July 19, 2024
Every business today is reliant upon payment networks (also known as payment rails, or payment channels) to process their transactions. As new payment types and new payment rails emerge, while others move towards obsolescence, it is becoming more and more important for treasury professionals to understand the various payment format options — and know why they matter.
Payment Formats: The Basics
There are three common types of payment format that co-exist today: text-based, XML-based, and APIs.
Text-based payment formats have been around for a long time and are usually proprietary. Swift MT (MT101, MT103), NACHA ACH, EDI 820, and Fedwire are common examples of text-based formats. Text-based payment formats can be either fixed-length or delimited.
With a fixed-length format — for example, an ACH credit — the amount for the payment is from position 30 to 39 in line three. It will be the same for every ACH file. With a delimited format, that information would be in a specific position based on the left and right delimiter (the delimiters are often commas or semicolons) rather than being limited to a specified number of digits.
XML-based payment formats allow a wider range of information to be included. The new ISO 20022 payment format standard, which includes pain.001 and pain.008 files, is XML (extensible markup language)-based. With ISO files, information is provided in tags rather than position. The relevant content is always located between an opening and closing tag.
APIs (application programming interfaces) are another format for payments that have been growing in adoption. They operate a bit differently, as both format and delivery channel are included. Rather than a position-defined field or tag, an API provides parameters with a type definition and validation level. These are commonly REST or SOAP APIs with JSON or XML formatting. Which of these you use is based on what your counterparty (bank or provider) supports. In the context of payment formats, APIs are more often looked at as a connectivity channel, for example an API connection with a specific bank through which information is disseminated.
Why Migrate to XML?
Businesses around the world are already moving to the XML-based ISO 20022 formats. The richer the format, the more data can be provided, and the more use cases can be implemented. Therefore, it’s only a matter of time before legacy formats are replaced by a format that can provide far greater interoperability.
The proprietary nature of non-standardized payment formats and channels means that some delivery options are limited to a specific payment format. For example, SWIFT MT and SWIFT FIN. The SWIFT MT file standard is tied together with the SWIFT FIN network. However, you can send an MT file via SFTP, via a portal, or via email but you cannot send an XML pain.001 file via SWIFT FIN. Some banks even still accept faxes. But they’re getting harder and harder to find, and more labor-intensive for the treasury staff to have to manage.
Speed and Efficiency. Moving to newer payment formats like ISO 20022 significantly enhances speed and efficiency. Modern formats streamline operations, allowing for faster processing with fewer errors. If you can reduce the time it takes to process a payment from days to just minutes, you improve cash flow.
Streamline International Business. Transaction processing, reconciliation and regulatory compliance — especially for cross-border payments — can extremely difficult to manage. ISO 20022 is designed to work across different systems and countries. As the same format can be used globally, it will make the entire international payment process easier.
Improve Reconciliation. Moving to ISO 20022 provides higher data quality. XML-based payment formats can carry much more detailed data compared to older formats. That’s why they’re referred to as rich, or enriched. This means better transaction details, which will help with reconciliation, reporting, and compliance. For example, detailed transactions can help staff quickly identify and resolve discrepancies.
Bolster Security. Security is also an ongoing concern for treasury, especially for older payment formats and processes that are simpler and therefore easier to hack. Modern formats like ISO 20022 incorporate advanced security features to protect against the fraud and cyberthreats.
Support Growth. As business grows, your transaction volumes will increase. Newer formats are designed to handle that growth seamlessly, giving you the scalability you need for ongoing success.
Financial institutions around the world are already setting deadlines to decommission their older formats. Being proactive now will better prepare businesses for the future. What’s a competitive advantage today could be a basic requirement tomorrow. By embracing these advancements now, you can position your organization as a leader rather than a follower — and yourself as a trusted advisor.
One way to get ahead of the curve is to work with a treasury aggregator like Fides. We provide a system that acts as a single connection point for all your banking and financial service needs. Instead of managing multiple connections with multiple banks on your own, we can consolidate that all into a single, central hub where you can manage all your transactions, bank accounts and financial data with the seamless connectivity to all your banks and financial institutions regardless of the payment and messaging channels you’re using.
For more details on payment formats and why they matter, watch the replay of our recent webinar with Strategic Treasurer, “Understanding Payment Formats.”
