Contributed by Chesapeake’s John Snyder, Vice President of Business Development
The Big Picture
Today we live in a world of electronic messaging. From email to IM to text to Twitter to Facebook, each technology carries its own standard for creating, communicating and consuming messages. As the old saying goes, “The great thing about standards is that there are so many from which to choose.”
In the world of finance, messaging is a serious concern. After all, these communications involve money, not silly tweets. However, here too, there is an overabundance of messaging standards ranging from BAI to NACHA to SWIFT to EDI to XBRL to FIX, and more. You might wonder, “Why can’t we all just get along and speak the same language?” The not-so-simple answer is: Because most of these languages have been around for decades, and each is associated with a specific communication system and purpose.
Further, all are embedded within untold corporate software systems. It isn’t broke; it’s just messy and inefficient. So, do we need to fix it? The answer, at least over the long run, is “yes” for a number of compelling reasons. First and foremost, international commerce is expanding. Yet, there are two standards just for Electronic Data Interchange (EDI), which enables the basic transfer of business documents. They are: ASC X12, employed within the United States, and EDIFACT, used by the rest of the world. ASC X12 contains the 822 transaction set, the standard for bank account analysis used exclusively in the United States. Why doesn’t the rest of the world adopt 822? Because it is part of ASC X12 and its standard bank service code definitions do not accommodate bank services, fees and charges that are common outside the United States. Conversely, EDIFACT does not offer any equivalent to 822.
The second reason is the need to improve efficiency. Expanding commerce means more message traffic. We need to minimize, if not completely eliminate, human interaction with messages. That is, we need to achieve straight through processing (STP), or executing the complete business transaction life cycle untouched by human hands. Having different standards doesn’t mean that the same data are contained in different looking packages. Every standard has a different perspective on content.
For example, an invoice may start out as an X12 810, resulting in a NACHA payment credit, which, in turn, is reported as a BAI debit to the originating account. Essentially, it is the same transaction in three different forms. But, even in the simplest case, data content will be changed, added and deleted along the way, as it is mapped from one standard to another. In a perfect world where a common standard exists, transformation processing would be unnecessary and all data would be preserved along the way.
The third reason is technology obsolescence. Standard development derived from old technology requirements, and a lot of this technology no longer exists. For example, BAI 88 continuation records and NACHA record and block sizes harken back to the days of punch cards and magnetic tape when data block length needed to be limited and managed.
Likewise, older computers offered limited bandwidth, and there was no Internet for sending data around the world on demand. These limitations are long gone, but their remnants create unnecessary complexity and inefficiency. They also make it difficult for humans to simply look at data and make sense out of it. Still, new technology exists and must be leveraged.
The final reason is the need for new messages to accommodate new financial functions and data. Instead of creating yet another disparate approach that, at best, tries to avoid the errors of the past, wouldn’t it be great to have one intelligent and consistent framework? That is what ISO 20022 is all about.
Check back next week for part 2 of this 3 part series: History and Scope.
If you have any questions, you can contact Chesapeake Systems Solutions by calling 410.356.6805 or visit Chessys.com today!
Chesapeake provides industry-leading, end-to-end financial solutions that seamlessly integrate cash management/treasury with general ledger account reconciliation, account analysis, and regulatory compliance functions. Information-sharing across all applications optimizes funds management, improves the financial close process, increases the efficiency and accuracy of general ledger account reconciliation, and simplifies compliance by enforcing company policies and procedures and financial regulations. Chesapeake solutions deliver actionable information and productivity improvements that can benefit a wide range of organizations, yielding tangible ROI from your software investment. From retailers to banks and financial services organizations to insurance companies, Chesapeake solutions help minimize risk, reduce costs, and maximize profitability.