What will payments over the internet look like in 2030?
A revolution in finance and payments. That’s what crypto-based platforms like Bitcoin, decentralized finance and stablecoins are attempting to do. But just because traditional money is centralized around monolithic central banks doesn’t mean that it can’t have a revolution of its own.
Over the next ten years, a big bang will be unfolding in central bank land. ISO 20022, a for communicating electronic payments instructions between financial institutions, will be taking over. This, combined with the emergence of real-time central bank retail payment systems, means that payments in 2030 are going to be much better than in 2020.
Anyone involved in anarchic finance may want to keep one eye on what the suits have planned for the next decade. Not everyone will be included in this centralized revolution. Decentralized options will be the go-to back-up for many people.
We rarely notice standards, but they affect all parts of our daily life. Standards govern everything from screw thread spacing (ISO 68-1) to country codes (ISO 3166) to child seats (ISO 13216) to quality management (ISO 9000).
Settling on a uniform way of doing things makes life easier. Prior to the 1950s, for instance, international cargo shipping handling required a “Tetris-like” approach to dealing with diverse package sizes. It was expensive, dangerous and labor-intensive. Putting everything in a universal metal container made the cargo handling process go much more smoothly. The International Standards Organization, an international non-governmental technical body founded after WWII, helped the industry settle for shipping containers by creating ISO 338, ISO 790 and ISO 1897.
The principles that apply to shipping are equally applicable to payments and commerce. To avoid a cacophony of different payment requests and orders, it helps if everyone uses a common grammar. The payments community builds this grammar by agreeing ahead of time on a fixed way of formatting messages. Standard headers. Footers. Payee account number fields. Character limits.
Take the U.S. People usually pay their utility bills by making an automated clearinghouse (or ACH) payment. All parties to an ACH payment must agree to use the common grammar set out by the National Automated Clearing House Association, or NACHA, the not-for-profit organization that governs U.S. ACH systems. A typical NACHA message looks like this:
To the human eye, a NACHA-formatted message looks like gibberish. But there are many advantages to a standardized message format like this, including that it is readable by machines. And so all ACH payments can be automated from one end to the other. This reduces costs, processing times and errors. Without NACHA’s standards, monetary chaos would result.
There are a number of local message standards in the U.S. The Federal Reserve, for instance, requires participants to use its own proprietary messaging format if they wish to make wire transfers via the Fedwire Funds Service. And so a U.S. bank, municipality, or corporation must be fluent in the financial grammars of both NACHA and the Fed.
This proliferation of messaging standards is a global phenomenon. The U.K.’s multiple payments systems each use a different one. The Faster Payments Service uses a modified version of ISO 8583, BACS (the UK’s ACH system) uses Standard-18, and CHAPS (its large value payment system) uses the SWIFT MT messaging format.
It is into this babel of standards that ISO 20022 is being ushered. The idea is to convert all existing payments systems from their own proprietary messaging standards over to ISO 20022. And so ISO 20022 will become the English of payments, a global lingua franca for transferring value electronically.
ISO 20022 isn’t new. The ISO began to devise the standard in the early 2000s. In the 2010s, a few trailblazing nations shifted over to it from their domestic standards. The Chinese are the leaders, having converted their main payment systems to ISO 20022 in 2013.
But most countries have yet to make the shift. The U.S.’s main large value payment system, Fedwire, was to start transitioning to ISO 20022 over a three-year period beginning in late 2020. But thanks in part to COVID-19, the start date has been pushed to at least 2022, which means that the final changeover won’t be complete till 2025 or so. The European Central Bank’s large value system, Target2, will in November 2022. The UK will switch in April 2022 in conjunction with a new real-time gross settlement system.