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Straight-through-Processing in Payments. Why do banks need to think about it?

 

Straight-through-Processing in Payments. Why do banks need to think about it?

The transaction banking numbers for the coming years look promising. $509 billion revenue projected by 2021, with a growth rate of 10.4% and a profit margin of 38% makes transaction banking a profitable venture for banks. But one of the key challenges that banks face are with their systems, with only 36% of the banks being able to achieve STP rates greater than 75%, that too in the payments category. Banks need to better this rate, not only to optimize their working capital and increase cash flow but also to keep their customers happy enough to continue their banking relationships. While 100% STP may seem like an impossible dream, achieving the highest possible STP rate is critical for banks that desire efficient operations. Why should banks really worry about their STP rates?

Understanding STP

What is STP?

Straight-through-processing (STP) is all about automation, right from the initiation of a transaction to its settlement. During the 1990s, six days is what it took to settle a trade after it had been initiated. Eventually, the industry moved to a T+3 standard, a settlement cycle of three days. But that doesn’t seem like a very appealing option anymore. The least expectation is of a same-day settlement, and if banks can achieve that within hours or minutes, that’s even better. Real-time settlement is what banks and corporations are both looking for.

The idea behind STP is to build a workflow that has a number of steps that have been pre-defined. During processing, the system automatically moves through each of the steps. If an error or something unusual is encountered during the STP workflow, the system comes to a halt. This means that minimal manual intervention is required and that too, only when it is absolutely necessary.

Why is it complex?

Payments are complex. Many players are involved in this area – Central Banks, Clearing Houses, Service Providers like SWIFT, and integrating all their services together to enable higher STP rates, can be a complex matter, especially if they are running on legacy systems. Many of the processes involved in the payment transaction are still manual and require physical documentation. People are needed at various stages for decision-making. Often times the quality of data is such, that human intervention is required before the transaction can be processed further. This means more manpower is spent on fixing issues or reconciling data than is desirable. 

Why does a corporation prefer a bank with high STP?

Corporations need to achieve STP in their systems to plug gaps in their financial supply chain, and since their payments and receivables flow through their bank’s processing systems, a better STP at the bank’s end means faster processing of transactions and appropriate information is obtained in a timely manner. A bank that achieves high STP rates will allow the corporations with whom it is integrated, to achieve better STP rates as well. Corporations want to be able to transact in a self-service mode. When the bank’s system has high STP rates, corporations can access funds faster and in real-time. 

Achievements to be had with STP

Up

  • Automation of payables and receivables
  • Agility
  • Transactional and business intelligence for proactive and reactive decision making
  • Working capital optimization
  • Secure and transparent processing of payments
  • Predictability on liquidity
  • Real-time position of funds
  • Customer experience
  • Quality of outbound information

Down

  • Time
  • Operational costs
  • Manual processing errors
  • Settlement risks 

Enabling end-to-end STP in Payments

STP allows the increase in efficiency of the payments process. To achieve this, banks must substitute manual processes of data capture with information captured from online interfaces. Rules-driven services like payment validation, order enrichment and exceptions management adds to increased efficiency. Generation of alerts and notifications delivered to the customer via SMS or mail allows the customers to stay updated so that they can make decisions quickly and proactively.

Banks need to seriously consider increasing their STP as the payment landscape is evolving, corporations are seeking better and transparent services from the banks and transactions are being regularly scrutinized by the regulatory authorities. High STP rates will ultimately allow the banks to enjoy greater wallet share of $509 billion industry. 

manual_author: 

Razia

Date Modified: 

Monday, June 8, 2015
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