Financial industry unites to create XML payments standard to cut processing costs

Global investment banks and financial suppliers have unveiled one of the most ambitious attempts yet to agree on a common...

Global investment banks and financial suppliers have unveiled one of the most ambitious attempts yet to agree on a common technology for the payments industry.

Investment banks including ABN Amro, Citibank and HSBC signalled their commitment to the International Standards Team Harmonisation Group earlier this month.

They join the Society of Worldwide Interbank Financial Telecommunications (Swift), a global co-operative of 7,000 financial institutions that handles security, messages and international payments between banks through its X.25 and IP networks.

The group aims to develop an XML-based payment "kernel" that can be used by any bank or company to send payment instructions. It will publish detailed plans next year.

Why is a standard needed?

Few in the financial services industry would doubt the merits of a single standard for sending payment information. The large number of existing messaging standards and systems used by banks increases IT costs and slows down transactions.

The creation of a messaging standard would help cut IT and business costs for banks and their customers by allowing different payment systems to talk to one another without the need for specially written interfaces.

Retail banks in Europe, the US and Asia Pacific will spend about £30.5bn on IT this year. An XML payment standard could help process trillions of pounds in transactions if widely adopted.

It would also be an important step towards straight-through processing - the automation of the trade and clearing process for financial transactions. Achieving this has been seen as one of the biggest challenges facing global financial markets.

Industry experts welcomed the move and said the financial services industry was littered with competing standards bodies. For example, one of the main backers of the new standards, the IFX Forum, was formed to create a messaging standard for financial services as long ago as 1997.

"You get a lot of these initiatives. The key thing with this is the end result," said Daniel Mayo, lead analyst in the financial services practice at research firm Datamonitor. "The intentions are good and there seems to be significant commitment from important organisations such as Swift and the investment banks.

The main attraction of an XML payment standard for banks is the potential to reduce their IT and business costs, said Mayo.

"If banks are using financial middleware software to translate payment data between different messaging standards, it means higher costs. If you have a common payments standard you can automate payments," he added.

Others were also cautiously optimistic about the industry's latest standards initiative. They said that heavyweight backing across the payment industry improved the likelihood of success.

"The importance of this is that it is not just the banks, as has been the case with some standards initiatives in the past," said Nicholas Downes, principal consultant in the financial services practice at Logica CMG, an IT services company.

Software suppliers will also have to write new software to work with the proposed XML payment standard.

Plans to create a payment standard reflect moves across the financial services industry to cut costs and speed up transactions by standardising on technology.

Pan-European standard

The European Union, for example, is developing a standard payments system called Target2 for member countries in a bid to reduce the cost of cross-border trades and cope with the expansion of the EU.

Target2 is due to begin operations in 18 months. It will update Target, the existing real-time gross settlement system infrastructure used and owned by the European central and domestic banks for domestic and cross-border payments.

Analysts believe the new system could simplify cross-border payments for UK banks and offer more sophisticated services, such as ensuring payments are only made once a transaction has been settled.

Although UK banks are likely to continue making payments through Target using Swift, a common technology platform means that banks in countries that have recently joined the EU could be saved from having to adapt their banking IT infrastructure to link to Target2.

Although the cost and technical specifications for Target2 have yet to be decided, messaging standards such as ISO 15022 will play a central role in its development. ISO 15022 provides information about the payment and confirmation it has been reconciled.

Potential success

Elsewhere in financial services, progress towards agreeing technology standards has been patchy.

Last year, the US abandoned plans to introduce next-day settlement of securities by 2005. The Securities Industries Association said it would promote next-day settlement and straight-through processing, but with no firm deadline for its introduction.

Last year also saw the demise of an influential standards body, the STP Global Straight-Through Processing Association, leaving City firms with one straight-through processing system standard, Omgeo, for cross-border trades in the securities industry.

The latest plans by financial firms to develop a global XML-based payments standard have a good chance of succeeding, some experts believe.

The International Standards Team Harmonisation Group has heavyweight backers from both the retail and investment banking sector, as well as Swift.

The potential for the XML kernel to cut costs would help bolster support for the standard. But analysts have pointed out that previous attempts to agree payment standards have achieved only limited success. Achieving a critical mass of corporate users across the banking sector is set to be a sizeable task.

The new payment standards group       

Members of the International Standards Team Harmonisation Group include ABN Amro, Citigroup, HSBC, JP Morgan and Deutsche Bank. 

Analyst firm Gartner is also involved in the initiative, as are four standards organisations in financial services: IFX Forum, a financial services group; the Open Applications Group, for the enterprise resource planning market; Swift, the widely used inter-bank messaging service; and the Treasury Workstation Integration Standards Team. 

The aim of the group is to create an XML-based "kernel" that can be used by any bank or company to send payment and information. The kernel will include information on how and when the payment was initiated and how to reconcile it. There are also plans to extend to the XML standard to cover direct debits and bank statements. 

Banks and companies currently use a variety of technologies for sending payment information, including Electronic Data Interchange, e-mail, telex machines and IFX for consumer banking. 

Anticipated benefits include automating the payment process, making payments easier to track and reducing IT and business costs for banks and their customers. Suppliers will also benefit, according to the group, because an XML payment standard will make it easier to develop software products for the payment industry. 

The first release of the XML payment standard is due by the second quarter of next year.

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