Levelling the Financial Standards Playing Field
Most commonly, the purpose of standards is to enable efficient communication of specific classifications of data traffic between organisations that share a workflow process or collaborative relationship. The absence of comprehensive, internationally recognised processing standards is at the root of many of the straight-through processing (STP) ‘disconnects’ that are faced by the global finance sector. At present, the collaborative playing field is more like an assault course.
In the payments community, there is CHIPS, NACHA, Fedwire and RosettaNet. In the treasury community, we have ISDA and TWIST. In the securities community we have FIX and BMA, etc. In the trade finance community, we have ICC and IFSA, etc. Across these major global communities, another 20 or so standards spring to mind, before we even consider those t hat are unique to some of the smaller communities.
Different standards, again, bridge communities such as SWIFT messaging and at the entry level, operating system protocols and standards like Windows or Unix add complexity to the stage preceding the connection to the system that contains the communication standard you choose to use.
Given the extensive business collaboration between these communities, it’s no surprise that global processing standards represent an operational utopia the finance sector aspires to achieve. Limited progress has been made within some communities, but many remaining workflow disconnects make it difficult to identify even fundamental communication hubs from which new global standards could be developed and propagated.
As some communities start to make progress, new standards arise elsewhere – making it hard to evaluate whether the overall directory is getting more or less complicated. One certainty is that progress is slow, meaning global standardisation appears on industry conference agendas year after year.
Within many communities, it is possible to apply and extend existing standards to new requirements, but the variety of data components that make up a single valid transmission can be very diverse, even within one community. The payments community alone handles many different classifications of payment, each requiring multiple content fields, with different validation criteria for each field. Reciprocal confirmations of receipt, error reports, batch summary reports, for example, are handled alongside outbound payment transmissions, as well as re-send/re-start facilities to recover failed or interrupted transmissions.
There are also many territorial sub-communities within the payments community. In Europe, the EBA STEP2 community, implemented as an urgent response to market conditions and regulations, exists (at present) only to settle low value cross-border payments in euro currency between banks with operational locations within the eurozone. Retail banks in the zone are no longer allowed to charge customers more for cross-border euro payments than they charge for domestic payments. Pre-existing international payment solutions were too costly to enable banks to standardise customer charges for euro payments without significant damage to their payments revenue. EBA STEP2 reduces international transmission costs significantly, so that banks can maintain commercially viable customer services, without a pricing differential.
EBA STEP2 applies only to euro clearing within the eurozone and to a finite number of organisations within that territory. To implement a cost effective and very specific solution quickly, the new standards to be used had to be rapidly agreed within the EBA community.
The EBA history is far from unique. Very commonly, new standards result from commercial expediency. A new finance community, or process within an existing community, must be implemented in a manner that is acceptable to the direct stakeholders in the community or process. There is no business reason to seek approval beyond those stakeholders. The solution most commonly chosen has either cost reduction or revenue implications, implying a time-to-market urgency. Adapting an existing standard may take considerably more time and effort than developing a specific new communication format. Which standards need to be brought in line and with what priority?
To determine a priority there has to be an agreement of common need. The problem is different communities have different views, as do different organisations within that community. Therefore, defining a consensus for change involves complex negotiations that can take years to resolve. At least four main drivers determine whether this consensus for change is achieved. These are dependent upon technology solutions providing a basis for effective collaboration between organisations.
The first depends upon whether the community is ‘open’ or ‘closed’ to the exchange of significant volumes of workflow processes with external organisations or communities. If it is ‘closed’, although it may not remain so indefinitely (e.g. the EBA community is currently fairly ‘closed’), then its internal operations are not significantly interrupted by external standards. ‘Open’ communities will tend to experience processing disconnects, inefficiencies and complexities around the edges of their operations and their members might share a need for improved inter-community standards. The external communities they collaborate with, however, may not see a reciprocal need.
For all potential members of a community, there will of course be a one-off time/cost investment when connecting with a specific community. This cost of access to the standard falls outside the global standardisation debate, but it does influence the second driver for uniform standards.
The second driver is stakeholder appetite. A stakeholder in this debate is any party with a business interest in usage of the communication standard. It may be a community association, an individual organisation or even a department or end-user within an organisation. While the stakeholder may see a good reason to change a standard, they must also be motivated into proactive collaboration with other stakeholders to initiate a mutually agreed change. Whether or not a stakeholder is motivated depends upon several considerations. For example:
If the net result of these considerations is not clearly positive, the stakeholder is unlikely to initiate or collaborate in any sponsorship for standards improvement.
The third driver is synergy between standards. Some communities utilise different standards that have many common components. For these, the definition of an open standard is mainly a matter of selecting that which is the best fit for its purpose, and reformatting the less acceptable standards to match. The wider the component differential, the more complex the open solution, leading directly to the final driver.
The fourth and final driver is the operational weight of the new and more uniform ‘open’ standard. If it is designed to unify several data transmission types across several global communities, then most likely it will be more complex than the separate standards that it consolidates. As a result, new stakeholders may need to make a larger investment to join. Although they might intend to use only a small part of the new standard, the increased size of the overall user base may make future enhancement to the standard either difficult or impossible to negotiate.
Aren’t there already enough standards to cover routine finance sector data transmissions? Definitely not. One example of many is at the retail end of the finance sector, where the sector interacts with its corporate customers – primary consumers of financial services and the initiators of many financial data transmission requirements. The corporate finance department is value conscious and accountable and therefore increasingly sophisticated in its operations. It requires excellent online connectivity, and as much STP as possible, most likely to several financial services providers. As there are few open standards in this space, the corporate customer often has to invest (or not) in different connectivity solutions for each provider.
Open standards in the finance sector will not be pursued for their own sake; as an ‘ideal’ alone they have no value. They will be pursued in and between established global communities where a large majority of stakeholders can determine a good value proposition to justify the investment in change and are motivated to organise themselves to achieve it. Even here, progress will continue to be relatively slow, simply due to the logistics of global change management. That does not mean there will be stagnation in the evolution of new and exciting financial services. Quite the opposite – so long as new service communities have the freedom to develop the independent standards that they need, innovative new services can be brought to market with speed and flexibility.
The practical way to level a financial standards playing field lies in the wider global adoption of high performance ‘process gateways’. These are high-performance data translation and routing engines that can deliver continuous workflow across diverse collaborative communities, converting transactions and data between standards as they do so. The cost of such solutions is much lower than that of converting legacy systems and processes for compliancy with new standards, particularly when community members do not share a common business case for change. Larger stakeholder organisations that can see direct benefit in standards translation will invest in business process technology on the basis that they can realise their own operational benefits quickly and accelerate their return on investment by outsourcing hosted standards integration services to smaller community members.