Financial transactions are at the very heart of the global economy. Without transactions, there is no economy.
The development and evolution of transaction processes help make all payments easier in all sectors including banking, finance, insurance, and eCommerce. In this article, we talk about one of the major trends in terms of financial transactions - Straight Through Processing.
Straight through processing has come through as a staple transaction method in payments and equities trading since the early 1990s. Since it automates the payment process and gets rid of any associated menial tasks, the entire workflow becomes more streamlined and efficient. The methodology is still evolving and working towards including the most recent advancements in payment, like cryptocurrencies, virtual wallets, and fintech providers.
What is Straight-Through Processing?
In layman’s terms, straight-through processing is the act of speeding up financial transactions by eliminating manual intervention from the process. Its mechanism enables the entire transaction to go “straight through”, with end-to-end processing via a single point of control over all elements.
We can refer to STP as capturing the whole transaction electronically at one go - right from the first deal point to the final settlement steps. Traditional financial transactions involve data entry, documentation, and manual communication. Each process would take longer and have higher chances of error or fraud. Whereas the implementation of straight through processing (STP) in a business can increase sales by 30%, saves about 20% of total costs, and reduces order fulfillment time by up to 80%.
Implemented completely, STP automates the entire transaction workflow, reduces operational costs, and eliminates settlement risks. Its applications and benefits can be looked at as a whole and separately in each industry, as we will discuss later.
One example of STP implementation in a major company is that of Amazon. Amazon has had its own online payment processing service since 2007, called Amazon Pay. It uses data from the company’s consumer base to provide users with a secure option to pay through their Amazon accounts, even on external merchant websites. Third-party eCommerce websites can add this payment option to their checkout page through the Amazon Payments SDK.
Which industries use Straight-Through Processing?
STP (straight-through processing) has brought about massive changes in several industries. Apart from the obvious sectors like banking and finance, industries like software and eCommerce have also implemented this process to revolutionize their functioning.
These sectors use straight-through processing as part of their daily activities.
The advent of internet banking has paved the way for straight through processing, with people opting for digital transactions rather than visiting a bank branch in person. By integrating banking systems with ERP and treasury workstations, the traditional leased lines are being replaced by automation. This is further helped by the creation of customer user groups that provide secure platforms and consolidated messaging standards, in exchange for payment information.
However, more integration and technological advancement is needed to combine ERP with banking software and reformat the information for processing by banks. To achieve that, many corporation banks have started using hybrid databases that validate bank routing codes.
Another advancement in the banking sector can be seen through digital currencies. Central banks in the US, including JP Morgan and Signature Bank, have moved towards accepting digital currencies and blockchain-based transactions, as proven by the JPM coin, a new digital coin prototyped by JP Morgan in 2019.
The most widespread use of STP is perhaps in finance and securities trading. It helps orders to get processed, confirmed, cleared, and settled almost in real-time. Earlier, stock settlements were carried out manually. The seller would often hand-deliver stock certificates to the buyer and receive money.
With straight-through processing, the entire trading process can be automated and done electronically within two days. This is known as the T+2 cycle, meaning two days from the day of trade. It requires securities codes and brokerage accounting codes for the transaction to go through smoothly. However, this approach needs to get more mainstream to be considered universal.
The highest average use of STP in the insurance sector is for property and casualty insurance, with life or annuity lines. Even then, STP is not used more than 35% in totality. When implemented, STP benefits insurance transactions in the following ways:-
- It reduces the margin of human error in calculations and settlements.
- It allows more scope to establish a customer-centric business.
- It meets client expectations by increasing precision rates and decreasing settlement periods.
- It takes a more organized approach towards transactions and data collection.
One sector that has benefited massively from STP is eCommerce. With this approach, businesses can authenticate users online, complete the whole payment process automatically, and set shipping and delivery details.
For this to work perfectly, sellers need a flexible transaction solution that can partner with AmEx, Visa, PayPal, and other payment platforms. This also includes offering EMIs, credits, and other payment schemes through a single sale point. Almost all the eCommerce giants, like Amazon, eBay, Alibaba, etc., have enabled STP on their websites so that users can complete the transaction without any delays or manual interventions.
Other smaller companies can also license STP solutions directly from vendors to implement in their websites. Combining bank routing information with company payment systems can decrease payment errors massively and increase STP rates by 95%.
What are the benefits of Straight-Through Processing?
Straight through processing is extremely beneficial for financial processes and transaction cycles. This is because:-
- It shortens the settlement cycle significantly. For example, a bank transaction that would earlier take 2-5 business days to reflect can now be shown almost instantly in the recipient’s account.
- It increases transparency between two parties and ensures transaction details are readily available.
- It helps avoid the charges of manual labor and tedious duplication of work.
- It leads to a reduction in human errors and security risks. For instance, out of 200 daily payments, STP has an error margin of 1%, whereas traditional transaction processing reports 10% errors, which is 20 payments per day.
- It helps you capture data faster and generate reports in almost real-time.
- It optimizes the whole transaction processing workflow by eliminating several steps in the middle.
- It makes the whole market cost-effective and regulation-friendly in case of audit trials.
- It removes all physical checks and converts the whole process to an electronic exchange of information and funds.
- It enforces automatic communication protocols in trading and helps participants connect seamlessly with stakeholders.
- It enables higher scalability and reliability of the business.
By opting for STP, you can future proof your company and enable a more sustainable environment. If implementing complete STP is not feasible for your business, you can opt for internal STP levels. This means you can license external software to be integrated with your software systems at a level that can optimize the company’s benefits.
This can be done on an individual level or by partnering with groups of firms to improve translation automation quality and reduce the costs as a community through external STP. It also reduces the percentage of failed payments as errors and false write-offs are reported immediately, instead of wasting days for manual intervention and eventual rejection.
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