The world relies on electronic payment systems. They are part of the fabric of our lives; the unconsidered plumbing that ensures our bills are settled, our salaries and benefits paid. Payment systems ensure that money is exchanged seamlessly, cheaply and reliably; they work so well that we barely notice them.
But behind the apparent simplicity lies a complex accumulation of organizations, schemes, legal frameworks and technology that has evolved over decades in different places and at different speeds. How does the financial industry ensure that these moving parts combine efficiently to process today’s transactions, and at the same time that the infrastructure can evolve to match new customer expectations like mobile payments or contactless?
One part of the answer is industry standards. There are many standards involved in processing payments, including an array of technology standards covering anything from physical cables to data transport and data security. But I’d like to focus on business standards, common definitions for business information that allow one component of the payments system to understand another. Today’s business standards fall into two broad categories: reference data and messaging. Reference data standards define universal codes for key data elements such as currencies, countries and parties. They define both the format of the data (e.g. the length and format of a currency code; the attributes required to describe a currency) and the data itself (e.g. the list of agreed currency codes, EUR, USD, etc.). Reference data standards ensure universal consistency for important business information.
Messaging standards describe very precisely the content and format of business messages exchanged by industry participants like banks and clearing houses to complete payments and other processes. Wherever possible, messaging standards specify data elements using reference data standards. The combined effect of these standards is to reduce drastically the ambiguity of the information exchanged. This is important, because ambiguity brings risk. Consider this date: 12/11/17. Is this the 12th of November? Yes, probably, if you are European, but in the US it would likely be interpreted 11th December. It could also reasonably be read year-month-day … 17th November 2012 (or 1912?). If it’s the date a payment is to be executed, you need to be sure! Standards ensure important details like dates are written and interpreted in one way, and one way only. The other reason we want to eliminate ambiguity is to enable automation. Machines can process thousands of payments transactions per second with perfect reliability, but only if the data they are given is clearly defined and consistently formatted.
So where do standards come from, and how do they evolve with the needs of payments users? Many organizations create standards. In the first wave of payments automation in the 1960s and 1970s standards were typically proprietary, created by the operators of centralized services like clearing houses, and were different from one to another. But industry players quickly realized that standards are too important to be owned and managed by a single entity, and standardization efforts have increasingly been consolidated under specialized standards bodies that guarantee fair intellectual property rights and open maintenance processes. It is through maintenance that standards evolve; a user of a standard can request a change to support a new payment process or instrument, and if enough of the other users agree, the standard is updated. Many of today’s financial standards are managed by ISO (the International Organization for Standardization), an international body head-quartered in Geneva. But ISO provides principally governance and secretariat functions, the standards themselves are created and maintained by industry volunteers. It’s an important effort, and one that already involves many payments experts from around the world, but new participants and new perspectives are always welcome.
Stephen Lindsay is the Head of Standards at SWIFT.