Following the Money
XML must be a sure bet. The financial services and insurance industries, notable for conservatism, are leading the way in adopting XML as many companies convert data to XML formats.
“The capital markets are taking the lead. The largest dealers—Goldman Sachs, Bear Stearns, Merrill Lynch—do it first, and the smaller traders follow,” said Todd Eyler, an analyst at Forrester Research Inc., in Cambridge, Mass.
Banks, brokerage houses, and insurance and real estate companies spent $500 million on XML-related technologies last year and will invest an estimated $8.4 billion a year by 2005, more than any other industry, according to a recent XML market research report, “XML in Financial Services,” by Ron Schmelzer, an analyst at ZapThink LLC, a market research company in Waltham, Mass.
“The financial service providers have a lot of desire to use XML to consolidate data, reduce errors and reduce costs,” said Mary Knox, author of Gartner Inc.s Financial Services Provider Advisor newsletter at Gartners Financial Services Group, in Stamford, Conn.
In the rush to embrace XML, however, problems have risen in financial services, particularly in banking and equities trading. Schmelzer blamed standards wars; immature tools; and a lack of standardized approaches to security, reliability and executing transactions.
The problems are greatest for the banks and equities trading houses. The insurance and real estate industries tend to suffer from less conflict, Schmelzer said, thanks to broader standards in those industries.
With its ability to present data and capture information about that data in tags, XML has become the lingua franca of future Internet business exchanges. When financial services companies complete their transition to XML, it will bring the long-awaited goal of STP (straight-through processing)—or closing a trade within seconds of its being made—much closer. A milestone on the way to that goal is so-called T+1, or the transaction date plus one day until an equity trade is closed.
But STP is not on the horizon yet. Thats because the first implementations of XML have typically focused on converting companies internal systems to XML data formats so employees can share information.
One company that has done this is Fidelity Investments, according to Bill Stangel, senior vice president and enterprise architect at Fidelity, in Boston. The company started two and a half years ago and recently completed its planned revamping of data to XML over HTTP, Stangel said. The goal was “to reduce the amount of Fidelity-built middleware” used to translate data from proprietary database or file systems to a Web application, he said.
Since data can now be moved about in easily recognized XML formats, 75 of the specialized Unix and Windows NT servers that used to provide Fidelitys middle-tier data translation are no longer needed. Although the project started with an internal focus, visitors to the Fidelity Web site and online traders are now the beneficiaries. “Two-thirds of Fidelitys online transactions use XML to tie the back-end system to the Web site,” Stangel said.
Although Stangel declined to say how much the project cost, ZapThinks Schmelzer estimated, based on industry averages, that Fidelity probably spent $30 million to $40 million on the effort. Not everyone is in a position to spend that much money. And then theres the question of what to spend money on—where to place your bets on competing standards.
Analysts agree, for example, that OFX (Open Financial Exchange), a standard launched by Microsoft Corp., Intuit Inc. and CheckFree Corp., all suppliers of personal finance and business software, is now competing with another standard, IFX (Interactive Financial Exchange). Microsoft and partners launched OFX in early 1997 to allow downloads from retail financial institutions into Microsofts Money, Intuits Quicken and CheckFrees Electronic Bill and Payment systems.
Some of the most powerful retail bankers, some already members of OFX, broke away to form the IFX Forum Inc. (www.ifxforum.org). They include Bank of America Corp., Wells Fargo & Co., Citigroup Inc., FleetBoston Financial Corp. and MasterCard International Inc.
“Within three years, it is expected that IFX will replace OFX as the predominant XML-based specification for retail and commercial banking,” Schmelzer wrote.
However, IFX is not standing still. “IFX is shifting direction so it doesnt compete head-to-head with OFX,” said Gartners Knox, adding that this effort is likely to succeed. “Convergence is not likely to happen between the two. The business drivers that might force convergence are not there,” she said.
Chris Jolley, director of marketing for the Microsoft Financial Products Group, said the two standards are different and OFX will survive as an independent XML standard.
“OFX is designed for retail institutions to present to the consumer,” while IFX is designed for one financial institution to talk to another, said Jolley in Redmond, Wash. OFX has 1,400 participating financial companies, he said, compared with “really low membership” for IFX. The IFX Forums membership list shows 24 members.
The IFX Forum said its XML standard is meant to work “in many environments” and is not limited to exchanges among financial institutions. In the eyes of retail bankers, “OFX was meant to transition to IFX, but OFX is still lingering. Now theres competition between them,” Schmelzer said.
Schmelzer said the case is more clear-cut in the formerly competing standards of SWIFTML and FIXML (Financial Information Exchange ML), both XML standards for international network money exchanges. The FIX protocol was first established in 1993 by Fidelity and Salomon Brothers, and work began to integrate it with XML in 1999. By then, FIX was a standard in the public arena.
Two years later, the Society for Worldwide Interbank Financial Telecommunications network for wire exchanges among international banks began to encode its SWIFT messages in XML. Rather than pursue two separate tracks, the standards were merged in July 2001 under the International Organization for Standardization. The combined standard is now known as ISO 15022 XML. As ISO 15022 XML specifications are published, they will cover bases in both camps and resolve any doubts a financial organizations IT manager may have as to what standard to use.
In addition to ISO 15022 XML, work continues on FinXML (Financial XML) by FinXML.org, a commercial business that has developed a standard for capital market transactions. FinXMLs “full-solution approach” to various transaction specifications “overlaps the efforts of ISO 15022 [XML],” according to the ZapThink report. But it points out that FinXML.org is on the ISO 15022 XML working group, so it is likely to differentiate and reposition FinXML from that standards effort.
