Straight-Through Processing (STP)
What Is Straight-Through Processing (STP)?
Straight-through processing is an automated interaction done absolutely through electronic transfers with no manual intervention included. Its famous purposes are in payment processing as well as the processing of securities trades. Any company associated with straight-through processing should have the vital systems and technical networking in place to facilitate STP productivity.
Understanding STP
Generally, straight-through processing is most notable in the areas of payments and securities trading. In any case, overall it is a methodology that could be implemented in a variety of technical situations. In all areas of STP, the technology for STP is constantly advancing. In payments, cryptocurrencies and fintech providers have introduced a lot faster types of straight-through processing, particularly as alternatives to banks.
Payments
Straight-through processing is an innovation that has developed alongside the integration of computers and computer programming. In the mid 1970s, Automated Clearing Houses (ACH networks) started development. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) was likewise established around this time. SWIFT and ACH significantly overhauled banking payment transfers from a previous telegraphic system, which included a single operator typing telegraphic transfer orders through Morse code. ACH was first introduced in the United States by the Federal Reserve Bank of San Francisco, mostly as a solution for payroll direct deposits.
The 1970s brought about the first efforts for STP in bank payments.
Since the 1970s ACH and SWIFT networking has developed, though these two systems form the fundamental structure for most all domestic and global payment transfers. Any financial service provider who wants to be in the payment processing business should connect up with a payment processing network for facilitating electronic STP.
By and large, most all electronic payment processing is viewed as STP. Be that as it may, advanced coding within payment networks can be added to flag or stop suspicious transactions for the alerting of security specialists.
ACH and SWIFT were pivotal introductions that changed the capabilities for banks and furthermore created a vast exhibit of opportunities for financial technology platforms. STP itself has increased the productivity and speed of payments domestically and globally. STP streamlines the utilization of payment and routing information so the instructions don't should be manually entered.
How Straight-Through Processing Differs from Traditional Payments
The traditional method of sending money included multiple departments both on the initiation and getting end of the transfer that could take days to complete. Payment would first be initiated through the telephone or a software program. The payment settlement details would need to be confirmed by a person at both companies by means of the telephone, email, or fax. The settlement details were then manually input into a payment system and later confirmed either by a supervisor to guarantee exactness before delivering the payment. Before ACH and SWIFT, payment transactions were then sent by means of telegraphic message utilizing a special code. The interaction could take anyplace between several hours to a couple of days to even initiate, contingent upon the details in question.
International payments to emerging economies, for instance, must often meet stringent criteria with supporting documents that meet nearby regulatory requirements and laws before a transfer can be completed. As a result, several individuals might have been involved both on the initiating and getting end of the payment as well as employees from any intermediary banks included. Telegraphic transfers had a higher propensity for errors, delays, and increased costs. Likewise, the lack of automation caused instability as well as lack of exact processing expectations, which created issues for providers and customers trying to make timely business payments.
As you can envision, STP was a big assistance for businesses. It could streamline the accounting system for companies, particularly in accounts payable and accounts receivable. It helped in the tracking and collection effectiveness of money to and from business partners and customers. It diminished the number of errors associated with accounting functions and worked on working capital, cash flow productivity. It likewise helped with further developed business analytics, since companies can track client ways of behaving and spending patterns as well as costly postponements or errors by the customers or the system.
E-Commerce
STP permits businesses to authenticate their customers on the web, sell them a product, initiate a payment, and set delivery of the product, all with just a couple of snaps. Online business sellers must have a transaction solution, which might be multi-faceted. Web based business platforms can partner with brand providers like Visa, Mastercard, American Express, or Discover. They may likewise partner with a fintech like PayPal. The offering of payment plans and installment credit is additionally turning out to be more famous through fintechs like Affirm. Sales efforts can be enhanced since online systems can possibly offer products and services to a customer automatically through a single point of sale with a multitude of payment decisions generally done online.
