ISO 20022 XML and Messaging of the Future
The financial sector can be clearly seen to lead other industries in terms of operational efficiency, but only in some areas of its activity. For example, the financial markets trading room has become a battleground where banks, brokers and exchanges use leading-edge, high-speed technology to compete in executing trades for customers, with their competitive edge measured in single microseconds. Yet in other areas of their business operations, such as payments and settlement, financial institutions can be unbelievably inefficient and archaic, sometimes using technology that is generations old, taking days to carry out business processes and even then not always succeeding without errors.
As far back as the early 1980s, industrial manufacturers in Japan were already working to a regime that measured errors in terms of parts-per-million. Today financial institutions measure their straight-through processing (STP) error rates in fails-per-hundred. This difference in efficiency of several orders of magnitude can be incomprehensible to business managers in other industries, particularly those industries that are the customers of financial institutions. In fact, the term ‘STP’ is almost unknown outside of the financial sector: other industries have used the term ‘automation’ since the early days of Henry Ford. Even STP has fallen out of use among financial institutions almost as though it is an unachievable nirvana.
One of the key factors that made automation and modern operational efficiency possible is standardisation. Standardisation of technology, interfaces and protocols has led to real efficiencies in financial operations, such as the delivery of real-time financial market data, managing order flow and execution between investment firms and exchanges, and the clearing of huge and increasing volumes of derivatives trades. Volumes processed have grown biologically, but also in part due to the ability of financial institutions to process those volumes successfully.
Although markets today are clearly global, the financial sector is very much divided into a multiplicity of national, domestic markets serving customers that are primarily interested in their own domestic market. Over 90% of financial activity in any country is typically domestic, leaving a few percent of activity for international, cross-border activity. Standards have been developed and adopted domestically, frequently with no regard to their international impact or with any consideration of other relevant international standards.
In the days when technology was expensive and could be afforded only by larger organisations, these issues had a relatively small impact on relatively few organisations: for example, a stock exchange or central securities depository (CSD) or automated clearing house (ACH) might have only a few score of domestic member firms to exchange messages with. But today, with the reduced cost and much wider use of technology, the issue of standardisation has become critical to success and survival.
The financial sector is a volume business in almost every aspect of its operations, with a need to bring down its cost-per-transaction on almost everything that it does. At the same time, the financial sector is not an island totally separate from the principles of business and technology that apply across all sectors of commerce. Laws of change from the outside world are fully applicable and relevant, including ‘laws’ such as Moore’s Law (processing power doubles around every 18 months) and Butter’s Law (network capacity and demand doubles around every nine months).
Laws such as these are double-edged. They show what industry in general is capable of delivering and is in fact actually delivering, but they also show the benchmark that the financial sector has to take account of in measuring its own success. For example, if network volumes in general are doubling across the industry every nine months, this should lead to increased operational efficiency of the networks and infrastructure that financial institutions build and use. But if in fact the volumes that financial institutions are moving are not increasing at that same rate, or they are being spread over an increased number of networks and infrastructures, then the financial sector is falling behind in efficiency as compared to other industries. And as the rate of general change is doubling every nine to 18 months, the rate at which the operational efficiency of financial institutions is falling behind that of other industries may be accelerating rapidly.
The separation of the financial sector into multiple national, domestic markets has resulted in the perceived need by financial institutions to operate multiple, separate systems to meet the different technical requirements of different markets, which are different in terms of their geography, asset classes and process elements. Rather than having a single infrastructure that grows and achieves greater economies of scale as the organisation’s business grows and expands into other markets, instead the infrastructure itself multiplies as the organisation grows and this hinders the possibility of achieving any economies of scale.
This is of course where standardisation becomes absolutely vital, and it is one of the key reasons why an approach to standardisation at an international level across a wide range of business operations is vital for any financial institution. This means using international standards not only for international (meaning foreign or cross-border) operations, but also using international standards for domestic operations as these generally represent the majority of a firm’s operations. Using international standards for domestic operations generates the greatest economies of scale.
The success of standards can be measured in their rate of adoption by the relevant industry sector. ISO standards for data fields (e.g. country codes, date formats, etc) have been widely adopted across the financial sector, but this is not true of the ISO message formats that make use of those data fields. This was shown up some 10 years ago when an industry consultation in the EU, in response to the recommendations of the Giovannini Group, showed a minimal level of adoption of ISO message formats by market infrastructures across the region. It has also shown up again as a result of the single euro payment area (SEPA) initiative in the same region but in other areas of financial operations.
Significant efforts have been made to push ‘the industry’ to a greater use of ISO standards, including the move from the ISO 7775 to the ISO 15022 standards. However, key infrastructures have still not applied ISO standards as a general principle, and the most evident of these infrastructures has been the financial regulators. Their approach has too often been “standards are a matter for the market, and we are not part of the market”, a view that is hard to understand when markets around the world for financial services are particularly highly regulated.
ISO 20022 XML is as important a step forward for the financial sector as HTML has been for the public internet. Again, it can be hard to remember the days when HTML (one usage of XML) was not part of the public internet, when the majority of internet content was text-based and non-graphical, and when the ability to view content depended totally on which application software you were using. The standardisation and interoperability that HTML brought enabled our everyday world of multimedia, high-speed and high-volume content that in turn created enormous economies of scale and that enabled this content to be available to the widest possible audience around the world.
Like HTML, ISO 20022 XML is network-independent, and messages created by using this standard run across firms’ own private networks, across the public internet and across shared networks provided by third parties. Unlike the ISO 7775 standards, that go back to the days of punched cards and a world of mainly mainframe computers, ISO 20022 XML is not a set of fixed message formats but a standardised approach to generating messages. The result is that ISO 20022 XML can be used to generate message formats that meet the needs of different firms to do similar things and can therefore create an environment of interoperable, standardised messages. For example, ISO 20022 XML is used to generate FIX Protocol messages for clearing trades across all relevant asset classes.
The interoperability that the ISO 20022 XML methodology embodies allows financial institutions to address the real world in which they operate, a world of multiple ‘standards’ including those that are domestic, international and proprietary. Rather than adopting a ‘boil the ocean’ approach and trying to reduce all business operations across the whole world to one single set of international standard message formats (a goal that is almost certainly unachievable), adopting the ISO 20022 XML methodology helps firms to create a stable platform on which to base their development of new applications and new messaging systems, and the adaptation of their existing applications.
The ISO 20022 XML methodology allows financial institutions to adapt to the approaches that their customers use already, rather than trying to force their customers to change the way that they operate before they can do business with those financial institutions. Its network-neutrality allows it to be used across all of the network infrastructures that financial institutions already use or plan to implement, but also permits firms to rationalise those network infrastructures to reduce their costs, increase their operational efficiency and achieve greater economies of scale.