Straight Through Processing (STP)

Straight-through processing is an automated electronic payment process that is used by corporations and banks. STP allows for the entire payment process, from initiation to final settlement, to be free of human intervention. Straight-through processing can help local businesses, as well as large corporations, pay and receive money faster than the traditional process.

Straight-through processing has changed the way companies, and banks pay and receive money. STP has increased the efficiency and speed of payments globally. STP streamlines the payment and routing information so that the instructions don't need to be manually entered each time. And since many payments are sent to the same customers, suppliers, and banks, STP saves time and money.

How Straight Through Processing Differs from Traditional Payments

The traditional method of sending money involved multiple departments both on the initiation and receiving end of the transfer that could take days to complete.

Typically, a payment would be initiated via the phone or a software program lacking STP capability. The payment settlement details would have to be confirmed by a person at both companies via the phone and sent via email or fax. The settlement details were then manually inputted into the payment system and later confirmed either by a supervisor to ensure accuracy before releasing the payment. The process could take anywhere between several hours to a few days if multiple countries were involved.

International payments to emerging economies, for example, must often meet stringent criteria with supporting documents that meet local regulatory requirements and laws before a wire transfer can be completed. As a result, several people are involved both on the initiating and receiving end of the payment as well as employees from any intermediary banks involved. With more human intervention and exception processing, the payments become labor intensive resulting in errors, delays, and increased costs. Also, a delayed payment to a supplier, customer, or bank could cause reputation risk for those involved.

Straight-through processing allows for automation of back-office functions including the settlement process such as a wire transfer's bank details. Automatic payment processing avoids steps in the traditional process such as phone or fax verification and any checks and balances that involved a supervisor to release the payment. STP automates the payment using a ruled-based system and allows companies to monitor the transfer's progress in real time.

STP also helps streamlines the accounting process for companies including accounts payables and accounts receivables as it accelerates and tracks the collection of money to and from customers. STP reduces the number of errors involving accounts payables and receivables helping companies to save on overhead costs and manage their cash flow more efficiently.

E-commerce

STP allows businesses to authenticate their customers on the web, sell them a product, initiate payment, and set delivery of the product all with just a few clicks. Sales efforts are often enhanced since the online system can offer additional products and services to the customer automatically, through one point of sale.

An example of a company that has implemented straight-through processing is Amazon.com. The online retailer has remained focused throughout its existence on removing any obstacles to customers purchasing products on its website. Amazon has excelled in making use of automation technology and sophisticated algorithms to serve its customers and drive revenue.

As a result of STP, companies can enhance their profits by reducing labor costs, costly errors, and increase the cross-selling of other products. STP offers improved business analytics as companies can track client behaviors and spending patterns as well as costly delays or errors by the customers or the system.

Let's say Bank ABC processes 200 payments per day and currently does not have a straight-through processing system in place.

Through analysis, the bank has calculated that for every 200 payments processed, 20 payments are processed incorrectly or 10% of the payments.

The bank is charged $20 for each payment that is not processed properly. The fee is assessed by the receiving bank or correspondent bank since they have to correct the payment instructions or perform manual entries to fix the error.

Here are the numbers:

• 200 payments processed per day or 4,000 payments per month.
• 10% error rate equates to 20 payments per day or 400 errors per month.
• At a $20 fee per error, Bank ABC is charged $8,000 per month.

After implementing an STP system, the payment errors decreased to 3% per 200 payments.

• At a 3% error rate, only 6 payments per day or 120 payments per month were processed incorrectly.
• At a $20 fee per error, Bank ABC reduced the cost of errors to $120 per day or $2,400 per month.

With an STP system, accurate settlement and routing information can be saved in the system avoiding manual entry of payment details and costly errors for the bank and customers.

For smaller companies, STP can be cost prohibitive due to the systems that are needed to automate the payment process. As a result, larger companies stand to gain the most from STP since they have economies of scale whereby even a small percentage of savings can lead to significant decreases in costs. However, as technology advances and new STP software programs are developed, smaller companies might realize the full benefits of straight-through processing in the years to come.