In response to "unambiguous corporate demand" the Federal Reserve announced plans to incorporate remittance data into wire payment formats by the end of 2010. This is a major milestone in the migration of business-to-business (B2B) payments from electronic to paper and addresses a long term headache for corporate finance. Business payments remain stubbornly paper based because electronic payment formats do not incorporate a standardized means for describing the nature of the payment – the invoices paid, any short pays and reasons for short paying, etc. Corporate treasury offices receive wires and struggle to understand which customer they are from and which invoices they are meant to settle. Remittance data explaining the purpose of the payment arrives separately via fax, email, mail, or verbal phone instructions, preventing automated processing of the incoming payments.
The new 9,000 character field provides flexibility to format data in either STP 820 (the simplified EDI format favored domestically) and ISO 20022 (the XML format favored internationally and adopted by SEPA for cross border ACH) or even proprietary formats (let's hope not). It was widely expected that the Fed would endorse the STP 820 format with a promise to eventually support the international ISO 20022 format, but it seems International interoperability won out.
The Association for Financial Professionals (AFP) has long been clamoring for this change, and more than 90 of the corporate treasury trade group's members have
signed an online petition committing to using the capability if the Fed
An October 2006 study by the Fed and The Clearing House (the other large wire provider and developer of the STP 820 format) indicated strong demand for wire remittance, and estimated that even if a mere 2% of check volume moves to the wire payment system it would represent a 47% increase in wire transfer volume. Given the relatively high price of wire payments, it's no wonder banks have been pressuring the Fed to make this change (The Clearing House has been a long time proponent but could not modify its own wire systems until the Fed committed to make changes).
It is widely expected that the new remittance capability will inspire a wave of banking products to meet the pent up demand for corporate straight thru processing.
The new standard – whether STP 820 or XML format – will support approximately 25-30 invoices and will include the following data elements:
The Fed was able to cost justify the change by tying it to another Fed wire format modification necessary to provide anit-money laundering transparency to cover payments used to settle funds between correspondent banks for International transfers. This decision was based on survey data gathered by the Fed in February and March of this year asking bankers to choose between one option enabling a solution to the cover payment challenge and a second option addressing cover paymetns as well as enabling remittance information. More than 80% of the respondents favored including corporate remittance data.
- Federal Reserve Press Release
- Federal Reserve Q&A
- American Banker coverage (subscription required)
- October 2006 wire remittance research sponsored by the Fed and The Clearning House