15 October 2017

Safeguarding efficiencies of new technologies: Why common standards matter

How ISO 20022 can better enable DLT and API technologies of tomorrow

Join the New Technologies and business standards conversation on Tuesday 9:30 at Sibos Toronto.

New technology, and new applications of existing technology, are on the cusp of revolutionising the financial services industry. Distributed Ledger Technology (DLT or ‘blockchain’) and Open Application Programming Interfaces (APIs) are examples of how emerging technologies are poised to challenge the structure of traditional banking systems and potentially alter the landscape of financial services providers themselves. Since the 1970s, the automation of the financial industry has been dependent on standardised messages that have evolved over the years to meet the need for new processes and data. The question today is whether common messaging standards will continue to form the basis of seamless interaction for these new technologies and applications in the future, hence allowing institutions to reap the full benefits of interoperability whilst minimising risk and cost.

Open APIs: Avoiding complication

Open APIs have revolutionised mobile technology, and regulators would like to apply the same principles to the financial services industry to make it more open and competitive. The European PSD2 Regulation and the UK Open Banking Order will require banks to offer access to account balance and payment initiation services to authorised third parties via APIs.

The risk of non-standardisation of messaging in this new landscape would mean a complex world of each bank designing its own implementation. Whether we are talking about service aggregation or downstream compatibility with back-office systems, the potential for data to be misinterpreted or corrupted as it flows through the financial system would be great, meaning an increase in risk and cost for enterprises. 

There have been several organisations looking at the standardisation of APIs for banks, with many referring to ISO 20022 as the standard to be used for data exchange. This follows a logical evolution as the financial industry has been progressively adopting the ISO 20022 messaging standard over past years in order to deal with increased compliance and data demands. There are some parties, however, who believe that ISO 20022 is not suited to an open banking environment and imposes too heavy a governance process.

To answer these charges, development of tools and methodologies is currently underway so as to evolve the standard to accommodate API users. The overall approach has been to re-purpose existing ISO 20022 components where possible and extend the methodology where necessary in order to ensure that the benefits of common end-to-end business data definitions are made available in the open banking environment.

DLT: Accelerate the roll-out

Even though DLT has been the subject much hype, it has been generally felt that the technology would need to mature before industrial-scale application to financial services. Yet recent progress has been made on the subject of data privacy, for example, in the form of data segregation on major DLT platforms targeting the regulated financial industry. In addition, rather than completely replacing all major business processes as previously predicted, DLT will instead take its place beside other automated technologies (such as APIs and messaging) and integrate with existing back-office systems through APIs.

It is also expected that some of the first live implementations to reach industrial scale will offer system access to all but the largest participants using ISO 20022 messages. In order to provide data interoperability between different DLT solutions, SWIFT Standards is currently exploring the use of ISO 20022 business definitions for common instruments such as Letter of Credit or FX Option. These language specifications would be made compatible with deployment, and could eventually assist in accelerating the rollout of DLT.

The fidelity and integrity of data

In the deployment of new technologies, common standards such as ISO 20022 have an important role to play in improving interoperability and transparency in the front, middle and back-office. Standards that have been developed within the international standards domain have much to offer in terms of standardisation techniques and assets.

The hazard in not adopting international standards is that transactional data will be dumped into a confusion of proprietary systems, processes and data models. This puts the fidelity and integrity of data at risk, thus making the entire end-to-end financial transaction vulnerable. By implementing ISO 20022 international standards, operational effectiveness is improved by end-to-end visibility, providing transparency for CROs and CDOs and accountability to regulators. Moreover, the methodology and model-driven approach of ISO 20022 can be also applied across internal business silos of an enterprise.

Move ahead by looking back

DLT and Open APIs represent the technology for the future of financial services, but that does not mean to say that we have to repurpose whole systems from scratch. Rather, we should take the building blocks successfully developed and used over the years by the financial industry and put them to good use, repurposing where necessary. Financial transactions, whether originating from Open APIs or running through DLT systems, ideally need to have a common language to reduce risk and cost. SWIFT believes that ISO 20022, with a few improvements to accommodate new technologies, can not only provide the basis for common standards going forward without distorting development practices or technology choices, but actually accelerate projects by providing ready-made, industry-agreed definitions for core business concepts. By looking backwards, industry can ultimately move forward much more quickly and on a more efficient basis.

Join the New Technologies and business standards conversation on Tuesday 9:30 at Sibos Toronto.

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Business Standards and Emerging Technologies

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Last update: 
13 October 2017

For decades, financial industry automation has been based on the exchange of structured financial messages, but this picture is changing rapidly. New automation approaches such as Distributed Ledger Technology (DLT) have emerged to challenge messaging’s dominance, while maturing technology, including Application Programming Interfaces (APIs), is being widely deployed in the financial services industry, driven by regulation and competitive forces. In the near future we can look forward to business processes that span multiple automation mechanisms.

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