Straight through processing (STP) is an automated method of completing transactions that is used in the financial industry to speed up operations and eliminate the need for manual intervention. This type of automation helps detect and prevent fraudulent activities and the losses from fraud: US finance professionals reported, as of 2022, an average loss of $300,000 per year to invoice fraud.

Below, we’ll explain how STP works, its benefits, how it’s used, common STP challenges, and best practices for implementation.

What’s in this article?

• How does straight through processing (STP) work?
  
• Traditional vs. STP payment processing
  
• What types of businesses are most suitable for STP implementation?
  
• Benefits of STP
  
• How STP is used
  
• STP adoption challenges—and how to handle them
  
• Best practices for implementing STP
  

How does straight through processing (STP) work?

STP automates the lifecycle of a financial transaction, from initiation to completion, eliminating the need for manual intervention such as data entry, verification, or reconciliation. This automation leads to faster processing times, fewer errors, and lower operating costs. Here’s how it works:

• Initiation: A transaction, such as a payment or trade order, is initiated electronically. This could be via online banking, a trading platform, or other digital channels.

• Validation: The system automatically validates the transaction details, including the account information, amount, and any relevant instructions.

• Enrichment: Any additional information required for processing (e.g., currency exchange rates, security details) is automatically retrieved and added to the transaction.

• Risk assessment: Based on rules or algorithms, the system might perform risk checks to detect fraud or other potential issues.

• Approval: If the transaction passes validation and risk assessment, it is automatically approved and proceeds to the next stage.

• Routing: The transaction is routed to the appropriate destination for the transaction type and instructions. This might be a clearinghouse, payment processor, or exchange.

• Settlement: The transaction is settled electronically. Funds are transferred between accounts, and any updates are made to relevant systems.

• Confirmation: The parties involved in the transaction receive electronic confirmation that it has been completed successfully.

Traditional vs. STP payment processing

Here’s a breakdown of the differences between traditional payment processing and STP:

Traditional payment processing

Traditional payment processing relies on manual data entry, verification, and reconciliation, with multiple people involved in each step of the process. The process often involves physical documents such as checks, invoices, and receipts, and processing times can range from hours to days because of the manual steps and potential delays in document exchange involved.

Manual data entry also creates an increased risk of errors, which can lead to discrepancies, corrective measures, and increased operating costs for the labor required to complete this process. Tracking the status of a payment requires further manual checks and communication between different parties.

STP

STP is electronic and automated. The process relies on electronic data exchange and communication, eliminating the need for physical documents. Processing times are substantially reduced: transactions can take minutes or even seconds to complete.

The automation involved in STP minimizes the risk of errors, reduces manual labor and operating costs, and provides real-time visibility into payment status and history, allowing for better tracking and easier reconciliation.

Examples of each type of processing

Traditional

• Sending a check by mail

• Manually entering invoice details into a system

• Calling a bank to verify a transaction

STP

• Paying online with a credit card

• Setting up recurring bill payments

• Automated Clearing House (ACH) transfers

What types of businesses are most suitable for STP implementation?

Businesses in highly regulated industries, those with high transaction volumes, and those that handle sensitive personal data are well suited to adopt STP.

STP can help businesses with compliance by automatically enforcing rules and capturing audit trails, speed up transactions, and help protect sensitive data with greater accuracy and reduced risk of human error. These types of businesses can see significant benefits from STP:

• Banks and financial institutions: STP is widely used for payment processing, trade settlements, account reconciliation, and protecting sensitive financial data.

• Insurance companies: STP simplifies claims processing, policy issuance, and premium collection.

• Ecommerce platforms: STP enables fast and secure online payments and order fulfillment.

• Healthcare providers: STP facilitates easier patient registration, billing, and insurance claim processing and protects patient health information.

• Government agencies: STP is used for tax collection, benefit disbursements, and license processing and protects sensitive citizen records.

Benefits of STP

STP creates these benefits for businesses:

Fine-tuned operations

• Reduced manual effort: STP eliminates repetitive tasks such as data entry, verification, and reconciliation, freeing up human resources for important activities.

• Accelerated processing: STP automates workflows and speeds up transactions.

• Scalability: STP systems can handle increased transaction volumes without requiring additional manual resources.

Lower costs

• Lower labor costs: Automation reduces the need for manual labor, leading to savings on payroll expenses.

• Error reduction: STP minimizes costly errors associated with manual data entry such as incorrect information or duplicate entries.

• Reduced paper usage: STP saves on printing, storage, and mailing costs incurred by paper-based processes.

More accurate data

• Less human error: Automation reduces the risk of inconsistencies and discrepancies caused by manual data entry.

• Improved compliance: STP systems can be configured to enforce compliance rules and regulations, ensuring data accuracy and reducing the risk of noncompliance penalties.

• Data integrity: STP maintains data integrity throughout the transaction lifecycle.

Better customer experience

• Faster transactions: STP enables near-instantaneous transaction processing, leading to improved customer satisfaction and loyalty.

• Transparency: Real-time tracking and status updates provide customers with visibility into the progress of their transactions.

• Reduced errors: Fewer errors mean fewer customer complaints and inquiries, leading to smoother interactions and increased satisfaction.

Risk mitigation

• Fraud detection: STP systems can incorporate risk assessment models and fraud detection algorithms to identify and prevent fraudulent activities.

