What is Straight-Through Processing (STP)?
Straight-through processing (STP) is an automatic solution for seamless electronic transactions and interactions without manual intervention. STP is commonly used by financial institutions to reduce transaction time and stock markets to facilitate seamless initiation and settlement of securities without manual intervention.
The straight-through processing’s infrastructure provides fully electronic and smooth solutions to all aspects of the business cycle. Companies involved with STP must obtain the necessary computer software systems to facilitate various stages of trading.
- Straight-through processing (STP) is used by financial institutions and stock trading platforms to facilitate transactions and interactions without manual intervention.
- STP’s ultimate goal is to eliminate the manual process’s inefficiencies and provide the needed new functionalities in financial transactions and stock markets.
- Straight-through processing has streamlined businesses and improved the accounting process, particularly in accounts payable and accounts receivable.
Understanding Straight-Through Processing
The straight-through processing (STP) refers to a technology solution created to automate all operations related to trade without manual intervention. It is a technical methodology that aims to automate all processes and communications between market participants.
STP imposes pressure on financial institutions and other market participants to make their operations less personal-dependent and more technology-reliant. Unlike the traditional payment processes involving many departments, trading various financial instruments through straight-through processes helps shorten the settlement cycle.
All aspects of STP’s technology are constantly changing. For example, fintech providers and cryptocurrencies now use more advanced technologies that facilitate a faster settlement process.
Pillars of Straight-Through Processing
1. Electronic processing of transactions
The straight-through process entails an automatic exchange of information between traders to confirm settlement details, eliminating the physical processing of transactions using physical checks and securities.
2. Seamless communication between trading parties
The straight-through processing’s infrastructure comprises automatic communication protocols to allow the trade lifecycle’s participants to link seamlessly with each other. Market participants who utilize STP include sell-side and buy-side firms, custodians, and clearinghouses.
3. Concurrent exchange of information
The straight-through process facilitates the concurrent exchange of information during the trade in a real-time automated environment.
4. Real-time processing
With straight-through processing, traders reap the benefits of systems that process information in real-time. The straight-through process necessitates the automatic entry of data and other personnel’s functions, rather than making manual data entry.
The effectiveness of the forbearing STP’s objectives is measured using a number of metrics. When evaluating the implementation of straight-through processing, the dimension considered includes seed, accuracy, connectivity, reliability, scalability, security, and speed.
Payments Using STP
Evolution of STP
Initially, the traditional money transfer process involved various departments that could take many days before the cycle was complete. A software program would be used to initiate payment before it is processed. Payment information was verified by personnel at both ends of the transaction using email, phone, or fax. A manual payment system would then be used to capture the settlement details to be confirmed later by a concerned party to ascertain before releasing the payment.
Before the invention of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and the Automated Clearing Houses Networks (ACH), special codes would be used to send the payment transaction through the telegraph. The time taken to process the information and complete the transaction cycle would be far too long, depending on the details involved.
STP in Modern Trading
In emerging economies, financial institutions and stock markets operate within strict laid-down procedures with supporting credentials that meet regulatory requirements when initiating and completing transactions. As a result, the post-trade and settlement confirmation involved many parties, including intermediary financial institutions.
With telegraphic transfers, the probability of human and trade errors and delays was high, not to mention high administrative costs. As well, there was a lack of real-time processing of payments transactions, which subjected traders to delays. The implementation of straight-through processing was a long needed solution for many businesses. It streamlined and comprehensively improved the accounting process for companies, especially in accounts payable and accounts receivable.
Straight-Through Processing in E-Commerce
Straight-through processing allows businesses to authenticate their online customers in all phases of the trade cycle. With just a few clicks, companies can sell their products, initiate payments, allocate associated settlement instructions, and deliver the product.
E-commerce businesses must adopt an automatic accounting platform to offer transaction solutions to customers. It can be achieved if such sellers partner with electronic payments processing companies, such as Mastercard, American Express, or Visa.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: