What's black and white and read all over? Bar codes that can tell us who manufactured a product and where it's been — except when it comes to the financial services industry. Here, financial firms and their suppliers are arbitrating their own system of identification standards from the myriad proprietary nonstandard identifiers that exist today. Now they may consider using an excellent identification system that's already available.
Most global businesses have adopted universal standards to identify products, their supply-chain participants, and delivery and payment end points. Every product has a traceable bar code readable at any point along its journey from creator to customer. But a financial document, the starting point of a financial transaction, cannot be tracked and traced. There's no way to find it or locate it, especially when it's at the center of an international transaction.
In this age where high finance and high technology overlap in many value-producing ways, there remains no universally accepted standard for the electronic codes used to identify products and trade parties in the global financial services industry. For this reason Congress is set to pass a financial reform bill that would establish a taxpayer-funded data center to prescribe and administer standards for financial transactions. Such identification data is frequently incorrectly or inconsistently defined, leading to huge infrastructure costs and systemic risk, a key consideration in the current debate on financial reform.
The current issue of systemic failure in the financial industry recalls the retail industry's crisis some 40 years ago when it became apparent its plumbing needed repair.
Long lines were forming at checkout counters. Inventory management and price-labeling were manual and error prone. Labor-intensive check-ins stymied delivery to outlets. Error rates, pilferage and unaccounted inventory discrepancies began to soar. Leading retailers including Kroger Co. and A&P, along with manufacturers such as H.J. Heinz and General Foods, insisted the industry take on the task of solving these problems, for themselves, and leveraged available technologies to create one of the fabled success stories of the information age, the creation of the Universal Product Code.
Today, the UPC and other standards administered by the not-for-profit GS1 organization identify products, transportation intermediaries and trade parties. Tightly integrated systems allow parties to share the information, thus helping to trace recalled products to their origins.
Contrast this with the experience of the financial regulators during the recent meltdown; they could not find the mortgage that was defaulted on in a city that wound up as a toxic collateralized debt obligation on the balance sheet of a failing bank in Australia, nor could they see the counterparty positions allegedly held by the convicted financier Bernard Madoff at a London OTC options dealer. They certainly missed the numerous movements of securities bundled into Lehman's Repo 105 collateral moving from the United States to the United Kingdom and back again to dress up their leverage ratio.
The financial services industry doesn't need taxpayers to fund a government-run data center. Nor does it require the imposition of government-built data standards, when a phenomenally successful system such as GS1 already exists.
The financial industry needs to self-administer a coordinated set of global identification standards under regulatory oversight as is done with all the other significant segments of the global economy.
Neither a financial firm nor a corporate issuer could issue a new product, or bring a new security to market without getting a universal code first. Look at any bar-coded product in any supermarket across the world, and you'll see the simplicity and effectiveness of an industry-driven solution. That's what the financial services industry needs now.
