Nearly 40 years after the retail industry adopted the UPC bar code to improve transaction processes and information flow, the bar code’s administrator and a financial industry development firm are working to bring similar gains to financial documents, their associated electronic financial transactions, and their users.
GS1 US, the not-for-profit standards organisation that supports the UPC, and Financial InterGroup Holdings Ltd, a financial services joint venture development company, today announced a joint exploration to resolve efficiency and risk problems hindering financial firms, stock-issuing companies, and regulators.
The two organisations are studying how to use global GS1 System identification-numbering standards, used by more than 1 million businesses in 25 industries, to identify products and business entities in the financial industry’s transaction life cycle and supply chain. They have met with leading financial institutions to gather input for how the standards could best be adopted by the industry, and are seeking additional input.
“A global identification system would reduce systemic risk in the financial system’s interconnected supply chain,” said Allan Grody, president, Financial InterGroup. “Additional benefits would be lower capital costs and processing efficiencies that will bring middle- and back-office costs down, and help keep trading and infrastructure fees low.”
The standards could be used starting at the earliest point in the financial transaction lifecycle, when corporations draft prospectuses, offering memoranda, financial event announcements, and other documents.
“The recent financial crisis highlighted the long-festering problem of multiple, nonstandard, proprietary coding schemes used to represent financial products and business entities,” said Grody. “This is one of the root causes of regulators’ inability to observe risk building up in the financial system. A standard identification system would fix that, especially when used in conjunction with the XBRL standard for tagging this data in financial documents.”
Grody pointed out that boards of financial firms need to aggregate financial transaction and position data across their multiple lines of business for enterprise-wide risk management, and regulators need to do the same across all systemically interconnected financial institutions.
“For years our industry has sought so-called ‘straight-through processing,’ or STP, which basically means electronic processing and limited manual intervention, similar to the retail sector,” Grody said.
“A common language is required for STP, which will be even more important under the Dodd-Frank reform legislation as it generates new data management requirements and more activity among market data vendors, software companies, exchanges, financial firms, clearing houses, central securities depositories, and trade repositories,” he said.
The GS1 System of standards allows users to uniquely identify their products, documents and other assets; capture identification numbers; and share related information with their trading partners or counterparties.
“GS1 standards streamline commerce, improve consumer safety, and save companies in diverse industries billions of dollars a year, and they can do the same for the financial industry,” said Bob Carpenter, President and CEO, GS1 US. “Adopting GS1 standards should be relatively easy for the financial-services supply chain, and we will work with industry leaders to help them in their journey.”
Tim Smucker, chairman of the board and co-CEO of the JM Smucker Company (NYSE: SJM), and chairman emeritus of the GS1 management board, agreed: “We depend on the financial industry to conduct business and serve our shareholders. And we believe the financial industry can benefit from the adoption of the GS1 System of global standards,” he said. “We are committed to share with the financial industry what we in the consumer goods industry have learned in adopting and using universal standards for efficiency and operational performance.”
As GS1 US and Financial InterGroup gain insights from industry leaders, the results could lead to results beyond adoption of the GS1 System.
“Looking past the study phase, we can see multiple possibilities,” said Richard Tinervin, principal, Financial InterGroup. “Whether the result is a universal system of identifiers, or a completely and digitally documented transaction and supply chain, or a central facility to arbitrate and assure standard data sets, or all of the above, we will be better for having embarked on this road.”
Laura Pollard, executive vice president and head of Fidelity ActionsXchange, a global corporate action information business, sees the announcement as “potentially a game-changing development. Once issuers take responsibility for structuring and standardising their corporate event announcements and placing bar codes on these documents, the entire transaction chain can be automated, eliminating manual processes and minimising interpretation risk. In today’s marketplace, we already have bar code reading functionality built into cameras on our hand-held smart phones – just click the camera, read the bar code, answer the question via the key pad or touch screen and email the result. Straight-through processing for real!”
“The XBRL standard is currently in use by over 75 percent of the world’s capital market regulators and is particularly relevant to the need for identifier standards,” says Mike Willis, chairman of XBRL International and a partner at PricewaterhouseCoopers. “Structuring and standardising information elements contained within a broad range of documents such as prospectuses, offering memorandum and corporate event announcements will be useful to processes throughout the financial industry supply chain.
“Structuring identification standards as industry best practices will allow seamless population of referential data bases, minimisation of errors in corporate event announcements, and seamless matching of financial transactions in payment and settlement systems,” Willis says. “Most importantly it will allow seamless aggregation of financial disclosures for individual firms’ risk-management and for regulators’ systemic risk analysis needs. For this to occur, however, issuers need to structure standard identifiers within financial instruments similar to how the SEC now requires within their XBRL Mandate for company financial reports.”