For the financial services IT manager, making the right moves presents “extremely difficult, risk-intensive choices,” Gartners Knox wrote last year in Gartners Financial Service Provider Advisor. The IT manager must commit to an XML standard but cant predict what standard a future partner might have committed to, she said.
In some cases, Forresters Eyler said, standards conflict will have to be resolved in the marketplace. Where two standards exist, such as OFX and IFX, an influential organization, such as MasterCard, can “serve as a hub that rationalizes the competition” by supporting one and not the other.
Supporting two standards is twice as expensive as one, and financial institutions will make hard choices about competition that drives up their costs, he said.
Likewise, in the insurance industry, ACORD, or the Association for Cooperative Operations Research and Development, is pursuing a global XML standard called eMerge across its existing XML standards for property, casualty, life and joint venture reinsurance.
Such a standard would allow dissimilar forms of insurance to be included in the same document exchange and bids by carriers on more than one aspect of a customers insurance needs.
“Whether it was originally a tape of data, an Excel spreadsheet, a comma-delimited ASCII file or a flat file, it all needs to be articulated to Swiss Re Group,” a large reinsurer in Zurich, Switzerland, said Jim Laughlin, managing director for insurance and financial services at Excelon Corp., in Burlington, Mass. Excelon makes XML data storage and translation products.
Despite the global aims of the industry standards group, XML adoption throughout the insurance industry remains uneven, said Bob Pachner, CIO of Kaye Group Inc. insurance company, in New York, a unit of Hub International Ltd., in Toronto.
His company is planning on automating its agents offices with XML-enabled office management systems. But much of the value will be limited if they cannot engage in XML exchanges with major insurance carriers, such as Travelers Insurance Co., in Hartford, Conn., or State Farm Cos., in Bloomington, Ill.
“Our frustration is with the carriers. Their adoption rate has been slow,” Pachner said. They are dragging feet in part because they dont want their insurance lines to be perused by Web shoppers based on price alone, he said.
The ZapThink Report also listed immature XML tool sets as a barrier to XMLs adoption in financial services. Schmelzer said XML tools are not robust enough to combine the development functions that financial services companies want, so many of the companies build their own tools. “Theres no best practices right now,” he said.
Fidelitys Stangel agreed but said, “When we started two and a half years ago, there werent as many tools as there are today.” Developing with XML for Web services requires a different mind-set than the traditional application development for operation with a database management system, he said. A Web services application has to be able to discover data and services on the Internet rather than invoke a path to a specific database. “The emphasis is on messaging and dynamic discovery, rather than data,” he said.
ZapThinks Schmelzer said another immature area is how to build security, reliability and transaction control into XML data exchanges. “There are a number of major proposals” addressing these issues, he wrote, but there still “arent widespread, standardized mechanisms.”
Kaye Groups Pachner said deeper penetration of XML into the insurance and financial services organizations would mean “quicker and more efficient transactions” and “an absolute reduction in cost.” The reduction comes as data re-entries and other manual interventions are eliminated. This is possible because XML enables computers to talk to one another and complete a transaction between two parties that have not engineered an automated link. With XML, “the settlement process in a securities transaction is almost fully automated, meaning fewer mistakes and “fewer people in the back office to deal with reconciliations,” said Forresters Eyler.
Despite problems, the rise of XML in financial services and insurance appears inexorable. By demanding better tools, questioning security lapses and asking for more safeguards, as well as by participating in standards organizations, companies can get a better sense of which XML standards are for real. Theres a lot of money at stake—as Schmelzer says, $8.4 billion.
Charles Babcock is a San Francisco-based technology writer. He can be reached at firstname.lastname@example.org.
The ABCs of Financial
The financial services industry is spawning dozens of sometimes competing standards as companies adopt XML for integrating internal systems and building partner-to-partner exchanges.
FIXML: The XML version of the Financial Information Exchange messaging protocol, developed originally by Fidelity Investments and Salomon Brothers, now used by banks for securities and money exchanges.
SWIFTML: The SWIFT networks XML; also used internationally by banks for securities and money exchanges.
ISO 15022 XML: The International Organization for Standardization standard for merging SWIFTML and FIXML.
Financial XML: FinXML.org is a commercial business that has developed the FinXML standard for electronic exchange.
The format is patent-pending and could no longer be an open standard if a patent is granted. It supports a wide range of financial products, including money markets, loans and deposits, bonds, and derivatives.
eMerge: The attempt by the insurance industrys standards body, the Association for Cooperative Operations Research and Development, to build a global XML standard that cuts across lines of insurance, including property and casualty, life, and reinsurance.
FPML: Financial Products Markup Language is an XML standard for over-the-counter trading among financial institutions, with provisions for a variety of transactions, such as interest rate swaps and foreign exchange.
OFX: Open Financial Exchange, sponsored by Microsoft Corp., Intuit Inc. and CheckFree Corp., defines how to execute transactions and download financial reports from institutions to consumer personal finance software.
IFX: Interactive Financial Exchange is OFX with added functionality sponsored by major retail banks, such as Wells Fargo & Co., Bank of America Corp., FleetBoston Financial Corp. and CitiGroup Inc.
It provides XML standards for funds transfers, credit card statements, recurring consumer or business payments, and bill presentment.