Are financial standards in sync with digital economy?

By: Saqib Sheikh, COO, SWIFT India

India is now an agile and vibrant marketplace. The private sector and individual entrepreneurs are charting the course of development—onward and upward. This is majorly due to the young, persevering and literate demographics, however, at the same time it is also a consequence of easing regulations and improving infrastructure.

Our national communications infrastructure is one of the pillars on which the foundation of innovation and entrepreneurship is being laid. The speed, security, and efficiency of communications of individuals and businesses is based on standardized and open networks. Consider a scenario where telecom vendors insist on operating separate and isolated networks with their own proprietary standards.

Calling your friends and family would require a Vodafone-enabled device, SIM card, and subscription plan. Reaching colleagues at work would require a different Tata Docomo device, SIM card, and a plan. And contacting overseas counterparts would require a third set of devices, configurations and subscriptions. Sharing text messages, emails, pictures and videos between networks would require either manually transcribing the content or translating and transmitting it through dongles and cables—a cumbersome and error-prone process.

In our hyper-connected world, standardizing the exchange of information and thereby integrating islands of networks and data is critical services we use everyday. We may not immediately appreciate the value of standards and the organizations that work hard at propagating these, but we could not function effectively or efficiently without these.

Financial Standards

In the financial world, where institutions are under significant commercial and regulatory pressures to ensure the speed, safety and security of transactions, standardizing channels and their message formats becomes even more important.

The scenario of warring telecom vendors is not so contrived as one may think. In Indian financial markets for example, banks rely on a disparate set of channels and standards to communicate with customers, process payments, exchange trade finance and treasury instruments, and report to regulators and government agencies. Furthermore, these channels and their standards evolve at different paces.

The associated costs and complexities constitute a large portion of IT spend in the banking sector, as much as `7.1 crore annually by our estimates. More importantly mindshare of critical product management, IT and operations resources are pulled from customer-facing value-creating projects.

This is not the consequence of malfeasance on the part of service providers, but the result of organic proliferation of new instruments and services. The impact, however, is the same—inefficient allocation of scarce funds and resources on channel integration and operations that provides no competitive advantage.

ISO 15022—Language of the Financial World

A great deal of care and attention goes into developing financial standards. The International Organization for Standardization (ISO) has established a Technical Committee 68 (TC68) dedicated to collaborative development of financial standards.

At the crossroads of the global financial community, SWIFT SCRL is entrusted with managing its standards and best practices. Under the umbrella of ISO and TC68, SWIFT SCRL is the registration authority for ISO 15022 (www.iso15022.org), or more commonly known as Message Type (MT) formats, and the next generation of ISO 20022 (www.iso20022.org) formats. As the registration authority, SWIFT SCRL supports ISO and facilitates the coordinated development of these message formats and with its expertise, tools and services promotes their adoption.

Whether you are transferring funds to a loved one over the NEFT, or securing your business by opening a letter of credit with your bank, you are using these standards, or a domestic derivative of these standards, to transact. They form the language with which the financial community speaks with one another.

ISO 15022 has been in use globally for over 30 years. It was envisioned as a structured and well-defined set of message types that would cater to payments, trade finance, treasury and securities markets.

It has been adopted world over and is baked into most financial software. Unfortunately the standard is rigid and as business needs vary greatly country to country, the standard no longer meets the needs of a global interconnected economy. While in India the bank branches are identified by the Indian Financial System Code (IFSC), overseas it is

a Business Identifier Code (BIC). While Western economies are satisfied with latin-based character sets, India would like to use Hindi, Tamil, Bengali and its myriad of languages.

ISO 20022–The Next Generation of Financial Standards

Designed to overcome limitations of ISO 15022, ISO 20022 is not just a message standard consisting of fields, their lengths and character sets. It is a comprehensive methodology of defining and describing financial business interactions, and provides the following key benefits:

#1 ISO 20022 comprises of a business dictionary, modeling language and message formats. Thus it structures not only fields messages, but also the interpretation and understanding of message contents.

#2 ISO 20022 decouples the meaning of a message and its contents from the syntax of the language it is implemented in. Thus implementation languages and technologies based on those languages can evolve independent of the standard. Although the eXtensible Market Language (XML) is the preferred language of implementation, it is not beholden to it, and another implementation language may replace it in time.

#3 ISO 20022 is a rich message standard that provides for longer field lengths, definition of structured and unstructured information, non-Latin character sets (such as Devnagri Hindi characters) and extensions. It offers flexibility in emerging and dynamic financial markets such as India. While offering standardization ISO 20022 does not

force homogeneity.

#4 ISO 20022 allows users to append additional information, rather than putting it into narrative text. For example additional remittance information, invoice details and even a copy of a cheque can be sent with a payment instruction.

#5 With the common use of XML, there are now readily available host of off-the-shelf tools to expedite the implementation of ISO 20022. Of note is the MyStandards (www.swift.com/mystandards) collaborative web-based tool provided by SWIFT SCRL that allows communities to collect, compare, review and publish their ISO 20022 based market practices.

ISO 20022 now offers a mature and growing set of message definitions, comprising more than 325 message definitions across:

1. Payments – Cash account management, payments initiation, clearing and settlement, and cash management.

2. Securities—Pre-trade, trade and post-trade clearing and settlement, securities management, securities account management, reconciliation, asset servicing and collateral management.

3. Trade Services—Procurement, trade finance products and services, forecasting, reconciliation, accounting and remittance information.

4. Cards – Card transactions between acceptor and acquirer, acquirer and issuer, sale system and POI, terminal management, clearing and settlement and fee collection.

5. FX—Pre-trade, trade, post-trade, notification, clearing and settlement, reporting and reconciliation of FX products.

The standard has gained momentum over time, and is now considered the standard of choice for any new or evolving financial community. Payments systems in particular, and the Reserve Bank of India specifically with the Next Generation Real Time Gross Settlement system (NG-RTGS), are leading the charge of its adoption.

Other communities that have adopted or are in the process of adopting ISO 20022 are Japan Securities Depository Centre (JASDEC) for securities settlement, Singapore Exchange (SGX) for corporate actions, China National Advanced Payment System (CNAPS) for high and low value payments, and the New Payments Platform (NPP) in Australia for low value payments.

Conclusion

Standardization of communication infrastructure may not be exciting front-page news, but its impact is enormous. As Indian entrepreneurs are unshackled and the economy rebounds, our infrastructure must be prepared to support them. This will require focus and collaboration in the development and adoption of standards.