The success of the financial services industry relies on its ability to process payables and receivables, as well as manage investments and loans on behalf of its customers both retail and wholesale. For years many of these processes were manual and paper intensive. However, the introduction of EDI has allowed the financial services industry to automate many of the transactions required to transmit payment and remittance data from one party to another.

As a result of the economic upheaval of the past few years, the world has come to recognise and appreciate the interdependent nature of the global financial infrastructure. The financial supply chain has become a reality for global business as buyers from one geography rely on goods from suppliers based in other regions that utilise different currencies and are governed by different regulations. EDI provides not only a low cost alternative to traditional paper-based payment methodologies but also enables organisations to realise faster, more accurate and more flexible payment structures in the course of doing business. 

EDI enables the full alignment of the financial supply chain with the movements of the physical supply chain.  A fully automated financial supply chain enables the seamless, accurate and timely exchange of financial documents between buyers, suppliers and their financial institutions. With EDI an organisation can electronically transfers funds from one bank account to another designated bank account or counterparty. Electronic payments are processed to allow organisations to have access to funds more quickly and with fewer exceptions or delays due to human error.   

Due to the global nature of the financial services industry, there are numerous communications and document standards in use today, along with a number of regional specific EDI networks. The structure of the financial supply chain and a description of the communication protocols and document standards used are described below.

Supply Chain Structure

All industries utilise some version of a supply chain to track the flow of goods and services it uses and produces.  The financial services industry is no different.  Financial transactions are an integral component of the physical supply chain.  By connecting trading partners from order placement to settlement, the financial supply chain carries the flow of financial information and money in the direction opposite to the flow of goods and services.  

The financial supply chain is one that is closely aligned with and triggered by processes in the physical supply chain as demonstrated by the diagram shown below.  Financial supply chain services include transactions related to purchase order processing, Letter of Credit, open account management, pre & post shipping financing, reconciliation, invoice presentment, dispute management, foreign exchange and insurance management.

Buying firms initiate the process when they begin to source materials and/or finished goods from suppliers within their supply chain.  Financial institutions may help advise the buyer on issues related to credit and financing. Once an order is placed the financial institution may provide partial payment against the negotiated terms or supply an approved letter of credit to show the supplier that the buyer has the means to pay once production begins. Once the goods are produced and shipped, the financial institution may help insure the goods and upon receipt settle the account according to the terms of the contract.  The financial institution may also help the buyer to forecast cash flow based on cash management services it may provide to the buyer. The financial institution may also help to reconcile disputes, validate data related to the goods and finally release funds and remittance detail. 

Communication Protocols Used

EDI is widely used by the financial services industry for electronic funds transfer (EFT) between financial institutions, which facilitates such common transactions as the direct deposit of payroll cheques by employers, the direct debit of consumer accounts, and the electronic payment of government taxes by businesses. With the increasing emphasis on security, the financial services industry has added a number of secure communication protocols to use along with the more common ones used for other industries.  While many organizations utilise FTP and FTPs, others in use in the financial services industry include  AS1, AS2 and AS3, HTTP, HTTPs as well as ebXML for varying parts of their organisation.  However, others rely on other protocols to enable both domestic and international transactions for payments, cash, trade and securities.  The predominant communications platform for financial transactions between financial institutions is SWIFTnet.

Financial Information eXchange (FIX) protocol is an electronic communications protocol initiated in 1992 for international real-time exchange of information related to the securities transactions and markets.  In Europe, specifically in France and Germany, EBICS is gaining in acceptance as the transmission protocol for business-to-bank communication using the XML format which supports the Single Euro Payments Area (SEPA) initiative to standardise clearing protocols in the interbank networks.

