Susan Feinberg

The trouble with standards in the financial services industry

January 23, 2013 6:00 AM EST

Standards normalize the meaning of fields and make the efficient, consistent exchange of files possible -- a critical factor when initiating financial transactions and reporting financial activity. 

The financial services industry, and particularly banking, has long embraced standards as a way to simplify integration between service providers and clients. 

Traditionally, the largest financial institutions have developed, approved, and rolled out standards without soliciting input from other organizations, thereby forcing those organizations to interpret the standards on their own. The result: gross inconsistency, inelegant customization, and overburdened IT departments who are simply trying to onboard, test, and manage ongoing partner relationships. 

XML and ISO 20022 were introduced as remedies to this result -- a standard and a global platform, respectively, that aim to standardize message formats. Their impact has been most notably realized in the European Union’s SEPA, a mandate that European banks and corporate clients are obliged to use when exchanging payment instructions. 

That’s good news, right? Doesn’t the publication of global standards make it easier for institutions to integrate? Doesn’t a broadly accepted way of moving data solve the historical inefficiency associated with connecting new partners? 

If so, what’s the problem? 

Put simply: these standards are too limited. 

Many bank clients believe ISO 20022 doesn’t go far enough. They believe that having a global standard available and making sure all participants use the standard in the same way are two separate issues. 

I believe a good response to this doubt is Common Global Implementation (a.k.a. CGI, operating under the auspices of SWIFT [Society for Worldwide Interbank Financial Telecommunication]), a standard created to assure corporate clients using multiple banks in multiple countries that standards are being implemented in a consistent manner and that the “custom” coding that plagued previous implementations is being avoided. 

Nevertheless, despite tremendous progress on the global standards front, the financial services industry in the U.S. insists on both maintaining decades-old domestic standards (which never really go away) and developing new domestic standards -- from the Balance and Transaction Reporting Standard (BTRS) to the Fedwire extended remittance formats -- instead of moving to the ISO 20022 global standards. And they’re having a tough time. 

Compare this to Europe, where the European Commission has mandated the retirement of legacy domestic payment systems and formats and will, starting in 2014, enforce adoption of the SEPA format (based on ISO 20022) among banks in the Eurozone. 

Given all this, what should U.S. banks do? 

First, they should consider the integration needs of their clients. A client-centric approach is critical. Do the clients integrate with banks in other countries? Have they adopted ISO standards for their international business? Do the new domestic standards add any business value to clients that global standards do not? 

Next, they should evaluate their ability to perform data translation and enrichment. Does their solution allow them to respond to the evolution of standards and specific client requests, or is it an inflexible EDI system that should have been retired a decade ago? If it’s the latter, they need to secure a solution for upgrading and staying current (e.g., a cost-effective cloud-based solution). 

Finally, they should make haste to hop on the global standards bandwagon. They should stop coming up with new domestic solutions. They should abandon the mindset that adopting global standards is too disruptive and remember that any disruption here is justified by legitimate reasons.

Yes, the benefits of standards are still limited in 2013, but with the right approach and solutions, the U.S. financial services industry can still compete. They can perform as ably as their international counterparts do, respond promptly to changes in the marketplace, relieve their overburdened IT departments, and focus their attention on managing the business of money. They don’t have to ensure that the standards go far enough for their taste; they just have ensure that they -- as an industry -- go far enough for their clients.