STP in the Payments Industry: The Road Ahead

Straight-through processing (STP), a mid-nineties buzzword, continues to have relevance for financial institutions and their chief operating officers. For the banking community, STP offers a promise of optimising human resource deployment, delivering operational economies and improving customer service. Recent STP initiatives, backed by ISO 20022 standards and new messaging service offerings such as SWIFT SCORE, help facilitate access to corporate and real-time cash reporting and are aimed at enhancing payment services to customers. There are also focused efforts by the financial community to provide consolidated information to corporate customers on a real-time basis for their multiple branch operations, through multiple banking relationships.

STP is also increasingly relevant for the payments sector, as financial institutions address global standards requirements. Ideally, the industry should have been very close to achieving over 95% STP via globally accepted standards, business practices and associated compliance requirements that cut across the banking community and its customers. The reality is that though the industry has made significant progress in last decade, there are quite a few challenges and more importantly, different perspectives, around optimising STP.

In our discussions with bankers, their views do vary based on geography, size and nature of their institutions, and their domain of expertise (business/IT/operations, etc). While none questioned the significance of STP and the need for the evolving consensus for the standards, their views differed around implementation, scale and prioritisation, in these key areas:

STP not strategically implemented

This is a very common point (especially during the initial days of the single euro payments area (SEPA) implementation, for example) that was concerned with the effectiveness of STP. Typically, when financial institutions implement the standards driven by mandates from central institutions, regulators or service providers such as SWIFT, more often than not, the implementation approach is tactically focused. This means business applications continue to operate using legacy systems, data and standards. The main concern is over the perceived stability and sunk costs associated with legacy infrastructure, and the perceived higher cost and the complexity associated with a systems upgrade. While a tactical approach to STP implementation can fulfil mandatory compliance requirements, the true value of STP that is expected to be derived from the newer standards and additional information supplied in the payload, is then unfortunately not realised.

STP and standards adoption should look at the overall organisational processes involved, which encompass not only IT systems but also associated business practices, operations and compliance mandates. For example, the payments process involves activities beyond ‘just’ the actual transfer of currency; it also involves customer support and transfer capabilities furnished to a transactions account owner. Real benefits will be seen only when all the processes and systems are aligned. This long-term goal should inform the project, but should not become a barrier to beginning the effort.

Co-existence with manual systems

For large institutions, where scalability is important and handling large volumes a challenge, STP is a mandatory requirement. However, for smaller players who handle smaller volumes, their manual processing may work fine and any mandatory move towards automation may just make their business proposition unviable. This is where industry is facing a lot of pushback. While we believe natural market forces, including high fees from the correspondents, will bring a gradual and more natural shift towards full-scale standards adoption, being able to understand ‘optimum STP’ levels in the context of co-existence with older manual systems must be considered as a medium-term strategy.

Pace of change

While bankers embrace the value that new standards bring, most of their counterparties/correspondents are not ready, so it is commonly a challenge for banks to get buy-in to prioritise these initiatives. STP should ideally become the objective of the community, within certain achievable, realistic, mutually agreed-upon timelines. This is where leadership is commonly expected to come from the large banks, who should provide options to their counterparties to move to new standards while the overall industry migrates at a defined pace within a defined period.

Embracing Automation

This involves the readiness of the community to allow near-complete processing of payments from initiation to settlement without human interaction. This is about including processing rights from payments initiations through payments verifications, anti-money laundering (AML) checks, clearing and settlements/cover payments, prompt exception handling and resolution, cash reporting and efficient advising, among other things. The specifics can be extensively discussed, but STP optimisation has to be considered within the total picture, where elements like dual authorisations, sanctions checks and even risk management do require human intervention in the process. In any case, STP and reference data will certainly help speed up execution time.

Essentially, taking a philosophy towards engineering the optimal approach towards STP is crucial as banks look at STP and standards to enhance their credit and payment services. Customer focus and business needs would have to be central in the overall strategy, and the entire business must be part of the adoption strategy. For example, if the cash management application cannot respond with the status in a stipulated time without manual intervention, adopting ISO 20022 standards & SWIFT service for cash reporting may not help.

Our experience has been that whenever specific business needs were met with technology initiatives such as ISO bank identifier codes (BICs) or structured party-identifiers like IBAN or clearing codes in the business fields of the payments message, this certainly helped improve STP. While organisations will need to work on the detailed steps, the overall strategy needs to be to achieve end-to-end adoption, because end-state business applications will ultimately need to process and parse new standards and, more importantly, business practices will need to be aligned with the changes in order to reap the key, benefits with the greatest impact.

Conclusion

With all the turbulence of the last couple of years, the focus of the industry has been oriented towards optimisation and risk management. As banks start re-examining their payments strategy and architecture, the time is ripe to address this topic in earnest while acknowledging the existence of paper-based and manual processes in the payments systems. The continued focus and mandate on customer services and risk mitigation can largely be aided by working towards the STP goals in payments processing by leveraging standards, uniform practices and online systems.

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