product or demand a new product. ISO 2022 is about making sure that we are all speaking the same language.
No Time to Wait
For a while, the prevailing idea was that there could be a gradual transition to ISO 20022, which led to a lot of wait-and-see approaches. Many participants were happy to let the first movers go in and see what the reaction was.
By this point, that luxury is gone. The next step will involve actually using the data that will be included with these payments. The true winners in the ISO 20022 revolution will be those that can make the best use of all that data. “Start thinking about how you can leverage this new data to monetize the data and provide it to your customers,” Sullivan said. “ISO is not going to make you money in and of itself, because you have to continue receiving the payments. But never stop asking yourself: What are those killer apps?”