One illustration of a leading company that has implemented straight-through processing is Amazon.com. The online retailer has stayed zeroed in throughout its existence on eliminating any obstacles to customers purchasing products on its website. Amazon has succeeded in utilizing automation technology and sophisticated algorithms to serve its customers and drive revenue.
Cryptocurrencies
Cryptocurrencies are likewise an exceptional form of STP for transactions. Cryptocurrencies are electronic transfers that don't need manual intervention. The greatest benefit of cryptocurrencies is that they eliminate the requirement for a holding company intermediary. Crypto funds can be transferred starting with one person then onto the next directly on a unique network.
Illustration of How Straight-Through Processing Saves Money
Let's say Bank ABC processes around 200 funds transfers each day and currently doesn't have a straight-through processing system in place. Through analysis, the bank has calculated that for each 200 payments handled, 20 payments are handled incorrectly or 10% of the payments. The bank is charged $20 for each payment that isn't handled as expected. The fee is assessed by the getting bank or correspondent bank since they need to correct the payment instructions or perform manual entries to fix the blunder.
Here are the numbers:
- 200 payments are handled each day or 4,000 payments each month
- A 10% blunder rate equates to 20 payments each day or 400 errors each month
- At a $20 fee for each blunder, Bank ABC is charged $400 each day or $8,000 each month
After implementing a STP system, the payment errors diminished to 1% per 200 payments
- At a 1% mistake rate, just two payments each day or forty payments each month were handled incorrectly
- At a $20 fee for every blunder, Bank ABC diminished the cost of errors to $40 each day or $800 each month
With a STP system, accurate settlement and routing information can be saved in the system keeping away from manual entry of payment details and costly errors for the bank and customers.
STP in Securities Trading
In the modern day, practically all secondary market securities trading includes electronic processing. There can be some human intervention on the front end in setting trades but generally electronic systems accomplish practically everything. This is where STP comes in. Any transaction in the secondary market requires a trade settlement process, which is associated with STP. This means a huge number of STP transactions each day for stocks, bonds, mutual funds, exchange-traded funds, pink sheet trades, etc. All financial service companies have some form of back office staffing responsible for the management of trade settlements done through STP.
1971
The Nasdaq was sent off as the first electronic stock exchange.
Like at a bank, electronic trade transactions are monitored by administrative center employees. Trades might be flagged or stopped due to coded security measures, which then might require the intervention of a human. Generally, securities trades are completed, including the exchange of an actual certificate, within two days. In 2017, the Securities and Exchange Commission mandated a T+2 settlement for securities trades.
In securities trading, the STP interaction alludes to the full T+2 cycle. With STP the entire interaction from start to complete should be possible electronically without human intervention. STP for securities trading requires the requirement for securities codes as well as the utilization of brokerage accounting codes, like the coding required for bank and routing numbers. Electronic systems operate through code identifiers, which facilitate a full electronic processing cycle.
Other Innovations
Computers, centralized servers, electronic exchanges, and the internet are working on the opportunities for STP processing and innovation. Technology is likewise assisting with further developing the actual processing time of a full STP cycle. A few areas that are benefiting from worked on technological advances for STP incorporate underwriting and payrolls.
Creditors have the opportunity to fully automate underwriting utilizing STP. To do this, coding is utilized to set lending parameters, authentications, and endorsements. This can make credit extension almost endless supply of an online application.
Payroll systems additionally benefit from STP. Electronic time tracking logs take into consideration a simple flow through of authorization and endorsement, which can then be trailed by direct deposit. In the payrolls business, numerous fintechs are partnering with businesses to give workers options for daily direct deposit payments, which tackles cash flow difficulties.
Highlights
- Straight-through processing is an automated interaction done simply through electronic transfers with no manual intervention included.
- Computers, centralized servers, electronic exchanges, and the internet are working on the opportunities for STP processing.
- Generally, straight-through processing is most notable in the areas of payments and securities trading, though it can be implemented in a variety of technical situations.
