Banks 'need common technical standards to harvest online benefits'

The financial markets could benefit enormously from e-commerce but achieving the potential cost-savings will depend on banks agreeing on common technical standards, according to the Bank of England.

The financial markets could benefit enormously from e-commerce but achieving the potential cost-savings will depend on banks agreeing on common technical standards, according to the Bank of England.

An article in the Bank's Quarterly Bulletin, to be published on Wednesday, says the wholesale financial markets are still sending messages about transactions by fax and using incompatible electronic networks. The same data can end up being re-entered manually several times in the course of a trade. This means there are large potential efficiency gains from going digital. "Eliminating the manual re-input of data by different firms at each stage of the transaction process is likely to bring increased efficiency as well as a reduction in costs and risks," the article says.

The gains are likely to be bigger in wholesale financial services than in other business-to-business markets because a trade can, in principle, take place digitally in its entirety.

The author, Bob Hills of the Bank of England's market infrastructure division, notes that the US Securities and Exchange Commission has announced the US equity market will move to next-day settlement in 2002, while the UK market will move to settlement three days after the trading date next February. "None of this is likely to be possible without a significant increase in the automation of the trading process," he writes.

The market authorities are keen to reduce settlement periods because it will reduce the risk that one counterparty in a transaction might default. This will in turn make the financial system more stable, especially at times of great volatility.

The paper suggests the new eXtensible Markup Language, XML, being developed by the World Wide Web Consortium offers more hope for a common standard in the financial markets. Apart from its technical advantages, the fact that it is related to the wider internet technologies already in use will give it very broad acceptance.

Another article in the Bank of England's bulletin estimates that the changing age structure of the UK population accounts for 0.55 percentage points of the 5.65 point fall in the unemployment rate between 1984 and 1998. Older people have lower unemployment rates than young people, and the population is ageing.