There is a new word emerging from various financial technology debates: interoperability. It hardly rolls off the tongue but its popularity is growing.
There are many industry-wide initiatives considering how best to use technology to serve financial services consumers. Open Banking is the most high profile but there are plenty of others. For instance, FTS (Funds Trading and Settlement) is investigating the efficiency of fund distribution services, TRIG (Transfers and Re-registration Industry Group) is consulting on investment transfer services, and various pension dashboard groups are trying to agree the best approach to sharing pension scheme member data.
The common goal of all of these projects is for consumers to benefit from innovation and competition. Whatever framework is agreed by the industry there must be space and encouragement for innovative new technology solutions to emerge and competition to keep downward pressure on costs. And there is a growing realisation that interoperability is the key to creating the necessary environment.
But there is less clarity on what interoperability means. Interoperability is more than just getting systems to talk to each other. A central system with an API is not interoperable. If users (individuals or companies) don’t have a free choice of which technology to use then there can be no fair competition and therefore no incentive to innovate or reduce prices.
So let me try to describe what it does mean. Here are the key signs of a healthy interoperable technology market – let’s call it the interoperability litmus test:
- Collaboration: Technical standards, collaboratively developed with a wide range of participants, and freely available for anyone to use
- Competition: Multiple technology suppliers with solutions that comply with those standards and talk to each other over an agreed neutral network
- Freedom: Users (whether they are financial services companies or the end consumer) are free to choose any technology supplier without impacting other users
A great example of this is the TISA open transfer initiative for ISA and pension transfers. Launched in 2012, the open transfer framework comprises a set of open standards from the UKFMPG, a common legal arrangement via TISA Exchange and, currently, five competing technology suppliers offering compliant and interoperable systems. There are now over 200 participating financial services providers which benefit from the competition between technology suppliers, and over a million end consumers who have benefited from simpler and quicker transfers.
But creating interoperable markets isn’t always easy. We can’t ignore the existing landscape of ageing technology and centralised systems that makes change so hard. There are always siren voices calling for just one more proprietary system from incumbent suppliers to avoid all that hard work to agree open standards. It’s never straightforward getting the industry to agree a common approach but if we really want consumers to benefit from new innovations then we will have to roll up our sleeves and work together to create the environment in which that can happen.