Driven by the need for efficient transaction services, straight through processing (STP) for payments has become a focal point for many banks and corporates. However, technological and regulatory restrictions are slowing the practical adoption of STP.
In a nutshell, STP is the automation of a transaction from start to finish with minimal manual intervention. This is achieved by allowing information that has already been electronically entered at the source to be passed on electronically without the need for re-entering.
A main benefit of STP is the reduction of settlement risk, as a payment isn’t up-in-the-air and subject to risks arising from changes in the market during the payment period. STP can also reduce errors that occur when rekeying information, increase efficiency, and give companies quicker access to liquidity.
STP for payments is a complex task as it requires the alignment of a number of entities such as banks, clearing houses and service providers, which could be across different regions, with their own technical difficulties and regulatory standards which they have to adhere to.
One technical difficulty is the need for compatible payments systems across different entities. The ISO 20022 XML format is a standardized and popular format for payments among financial institutions. However, payments under the XML standard still need to be reformatted if the transaction goes through the United States’ Automated Clearing House network.
Regulatory requirements, which can include know-your-client checks and anti-money laundering, as well as risk and control, can mandate that a part of the process is completed manually.
“Apart from tech issues, one of the big deals, especially when it comes to cross-border transactions, is the following of standards on what data is going to be exchanged between one bank and another. We need to have some degree of standardization and not invent our own ways of doing KYC,” explains Dilip Rao, managing director for Asia-Pacific at technology company Ripple.
“The regulators are seeing that the costs of regulations are creating a lot of friction and it’s actually hurting the little people. If you can’t do STP for US$100 it’s not the big corporate that is getting hurt, it’s the little guy,” adds Rao.