• Audit trails: STP systems automatically generate audit trails, facilitating regulatory compliance and internal control.

How STP is used

STP has several applications. Here’s how it’s used:

Payment processing

STP completes transactions from initiation to settlement. STP automatically:

• Verifies payment details

• Checks for sufficient funds

• Approves or declines transactions in real time

• Routes payments through the most efficient and cost-effective channels based on transaction parameters

• Transfers funds between payer and payee accounts

• Reconciles balances and updating records

STP can also be used for payroll processing, automating salary calculations, tax deductions, and direct deposit.

Trade settlement

STP handles trade settlement. STP automatically:

• Executes trades, matching buy and sell orders in financial markets

• Clears and settles trades, transferring securities and funds between trading parties

• Reconciles trade details and discrepancies

Insurance claims processing

STP automates insurance claim processing. STP:

• Enables customers or healthcare providers to submit claims electronically

• Verifies policy details, coverage eligibility, and claim accuracy

• Assesses and approves claims based on predefined rules and medical guidelines

KYC (Know Your Customer)

STP helps businesses with KYC processes. STP automatically:

• Verifies customer identities using digital documents, biometric data, and third-party databases

• Completes onboarding, collecting and validating data and assessing risk

• Continuously monitors customer transactions and activities for suspicious patterns

STP can also play a role in loan processing and supply chain management. STP automates loan application processing, underwriting, and approval and facilitates the exchange of purchase orders, invoices, and shipping documents for supply chain processes.

STP adoption challenges—and how to handle them

STP adoption can have challenges. Here’s what to expect and how to work through it:

Legacy systems

Many organizations have outdated legacy systems that are not compatible with STP’s automated processes. Integrating new technology with these systems can be complex and costly.

Solutions

• Phased implementation: Gradually replace legacy systems with STP-compatible solutions.

• Middleware: Use middleware software to bridge the gap between legacy and new systems.

• API integration: Develop application programming interfaces (APIs) to connect legacy systems with STP platforms.

Cost

Implementing STP can require substantial up-front investment in new software, hardware, and training.

Solutions

• Phased approach: Implement STP in stages, starting with high-impact areas and gradually expanding to other processes.

• Cloud-based solutions: Consider cloud-based STP platforms with lower up-front costs and scalability.

Organizational resistance

Employees might resist change because of fear of job displacement or unfamiliarity with new technology.

Solutions

• Change management: Implement a comprehensive change management plan involving clear communication, training, and support for employees throughout the transition.

• Stakeholder involvement: Involve key stakeholders in the decision-making process, and address their concerns to gain buy-in.

• Incentives: Give incentives and recognition to employees who embrace and champion STP adoption.

Data quality and standardization

Inconsistent data formats and quality across systems can hinder STP implementation.

Solutions

• Data cleansing: Thoroughly cleanse and standardize existing data to ensure compatibility with STP processes.

• Data governance: Establish data governance policies and procedures to maintain data quality and consistency.

• Data validation: Implement data validation mechanisms so only accurate and complete data enters the STP system.

Regulatory compliance

STP implementation must adhere to relevant industry regulations and data privacy laws.

Solutions

• Compliance expertise: Engage legal and compliance experts to ensure STP processes comply with all applicable regulations.

• Audit trails: Maintain strong audit trails to track and document all STP activities for regulatory reporting and compliance purposes.

• Security measures: Implement strong security controls to protect sensitive data and prevent unauthorized access or breaches.

Best practices for implementing STP

These best practices can help your business effectively implement STP:

Data quality

• Conduct regular data profiling to identify inconsistencies, missing values, and outliers.

• Implement automated data cleansing routines to correct errors, standardize formats, and enrich data with missing information.

• Enforce strict data validation rules at the point of entry to prevent inaccurate or incomplete data from entering the STP system.

Handling exceptions

• Define clear rules and thresholds for identifying exceptions that require manual intervention, such as unusual transaction amounts or high-risk customers.

• Automate the routing and escalation of exceptions to appropriate personnel for timely resolution.

• Analyze exception data to identify patterns and root causes, and use these insights to improve STP rules and processes.

Workflow optimization

• Use process mining tools to visualize and analyze the flow of transactions through the STP system, identifying bottlenecks and inefficiencies.

• Implement robotic process automation (RPA) to automate repetitive tasks within the STP workflow such as data extraction, validation, and reconciliation.

• Use machine learning algorithms to improve decision-making processes within STP such as fraud detection, risk assessment, and routing.

System integration

• Use APIs to connect disparate systems and applications, facilitating real-time data exchange and synchronization.

• Break down complex STP processes into smaller, independent microservices that can be independently developed, deployed, and scaled.

• Design the STP system to react to events and triggers for real-time processing and decision-making.

Monitoring and analytics

• Implement dashboards that provide real-time visibility into STP performance, including transaction volumes, processing times, error rates, and exception trends.

• Use predictive analytics to anticipate potential issues and proactively address them before they affect STP performance.

• Conduct root cause analysis of errors and exceptions to identify underlying issues and implement corrective actions.

Continuous improvement

• Conduct regular reviews of STP processes and performance to identify areas for improvement.

• Adopt an agile STP development and implementation process, allowing for flexibility and adaptability to changing business needs.

• Promote collaboration among information technology (IT), operations, and business teams to align STP solutions with business objectives and deliver tangible results.