The Federal Reserve has switched its Fedwire Funds Service over to the ISO 20022 messaging standard, making the new protocol mandatory for all U.S. banks.

ISO 20022 offers a unified, standardized messaging framework aimed at improving interoperability among financial institutions, market infrastructures, and end users. It is expected to boost payment transaction efficiency, refine fraud detection mechanisms, and facilitate advanced data analytics. Nevertheless, it might also trigger changes in other sectors of the payments industry.

The Federal Reserve’s previous messaging format, FAIM, has been discontinued as this transition aligns U.S. practices with those already adopted by other regions that have embraced ISO 20022. Notably, the global cross-border payments system SWIFT is using the new format to accelerate solutions for managing payment investigations—significantly cutting down the time needed to resolve delayed payments.

Many Benefits Await

Financial institutions are expected to experience numerous benefits following adoption of ISO 20022, though these might not be immediately apparent until an FI has fully complied with it. Richer data accompanying payment transactions will offer substantial value by providing more detailed transaction information and enabling more advanced fraud detection methods. Enhanced data quality and consistency will streamline payment processing and reduce the frequency of manual interventions.

“ISO 20022 is significant, but its true importance lies in how banks utilize it post-compliance,” stated James Wester, Co-Head of Payments at Javelin Strategy & Research. “The industry has often treated this standard as a mere compliance checkbox exercise, but the real value comes from leveraging new data to modernize payment infrastructure: orchestration, fraud detection, reconciliation, and cross-border operations.”

Impact on FedNow

Real-time payments should benefit from fewer errors and more detailed remittance information as ISO 20022 is implemented. One of the primary beneficiaries could be FedNow, the Federal Reserve’s two-year-old instant payment service, which was designed with the ISO 20022 standard in mind.

“FedNow adoption will eventually benefit from ISO 20022, but not solely due to it,” Wester noted. “Banks need to reconsider key components of their payment stack such as liquidity management, risk assessment, and back-office design. Even customer experience and product strategy require re-evaluation. ISO 20022 matters, but modernization only occurs when someone chooses to build upon it.”