March 27, 2008

The banking industry has experimented with payments standards for years with varied success. One of the latest initiatives, spearheaded by the International Payments Framework (IPF), takes aim at cross-border ACH transactions.

According to Priscilla Holland, senior director, international projects, with NACHA, the IPF is an outgrowth of the Herndon, Va.-based ACH organization's Global Payments Forum. IPF, she says, was established to develop rules, processes, guidelines and service-level agreements among its members to make it easier to perform cross-border payments for their customers.

"So if you're a U.S. bank and want to offer cross-border payments in other countries, you can join the IPF and will know that the other members are processing the payments the same way, using the same standards," Holland explains. "Today, doing cross-border payments involves a variety of processing windows, rules and formats that differ by country."

Demand for cross-border payments is rising among both individuals and corporates as more people and companies buy goods from overseas or send money back to family in other countries, Holland notes, adding that standards will help reduce the cost to customers. "Corporates, for example, are switching from letters of credit to open account for their payments," she relates. "Anything you can do to reduce that transaction is helpful, versus their having to pay for an international wire, which tends to be more costly than ACH."

The IPF plans to use the ISO 20022 standard for financial messaging -- which is being used for transactions in the single euro payments area (SEPA) program -- as its framework. "We're expanding the use of ISO 20022," Holland comments. "SEPA was good for consumers, but it cost the banks a great deal of money. They can now take what they did for SEPA and go global with it. The IPF is a better way to get banks to cooperate and recognize economies of scale to provide these services." While SEPA changed the domestic ACH rules, Holland adds, "We're just building a bridge so that it's easier for banks to swing from one country to another."

Holland acknowledges that standardization will further the commoditization of payments. But, she asserts, "If you standardize payments, you can reduce your internal costs and management burden. ... This way, banks can concentrate on the value-added services."

A Phased Approach

While the majority of the IPF's members are large financial institutions and ACH operators, Holland notes, smaller banks can join themselves or benefit from the IPF if their ACH operator becomes a member. "The Federal Reserve Bank has expressed interest in joining. So if they join, then all the downstream banks would benefit, as well," Holland says.

During Phase I of the initiative, which was launched in January 2007, the committee recommended members use the SWIFTNet FileAct platform as the mechanism to exchange the payments. Other networks can be used, but members would have to take additional steps to ensure the security of the transactions, according to Holland.

So far, 30 institutions have joined the IPF, including Bank of America, JPMorgan Chase, Royal Bank of Canada, Bank of Tokyo-Mitsubishi, Voca and Swiss Interbank Clearing. The goal of Phase II, which currently is underway, is to begin processing transactions between member organizations by the fourth quarter of 2009.

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