Straight Through Processing – Definition

Cite this article as:"Straight Through Processing – Definition," in The Business Professor, updated February 10, 2020, last accessed August 13, 2020, https://thebusinessprofessor.com/lesson/straight-through-processing-definition/.

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Straight Through Processing (STP) Definition

Straight-Through Processing (STP) is a method used to speed up financial transactions processing time, by processing without manual intervention (straight-through), by financial companies. The main goal of STP is its ability to enable information to be filtered through a process across multiple points by financial companies. This process reduces the amount of time financial corporations’ employees use in entering the same data over and over again or the amount of time they use in ensuring that each transaction made has been fully processed. It thus limits the chances of an error occurring while documenting every transaction. STP also allows companies to electronically share information so as to share it in a quicker, more secure and effective manner.

A Little More on What is Straight Through Processing (STP)

While operating in the global financial markets, companies require sophisticated messaging capabilities. STP involves a lot of processes, from performing interactive processing with transfer agents and brokers to performing fund accounting management and custodian interfaces, payment and settlement processes demand effective controls, flexible workflow, and transparency. Many organizations process thousands of transactions in a day, and these transactions need to be kept up to date, have accurate information without any form of error on transaction flows occurring across multiple networks, be secured, and easily accessible for the organization’s corporate clients. Due to the fact that many payments are sent to the same customers, suppliers, and banks over and over again, STP helps to save time and money.

How Straight Through Processing Differs from Traditional Payments

Making payments traditionally involves many departments in a bank. Both payment initiation and received payment processing may take days to complete. Payments were initiated through various “human-friendly” (paper-based) means, such as processing through a human by paper order, over the phone, or via fax. The payment order was then inputted into the bank’s payment system, then confirmed by a supervisor to ensure an accurate input match versus order before sending the payment. The process usually took several hours whenever multiple banks, countries or currencies were involved. The higher the payment complexity, the higher the labor and additional human intervention resulted in more risk of errors, longer processing time, and higher costs.

Direct procurement in the B2C market gained early momentum. Internet retail processes are designed to require as little human involvement as possible from the ground. In this regard, Amazon is a role model. In order to manage a comprehensive product catalog, make personalized suggestions to purchasers, organize product and sales reviews from custodians and to handle process purchase orders and logistics and process reports, it relies heavily on information technology. STP can organize e-commerce processes in the purchasing process to eliminate friction. Straight-through processing offers a basis for network design that is useful in e-commerce. This helps e-commerce businesses not only to restructure processes in order to increase productivity and decrease costs but also encourages a more enjoyable shopping experience.

Benefits of STP

STP provides but is not limited to the following benefits:

  • It speeds up payment processing time and reduces costs, thereby, giving companies more room for growth.
  • It provides virtual instant transfer of information, automation of processes, and reduces payment errors.
  • Since STP is totally electronic-based, it can also automate processes, allowing organizations to speed up the Time to Cash process by automating timely manual processes.
  • It automates a payment with a rules-based system allowing companies to monitor the real-time progress of payment transfers.
  • It streamlines an organization’s accounting process as it increases and tracks money collection to and from customers.
  • It helps an organization to track client behaviors and spending patterns through improved business analytics process.

KEY TAKEAWAYS

  • Straight-through processing (STP) has revolutionized the way organizations pay and receive money, thereby, increasing the efficiency and speed of payments globally.
  • With just a few clicks, it allows e-commerce businesses to authenticate their customers on the web, sell products to them, initiate a payment, and set delivery of the product.
  • Amazon is an example of a company that has implemented straight-through processing. It successfully makes use of automation technology and sophisticated algorithms to serve its customers and drive revenue.
  • STP is not favorable for small businesses as it can be very costly due to the systems that are required to automate the payment process.

Example of How Straight Through Processing Saves Money

Assume a Bank X traditionally processes 150 payments every day. Bank X realizes that 50 of its processed payments are processed incorrectly after doing critical analysis. A fee of  $10 is charged Bank X for each error-prone processed payment. The receiving bank assesses the fee as they have to make proper corrections to the processed payment and manually make changes to fix the error. This means Bank X incurs a cost of $14000 per month. Bank X therefore, implements an STP and reduces its payment processing error to 2 per day. The STP helps Bank X reduce its monthly incurred payment processing error cost to $560.

Limitations of Straight Through Processing

  • STP is not favorable for small businesses as it can be very costly due to the systems that are required to automate the payment process.
  • An organization’s system may struggle while building the payment message because clients routinely miss out supplying vital information. This causes payment order to either be repaired or rejected depending on how much vital information is missing.
  • Insufficient funds in a client’s account make the payment move to a referral queue, thereby, blocking the payment passage.
  • Banks may enrich themselves through payment order processes by setting up automated enrichment rules.
  • The absence of interface orchestration causes pending payment order and conversion of interdiction check into a manual activity thereby obstructing the payment’s straight-through processing.

References for “Straight Through Processing – STP

https://www.paystand.com/blog/what-is-straight-through-processing

https://www.investopedia.com › Investing › Investing Strategy

https://en.wikipedia.org/wiki/Straight-through_processing

https://www.experian.co.uk › Latest Thinking Blog › Payments and Collections

https://www.opentext.com › Products and solutions › Products › Business Network

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