Document Standards Used

In addition to traditional EDI documents such as ANSI X12 and UNI/EDIFACT, the most popular standards for treasury, cash management and payments are ISO XML, SAP iDocs, ORACLE, BAI, NACHA and ROSETTANET.  With the rise in XML-based standards, organisations such as RosettaNet, a non-profit consortium aimed at establishing standard processes for the sharing of business information are becoming  more common in the financial services space due to their usage by participants in the physical supply chain.  The RosettaNet standard defines message guidelines, business processes interface and implementation frameworks for interactions between companies usually in  the supply chain area, but also manufacturing, product and material data and service processes. However, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the dominant standard by which financial data is exchanged worldwide. SWIFT is a member-owned cooperative that includes more than 9,000 banking organisations, securities institutions and corporate customers in approximately 209 countries around the globe. 

Standards are a core element of SWIFT's services and are designed to enable communication and collaboration between banks and their corporate customers. SWIFT provides standards for multiple business transactions including payments, trade services, securities and corporate actions. The most common SWIFT message standards are MT and MX. 

Industry Associations

Due to the economic meltdown, the industry organisations that help automate, standardise and centralise financial data are more widely known than ever.  A number of industry associations that cover the standards, communication protocols, formats and architectural structure used to exchange information electronically between financial institutions as well as between the financial institutions and their corporate clients.  Among the most recognised organisations are those that develop and oversee standards. Standards organisations are responsible for associations used around the world. Some of the most widely known standards organisations include SWIFT, ISO, NACHA, BIAN and TWIST.  The International Organisation for Standardisation (ISO), is an international-standard-setting body composed of representatives from various national standards organisations. Founded on 23 February 1947, the organisation promulgates worldwide proprietary industrial and commercial standards. It has its headquarters in Geneva, Switzerland. 

NACHA is a national, not-for-profit organisation that develops operating rules and business practices for electronic payments. Members of this organisation define the rules covering the Automated Clearing House (ACH) network in the United States. While NACHA has largely set the standards for electronic payments for business-to-business transactions in the United States, there are numerous global variants including NACHA has largely set the standards for electronic payments.

The Transaction Workflow Innovation Standards Team (TWIST) is another industry group designed to close the gap between the physical and financial supply chain.  By helping to rationalise financial industry standards, TWIST advocates open standards for the creation of user-driven, non-proprietary and internally consistent XML-based standards for the financial supply chain. TWIST standards help to automate business process and information flows where multiple parties have to interact and synchronise their business processes.

In addition to standards organisations, there are some organisations such as the Banking Industry Architecture Network (BIAN) that focus on accelerating the adoption of Service Oriented Architecture (SOA) in the banking industry by promoting convergence towards a common services landscape and the adoption of semantic standards to ease integration.

 

Industry Specific Networks

The financial services industry has long utilised industry specific networks to exchange data in a secure fashion. The industry standard is largely regarded as the SWIFT network. With more than 9,000 member banks and financial institutions, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the most widely used network for exchanging financial data.   In addition to SWIFT, however, many banks and corporates also use some variation of the ACH network.  

Automated Clearing House (ACH) is an electronic network for financial transactions that originated in the United States. There are similar clearing and settlement systems for electronic payments including state and regional networks such as the Wisconsin Automated Clearing House Association (WACHA) and the Mid-Atlantic Clearing House Association (MACHA) as well as global variations such as the  Bankers' Automated Clearing Services (BACS) and Clearing House Automated Payment System (CHAPS) in the United Kingdom,  scheme for the electronic processing of financial transactions, the Pan-European Automated Clearing House (PE-ACH) which is an ACH that is able to settle SEPA compliant credit transfers and direct debits across the Eurozone. In Japan the Zengin system is just one of three clearinghouses, operated by the Japanese Bankers Association to handle domestic fund transfers. China  also has three clearing systems which are:  The Electronic Interbank System (EIS), Electronic Funds Transfer System (EFT), and the Local Clearing House (LCH).

Even though all of these networks were developed and customized to meet regional requirements, in September 2009, NACHA—the governing body of the U.S. ACH Network—adopted new rules for international ACH transactions (IAT) to facilitate easier cross-border transactions.  IAT may be the first step towards global ACH as envisioned by some of the largest global banks.