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Questioning How Standards Are Set And The Implications For Financial Services

Richard Robinson

Richard Robinson

A senior business executive with more than 25 years of experience in the financial industry, with a rare perspective that spans working in operations and technology positions at global custodial banks, international brokers, investment managers as well as core industry utilities.
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How Standards Work – a multi-part series, Part 1: Questioning how standards are set and the implications for financial services

Standards exist across industries and create efficiencies and cost savings for many. But the world of standards is not as simple as it initially appears. In this series, we’ll examine why standards matter, what kinds of questions to ask when standards are being created, and what this all means for the financial services industry.

LinkedIn article by leading technology analyst Bob O’Donnell about the promise and confusion of USB Type-C reminded me of the challenges and conflicting issues that often arise when trying to create a standard.

In hardware and technology, a new standard typically presents new commercial opportunities. While the patent holder may benefit the most, others are building new cables and hardware for consumers, and then profiting off the need for consumers to upgrade. Consumers also win because the new standard and hardware usually offer improved functionality. And “competing” standards aren’t always a bad thing as they drive innovation – without Apple pushing its own USB cable standards, would USB connectivity really have advanced so rapidly?

Just because a standard exists, it doesn’t mean that it should be used for everything. For example, the Committee on Uniform Security Identification Procedures (CUSIP) created a nine-digit identifier for securities in 1964, while the International Securities Identification Number (ISIN) has its own standard for labeling securities. Both have a long history and were created to solve a specific problem, but that doesn’t mean they are right for every type of security, as ubiquitous as the term “standard” implies, or appropriate to use to address the new and distinctly different set of use cases being faced today.

Why do standards matter?

In financial services, standards play as important a role as in any other industry. In the identification of financial instruments, I can’t help but see some similarities between the Financial Instrument Global Identifier (FIGI) and USB Type-C.

Traditional solutions typically solve for one or two problems fairly well, focusing on the final application. They answer questions like “I need to get data from my phone to a computer” or “I need to identify a security so I can quote and price it.”  But beyond that primary need, a whole bunch of adapters are needed to get the user where they need to go. Or you need to add data elements alongside the identifier or map it to a completely different identifier when performing a different function. But it’s not always perfect.

Much like the new USB standard provides convergence across video, data and power delivery by focusing on the holistic need of evolving technology, FIGI provides convergence by examining the problem of multiple identifiers, not just looking at identification for identification’s sake. With a single symbology scheme, users can address a wide variety of issues, as opposed to needing to rely on multiple solutions (cables) for different functions.

Instrument identification is different, so more care needs to be taken in the implementation and definition of roles. By necessity, some level of control is needed to prevent duplication of codes and incorrect assignments. But there shouldn’t be restrictions on who can create an identifier – or restrictions on how to use it. Imagine, you want to buy a USB cable and have to purchase it from the single mandated manufacturer for your country, at a stated price without any comparison or negotiation. And after purchasing it, you can’t lend it to your friend to charge her phone or even sell it without paying the manufacturer a percentage for the right to do so.

Who is setting the standard?

Standard setting may seem like a closed, theoretical activity that takes place on the sidelines of an industry, but the process can actually have a profound effect on efficiency and cost. Considering the influence standards have over choices that must be made within the financial industry, the fact that many standards are being established and operated by organizations that are looking out for themselves should give anyone pause.

I’ve participated in industry working groups developing standards for close to 20 years. The goals of these working groups are admirable, and composed of individuals volunteering their time and effort. Typically these efforts aim to introduce change upon industry, sometimes causing disruption, altering the competitive dynamic. By improving processes, the benefits range from increased transparency, lower costs and opening the industry to new possibilities.

However, who is participating in the standard-setting process can be just as important as the standard that is trying to be set. Many of the efforts in which I was involved succeeded because participants checked their individual interests at the door and worked to achieve something that helped everyone advance. Other efforts have failed miserably because commercial interests and fears sabotaged best intentions. I have seen efforts that promised real change reach the point of launch only to be undercut and abandoned by participants who refused to put their own interests aside and embrace the kind of disruption that was best for all.

Disruption

Disruption, we know, advances industry. Disruption comes from the outside when there is a lack of competition within the status quo. Inevitably, the status quo often throws up walls to protect itself. When the question pertains to the disruption of a monopoly or virtual one, the status quo often trots out the lame defense that ‘competition is bad.’

Inertia becomes the friend of the status quo, especially when it is attached to a revenue stream. The established monopoly has solidified its hold on a standard. It has fortified its relationships with working groups, regulatory regimes and others where support would be critical to allow change.

Disruption is about evolving, and changing the notion of “It’s always been done that way.”  It can spawn new businesses and companies as well as transform and improve established companies that embrace new ways of thinking and doing. Disruption in USB technology has consistently shown long-term positive effects. If given the chance, disruption and evolving standards will surely bring similar benefits to the industry-specific needs of financial services companies.

Richard Robinson

Richard Robinson

A senior business executive with more than 25 years of experience in the financial industry, with a rare perspective that spans working in operations and technology positions at global custodial banks, international brokers, investment managers as well as core industry utilities.
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