Government and Finance Industry Urge Caution on XML
by Alan Kotok | Pages: 1, 2

GAO recommendations

While the GAO may have views about the state of XML standards, it is hardly in a position to influence their development one way or the other. However, the report recommends a series of actions to develop an overall strategy and better focus the development of XML in the government. The strategy, according to GAO, needs to address the following.

1. Developing a process for identifying, coordinating, and presenting consolidated government-specific needs before XML standards bodies. The report say the process could be patterned after the process used for EDI in the government, or extend the current EDI process to include XML.
2. Transitioning the pilot registry under the XML Working Group into an operational resource for federal agencies, and setting policies to support the registry and encourage effective participation by agencies
3. Ensuring that agencies' business needs for XML are part of the agencies' overall IT enterprise architectures and corresponding budget requests, and that agencies indicate their use of XML standards in the standards sections of that documentation.

NACHA council investigates XML for electronic payments

While GAO is a public sector agency, NACHA is a not-for-profit trade association that develops operating rules and business practices for the nationwide network of automated clearing houses (ACHs) and for other areas of electronic payments. Bank clearing houses were established first to process checks and other paper financial instruments from originating to receiving institutions.

The automated clearing house, as the name implies, automates the clearing process. In the ACH network, individuals, companies, or financial institutions send transaction data to an originating depository financial institution or ODFI, licensed to interact with an ACH. On the receiving end, a receiving depository financial institution or RDFI, also chartered to work with ACHs, receives the payment data and forwards the data to the receiving bank, company, or individual. Originating banks or individuals cannot initiate ACH transactions without authorization from the receiver.

Payment instructions and remittance data are sent through the ACH network in batch/store-and-forward mode and in high volumes. According to NACHA, in 2001 the ACH network handled some 8 billion transactions worth more than $22 trillion. NACHA expects the volume of electronic payments to reach 15 billion by 2006.

NACHA's Internet Council final draft report on XML addresses the question, should the ACH enable the exchange of XML remittance data? Payment instructions cannot travel through the network without accountability; they need associated remittance data describing each transaction to account for each payment. NACHA's rules require the remittance data to go in addenda records that adhere to the ANSI Accredited Standards Committee (ASC) X12 standard for EDI, or some other NACHA-endorsed format. In some cases the remittance data and payment instructions travel together through the network, in other cases the network carries only the payment instructions, while remittance data travel through a separate route.

Calling in the SWOT Team

To answer the question of whether XML messages should carry the exchange of remittance data, NACHA's Internet Council used an analytical technique listing the strengths, weaknesses, opportunities, and threats, abbreviated SWOT. With this technique, the Council summarized the current business-to-business technologies, based largely on EDI as follows:

Strengths – Businesses prefer to send the remittance data and payment instructions together, which the ACH network is well-prepared to handle. The volume of EDI data through the network has increased significantly in recent years, and the growing volume of electronic payments for businesses offers important revenue opportunities for service providers.

Weaknesses – While electronic payment volumes for businesses have increased, the penetration of electronic payments remains low compared to paper checks. The report cites a Gartner Inc. study (Avivah Litan. "The Unmet Demands of B2B E-Payments." 23 August 2000. ) that finds only 14% of corporate payments are made electronically. The Council attributes this lower level of activity to the high costs of EDI. The high EDI costs also reduce the profit potential to service providers.

Opportunities – The use of Internet-based EDI, often using Web interfaces, can reduce the costs of electronic payments to smaller businesses and provide at least the potential of expanding the market for electronic payment services.

The Council did not find any threats to the current system.

Using this same analytical technique on the projected use of XML for remittance data (the information now sent with EDI), the Internet Council makes the following evaluation:

Strengths – The network could technically support the use of XML for remittance data, when sent through the network along with the payment instructions. Also, service providers could offer a range of payment or remittance services using XML to generate revenue.

Weaknesses – While XML may have potential, its current level of use for remittances is low and the demand from end-users is negligible. XML file sizes tend to be larger than those for EDI (often much larger), which can affect storage needs and network throughput. Most companies, particularly smaller businesses, do not have integrated systems that would make full use of XML, and the need to support both EDI and XML would drive up costs during the migration period. Finally, no national XML standards exist for payments and remittances.

Opportunities – Implementations of XML payments and remittances may cost less than comparable implementations for EDI, and XML vendors are developing a range of solutions, some low in cost. These factors could encourage smaller enterprises to use e-business, thus expanding the market for electronic payment and remittance services. As more and more larger companies commit to the use of XML, it will encourage their supply chain partners to follow suit, and encourage a shift to electronic payments as well.

Threats – The Council questioned the potential of XML-enabled exchange services to compete with the ACH network ("intervene in the current ACH processing and revenue models"). The report also questioned if the XML option alone would be sufficient reason for check writers to begin using electronic payments.

When the Council tried to apply the SWOT technique to the future of Internet-based business-to-business payments and remittances, it found it did not have enough information to do a thorough analysis, but it lists a few issues that need to be addressed to conduct this analysis: (1) requirements and operational models for Internet-based business-to-business payments and remittances, (2) the future model's impact on the current ACH revenue model, and new revenue opportunities created for financial institutions, and (3) projected usage and anticipated costs for supporting the future model.

Triggering a re-evaluation

Because of the mixed verdict on XML and the sizable blanks remaining on the future of business payments over the Internet, NACHA's Internet Council says it could not provide a definitive answer to the question of whether XML should enable the transfer of remittance data over the ACH network and recommends tabling the issue for the time being. However, the report lists several indicators of change in the marketplace, what it called triggers, that could change the environment for XML:

1. Competition – other networks begin using XML for remittance data
2. Customer requests – large-volume financial service providers request XML capabilities
3. Government or regulatory demands – legal requirements to implement XML for remittance data
4. Legal/risk assessments – if current participants in ACH networks face some risk or liability for not providing XML
5. Related developments in the industry – if the financial services industry settles on a particular XML standard for payments

The Council says it remains interested in XML, and a change in any of these conditions could reopen the question.

Sending a message of stability

While the two reports look at different industries and each takes a different focus, they both came to similar conclusions about the state of standards, namely that a single set of business standards needs to emerge to provide businesses with a sense of stability that will encourage investment in the technology.

While this conclusion may be accurate in some respects, it does not tell the whole story. The XML standards bodies have recognized for some time the need for stability and interoperability in the business standards as evidenced in initiatives such as:

1. Meetings directly addressing interoperability and convergence, hosted by several groups including OMG and OASIS, as well as ASC X12. Each of these meetings generated follow-up actions, including work on registries initiated by OASIS and formation of an outreach and convergence work group by ASC X12.
2. Formation of the Web Services Interoperability Organization to develop profiles and eventually compliance tools

Inside the government, the XML Working Group released in January 2002 its draft XML guidelines, which came after the GAO completed its investigation, but before the publication of the report. The GAO report notes the guidelines were a work in progress at the time, but the guidelines emphasize the need for a government-wide registry to help encourage reuse of existing XML resources, a point also emphasized by GAO.

EDI plays a role in both reports, although in different ways. The GAO suggests that federal agencies coordinate their standards requirements in much the same way as done now with EDI, even recommending that the current process for EDI be extended to include XML. For electronic payments, EDI is the dominant exchange technology, and its use is growing. For XML to be considered as a complement or alternative to EDI, it needs to meet the same levels of performance, service, and security being provided by EDI to meet the high volumes of sensitive data being exchanged.

In some respects, these reports are looking at the world of business XML through rear view mirrors. But it will still take more effort on the part of the XML practitioners themselves to bring the kind of stability to XML that these high-performance end-users are seeking.

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