Rick Leander, Chief Strategy Officer, The Clearing House

Coexistence will replace the drive towards a single standard as banks demand a return on their investment in existing platforms, Rick Leander, Chief Strategy Officer at The Clearing House, claimed on Tuesday.

“There has been a philosophical shift in the past 15 to 20 years,” he said. “We used to assume that we’d end up with one standard. The truth is, there have been massive amounts of investment in what we have today – not just in standards but in protocols and business processes. If we were starting from scratch, we’d develop a single standard – but we aren’t.”

According to Leander, institutions that had developed proprietary standards after identifying market inefficiencies would be reluctant to relinquish them for fear of losing competitive advantage.

Convergence

Yet a combination of globalising regulation and cost pressure could equally drive standards development towards convergence, suggested Masayuki Tagai, Chief Manager, Global Network Management, Bank of Tokyo-Mitsubishi UFJ. “Regulators are talking about similar targets, even if they’re talking about different timelines,” he said. He pointed to an Asian trend towards regulatory convergence, with non-bank financial institutions offering microfinance appearing within the rubric of bank regulation.

Moreover, for banks, switching between MT double- and MX triple-syntax messages was costly. “If you choose MX, it will convert MT. But if you choose MT, it will reject MX’s richer content.”

Tagai raised the possibility that Asian markets, as relative newcomers to standards, could bypass MT for an MX format that can parse Chinese characters and offers flexible syntax.

“You might be surprised by the sudden takeup,” he said. In contrast to Europe, which is driven by the market, regulation-driven Japan picked up XBRL relatively quickly.

“If we were starting from scratch, we’d develop a single standard – but we aren’t.” Rick Leander, Chief Strategy Officer, The Clearing House

Outside Japan, too, the focus will switch from payments standards to the “big, big area” of corporate actions, according to SWIFT senior business manager, standards, Malene McMahon, with work underway to align transaction and accounting reporting.

In any case, even panellists who supported a sunset date for transition to MX were reluctant to suggest one. Tagai pointed out that a five-year period might not be long enough to coincide with banks’ planning cycles. “If you’ve had payments for thousands of years, as Japan has, perhaps you shouldn’t worry about an extra year or two. Or perhaps I’m thinking in Asian time.”

Coexistence: a fact of life

In any case, Irene Mermigidis, Senior Vice President, Product Management Core Products, Clearstream Banking, drew a distinction between necessity and desirability.

“Coexistence is a fact of life but, as with many facts of life, that doesn’t mean we won’t be glad when it’s over,” she said. “But we need to think of coexistence periods when we develop standards because the greenfield approach just makes the transition period more painful.”

“If you choose MX, it will convert MT. But if you choose MT, it will reject MX’s richer content.” Masayuki Tagai, Chief Manager, Global Network Management, Bank of Tokyo-Mitsubishi UFJ

She urged the industry to “finish what we start” by ensuring that future standards take into account adaptability and how they will be implemented, pointing to ISO 15022’s relatively weak market penetration as an example of available standards that the industry has failed to adopt.

“Senior managers should find adoption simple. Then we’ll be able to convince the market the new standard is a no-brainer,” she said. “Otherwise we spend too much time developing standards and assuming it all ends with a press release and us congratulating ourselves on the launch.”

Business case

What banks need to focus on is the business case for new standards. Mermigidis claimed regulatory pressure should be less important than opportunities and efficiency in decisions to adopt, but regulators would in any case likely support standards because they offer data comparability.

Although the internal teams working on standards development haven’t grown much since the 1980s, the cost to banks of investing in implementation and maintenance is considerable. In hard times there would be increased “scrutiny of the product and more demands for one platform with multiple, flexible products,” said Tagai.

“You’re always considering either return on investment or the regulatory imperative. The investment depends on which it is. If it’s a standard for a specific product, the product will have to recover the costs. If it’s a regulatory imperative, you’ll be looking at cost-recovery over three-to-five years,” he said.



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