NEEDHAM, Mass. – The Internet has become a way of life for consumers and financial institutions alike, but the online world has yet to make much inroads into the long-standing payment systems that are at the heart of the economic machine. Will that change? One problem has been the lack of a universal data standard that would allow reliable Internet delivery and integration of such services. XML may be the answer to that, but it's not happening particularly fast. There are a number of reasons for that, says Breffni McGuire, an analyst for TowerGroup and author of a new report: "Emerging XML-Based Payment Standards: Concepts and Realities Still in Flux." First a bit of background. XML simply stands for extensible markup language. The next evolution from the hypertext markup language (HTML) that drove the explosive growth of the World Wide Web, XML has emerged as the industry standard for Internet-based data exchange. Basically, it uses customized tags to describe the data content of a message in a way that's independent of the application being used, allowing different applications to use the same data. Of course, execution of payment orders is not possible without shared message types, structures and data elements, so it would seem that XML would be a natural for big transaction clearing operations. However, "the payments industry is characterized by standards fragmentation, with proposals, prototypes and product specifications to support, retail, wholesale, e-commerce and interbank payment needs," McGuire says. She says that although there are still many barriers to overcome, XML-based payments standards have the potential to: * Help financial institutions offer new IP-based services to corporate and business customers, including payment initiation and assurance, end-to-end remittance information, value-added information services (advices, statements, trade documentation, etc.), foreign exchange, delivery of imaged documents (e.g., checks); * Reduce costs, bridge e-commerce barriers for midsized and smaller businesses, and facilitate integration of financial systems and supply chains by tying payment to the commercial transaction; * Decrease overall industry costs by taking costs out of the payment system; * Allow individual banks and credit unions to achieve internal business and payment process efficiencies and reduce dependence on service providers as the cost of information management decreases. Despite those potential benefits, the TowerGroup analyst says, XML-based standards have been slower to develop for payment systems than in other areas of financial services. The overall tightly networked nature of the system is one factor, McGuire says, as is the wide range of electronic payment services available to end users. However, the fragmented state of payment systems hasn't stopped a number of private and public groups from trying to create XML standards and get them adopted. Generally, they are being promulgated in four ways, McGuire says: through industry collaboration, by the payment systems themselves, by standards organizations, and by vendors. But, because the current systems work, and the business need has not yet become overwhelming, the defining push toward XML in payment systems has not been there yet. And because of the size of the field, and the number of players, McGuire doesn't see any short-term end to the competition and the mix. However, she says, "Ideally, as standards emerge to support customer, payments- infrastructure and bank needs, they will converge, consolidate and become more interoperable. "This is becoming the case in e-commerce as standardization (takes hold) . For payments, however, the nascent stage and different types of XML-based payment standards make such potential convergence a much longer-term consideration." Indeed, the work has begun, and will continue. "The standards specifications being tested today are the foundation for future standards. Some will never achieve real usage and some will be merged with or absorbed into other standards (as has happened with OFX and GOLD standards," McGuire says. "Still others will expand and succeed on their own." Besides the benefits, the aging state of current payments systems will hasten the process – primarily because they were not designed to handle Web-based and Internet protocol (IP) applications and connectivities, McGuire says. And, as always, the consumer will be driving all this, too. "Needs for innovation in customer-facing payment services will continue to push the limitations of payment systems – for example, providing XML-formatted remittance information with a payment transfer," McGuire says. Moreover, she says, payment systems and individual financial institutions alike "have system, people and opportunity costs invested in legacy payment systems that will become more difficult to sustain over the long term, as well as need for internal business process efficiency that will drive them toward XML-based solutions." -

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