Adoption and Use of XML in the Financial Services Sector
By Ronald Schmelzer, Senior Analyst, ZapThink, LLC

While there has been a flurry of media coverage and press announcements around various XML and Web Services technologies, there hasn't been as much coverage around what is happening in various industry sectors. In particular, which industries are adopting and using XML in mission-critical, important ways, and what sorts of Returns-on-Investment (ROI) are they realizing by implementing these solutions? ZapThink has recently published a study of the Financial Services sector to answer these very questions.

The Financial Services Sector covers a wide range of businesses and industries including Equity and Fixed Income Trading, Commodities and Currencies, Investment Banking, Retail and Commercial Banking, Property, Casualty, and Life Insurance, Mortgages, Commercial Lending, and various accounting fields. A Financial Services Provider (FSP) deals primarily with financial instruments and their exchange. While the specific nature of each of these businesses differs, their main concerns are the same: how to improve informational representation and flow in order to improve profitability.

There are a number of factors that contribute to financial service's role as a leading implementer of XML technologies. First and foremost, Financial Services industries are information industries. FSPs depend on information for their day-to-day operations, and as a result, the information itself is highly valuable. Network or system outages, inefficient processes, or human-intensive operations can dramatically and critically injure a Financial Services Provider (FSP).

Since FSPs are so reliant on information for their day-to-day operations, they have implemented almost every known data storage, middleware, and exchange technology that has been created since the 1950's. As a result, one of the primary costs in the Financial Service enterprise is that of integration. The Financial Services sector, like many other industry groups, has three primary integration challenges to deal with: Internal, system-to-system or "Enterprise Application Integration" (EAI), External, business-to-business integration (B2Bi), and Integration across vertical industries. The need for integration is spurred by the desire to link multiple systems into a cohesive view of data that can power decision-making, customer interaction, and the delivery of integrated products and services.

Unique to the Financial Services sector is the move towards next-day settlement of securities trades, called "T+1", which will soon become a requirement by the Securities Exchange Commission (SEC). Currently, trades take three days between trade execution and settlement. It is in the interest of all parties to shrink that timeframe to as close to real-time as possible. The notion of "Straight-Through Processing (STP)", in which firms will be able to seamlessly migrate a transaction across system and organizational boundaries while maintaining security and transaction integrity, is targeted at meeting this T+1 goal.

Many FSPs, especially Capital Markets trading firms, derive much of their customer satisfaction and influence from the publication of analysis and reports. The challenge is to better distribute content in a variety of formats to a worldwide audience while maintaining typographical quality, data integrity, security and compliance. In addition to saving money on publishing processes, FSPs seek to derive additional revenue from their content by syndicating it across different delivery channels and destinations. In particular, opinions and other research can be syndicated to a variety of financially relevant web sites, allowing the FSP to derive revenue from content licensing or sale of additional reports. Syndication remains one of the largest sources of untapped revenue potential for any sort of content source.

XML solves many of these problems by nature of how the technology has been developed and positioned. One of the major problems solved by XML, and Web Services in particular, is the eternal computing challenge: getting systems to communicate and integrate. The evolution of Web Services has provided a new take on the problem and proposes to solve this challenge once-and-for-all by providing an "arms-length" means for systems to simply expose their interfaces while abstracting their internal processes. Service-Oriented Integration (SOI) implements service-oriented architectures based on Web services standards, and presents an open alternative to proprietary integration solutions, such as EAI brokers.

In order to facilitate interoperability without mandating architectural change, XML-based standards are needed. As a result, a whole gaggle of XML-based formats have been created to address various pain points on the financial supply chain. These formats can roughly be divided into two types: transaction-oriented specifications that are concerned with facilitating financial transactions, and reporting-oriented specifications that are concerned with representing financial documents and reports of different types. The current universe of Financial XML specifications include ISO 15022, FpML, MDDL, IFX, OFX, XBRL, FinXML, IRML, RIXML, MISMO, and ACORD, among others.

XML also offers an organization the ability to reuse content, enforce document validity, provide a means for content management, and enable document searching. Clearly, plain old Word documents provide unstructured text that cannot take advantage of any of these capabilities. Typically, content authoring is decentralized and inefficient, with authors unable to cooperate effectively for multi-author document creation. XML can "componentize" text into chunks that can be validated, assembled, stored, and searched in a standardized manner.

As an aggregate industry, Financial Services industries spend more on IT than any other industry grouping: over $195 Billion US dollars. When examined as separate verticals, Banking, Insurance, and Financial Services are three of the top five vertical industries in general. The Financial Services sector is the most aggressive implementer of XML technologies, by sheer virtue of the amount of money being invested in XML-based technologies and tools. ZapThink estimates that the Financial Services sector will spend $985 Million (US) on all XML technologies in 2002, expanding to over $8.38 Billion (US) in 2005.

The potential opportunities and pitfalls, and current ways in which XML is being used by this industry sector are explored in detail in ZapThink's XML in Financial Services report. This report addresses the specific question of how XML is being applied to solve various problems in the Financial Services and related industries. In particular, this report covers how XML is impacting different areas of the Financial Services industry including banking, securities, accounting, business reporting, investment research, and related industries, key drivers for XML adoption in these sectors, XML-based solutions to the most common Financial Services challenges, analysis of key barriers to XML adoption in these sectors, key specifications and standards influencing the space including ISO 15022 XML, FpML, FinXML, MDDL, XBRL, IFX, OFX, IRML, and RIXML, among others, ROI analysis for implementation of various XML-based solutions, and identification of key vendors and technologies offering XML-based solutions in this space For more information about the ZapThink XML in Financial Services Report, please visit the ZapThink web site at www.zapthink.com.