What Is Straight Through Processing and How Does It Work?

As the global payments industry continues to grow, global payment revenues are expected to increase by almost 9.5% (year-on-year) in 2022. By 2031, the revenue is projected to reach $3.3 trillion. As such, revolving credit card balances are expected to comprise a large portion of the revenue.

To maximize their profits, many merchants rely on automated transaction processing without human intervention. This method is called “straight through processing” and is ideal for high-volume merchants and/or those with recurring-payment customers.

In this article, we’ll help you understand how straight through processing works and how it benefits businesses.

Straight Through Processing Overview

Straight through processing (or STP) is an automated financial transaction process that eliminates human intervention. Applicable to diverse industries, the STP system greatly reduces data entry time and associated labor costs.

Consistent STP use also reduces the likelihood of operator errors. To keep pace with heavy work volume, a data entry operator may periodically make mistakes when populating data fields. Increased labor time is required to fix these errors, thereby decreasing the company’s profit. A business that incurs multiple errors can face a real dent in its bottom line.

STP-using businesses enjoy seamless electronic information sharing and data analytics efficiencies. Businesses desiring to implement an STP framework must ensure they have the computer infrastructure to support these sophisticated operations.

Straight Through Processing Business Applications

Companies in the financial services industry rely on straight through processing to handle expedited transactions. Major financial market players utilize STP to execute super-fast securities trades. Businesses in other industries also utilize STP technology.

• Electronic payment providers use STP to process payments including Visa and Mastercard credit card transactions.
• Businesses in many industries utilize STP to fast-track their accounts payable invoices and accounts receivable receipts.
• eCommerce businesses use the STP system to create real-time payment transactions without any manual intervention.
• Financial institutions and securities trading platforms use STP to streamline transactions with no human intervention.

What’s the Difference Between Straight Through Processing and Traditional Payment Methods?

Straight through processing is substantially different from traditional payment methods. Historically, sending money was often a multi-day process involving several departments from each company. Internal delays and inefficiencies frequently made the process take even longer.

How Traditional Payments Worked

To begin, an associate initiated the payment via a phone call or a special software program. Next, employees at both companies confirmed the payment instructions through a phone, fax, or email interaction.

Next, an associate performed a data entry transaction, manually typing the settlement details into a payment system. A supervisor checked the data for accuracy before approving the payment.

Before the integration of electronic ACH payments and SWIFT payments, transactions were transmitted via specially coded telegraphic communication. In the best case, the settlement process would take several hours from start to finish. With delays, the sequence could take several days, perhaps impacting workflow in other areas.

International Payments Faced Regulatory Restrictions

Completing international payments, especially in emerging economies, was even more laborious. Before transaction processing could take place, the parties had to provide supporting documents complying with local laws and regulatory requirements.

This process often involved employees at both companies plus associates from intermediary banks. With these constraints, sending a single wire transfer could become a major exercise in frustration.

To further complicate the issue, payment transfers via telegraph often resulted in errors and delays. These slower processing cycles meant slowdowns for suppliers and customers alike.

Why STP Is a Game Changer

With STP electronic transfers, companies in many industries can now streamline their business processes. With no need to rely on paper checks, accounting processes have become more efficient and less prone to errors. And with better cash flow, companies have more predictable working capital.

Finally, the STP process enables enhanced business analytics. Companies can monitor customers’ buying behaviors and changes in spending patterns. On a larger scale, seamless data acquisition assists businesses in formulating operations and marketing plans.

Straight Through Processing: How It Works

At its most basic, straight through processing is a technology solution that automates varied forms of transaction processing. All communications and processing functions will be completely automated with no human intervention.

Varied industries utilize specific technologies and payment processing protocols. Therefore, no standard operating procedure for STP transactions exists. With that said, several key technologies combine to make STP transactions flow smoothly:

• Optical character recognition: Converts paper documents into digital entities
• Digital signing protocol: Enables electronic approvals and signatures
• Document routing mechanism: Automatically sends documents to comply with a company’s requirements
• Data reconciliation capabilities: Syncs data through all relevant systems
• Data monitoring and mapping capabilities: Captures data from multiple system locations
• Electronic payment generation (or EFT): Digital payment processing with no human intervention

Examples of STP in Action

Companies with recurring-payment customers will see the most benefit from STP utilization. Mortgage servicers, auto loan businesses, fitness centers, and similar merchants are good examples.

When these organizations use a fully automated payment processing system, they will minimize expenses linked to individual customers. Following are examples of STP’s efficiencies in specific industries.

STP in eCommerce

An eCommerce retailer ideally wants a smooth purchase transaction that requires no human intervention. Specifically, the business owner wants to sell a product and quickly receive a payment.

Finally, the merchant wants to smoothly settle the transaction and arrange the delivery logistics entirely through the eCommerce platform. By partnering with a reputable payment processing provider, such as Payment Depot, it’s easy to achieve these goals.

Amazon has reached the pinnacle of eCommerce success by utilizing STP technology. The company’s vast online product catalog caters to customers’ diverse tastes. Using a proprietary algorithm, Amazon provides customized purchase suggestions and handles all purchase logistics.

Amazon’s STP technology drives consistently fast, flawless purchase transactions. Through the use of high-level automation capabilities, the company excels in meeting customers’ needs and generating record revenues.

STP in the Banking Industry

The 1970s-era development of ACH and SWIFT payment transfers helped the banking industry to up-level its operations. Prior to that, banks were forced to process payment transfers via a telegraph operator’s Morse code transmissions.

In the 21st century, the ACH and SWIFT payment networks handle most domestic and international payment transfers. The networks’ wide utilization has spurred numerous financial technology companies to develop their own industrial applications.

Today, banks can save money by using STP technology. For example, a bank that initiates numerous monthly payments may execute a substantial portion of those payments incorrectly.

As a result, the receiving bank charges the initiating bank a monthly per-transaction fee for each payment to be corrected. Through the integration of an STP structure, the initiating bank can greatly reduce its processing error charges.

STP in the Crypto Market

Cryptocurrency transactions typically utilize STP for financial transactions. By design, these electronic transfers don’t go through a central exchange or holding company. Instead, one investor transfers the crypto funds to another investor within a distinct network’s infrastructure. Manual intervention is not required to smoothly complete a crypto purchase or sale.

In today’s fast-paced digital world, STP technology continues to evolve. For example, cryptocurrency transactions have adopted higher-level technologies that enable faster settlements.

STP in the Credit Underwriting Industry

Credit (or loan) underwriters can now completely automate their underwriting process via STP technology. When a loan prospect submits an online application, preset codes establish the loan parameters.

Other coding sequences perform authentication and loan approval (or decline) functions. With these protocols in place, an applicant’s credit decision is almost instantaneous.

STP in the Payroll Industry

Payroll processing specialists regularly utilize STP technology. Electronic time logs streamline the authorization and approval cycle. This sets the stage for automatic direct deposit.

In the competitive payroll processing industry, a resourceful fintech may create an API that generates daily direct deposits. This can help a business’ employees navigate cash flow problems.

Pros and Cons of Straight Through Processing

Every technology has its advantages and disadvantages. With that said, straight through processing’s positive attributes collectively outweigh its negatives.

Pros of Straight Through Processing

• Spurs fast information transfer and process automation
• Enables businesses to accelerate diverse financial transactions
• Drives efficient, cost-effective payment processing that supports business growth
• Enhances the accounting workflow, enabling faster accounts payable and accounts receivable functions
• Streamlines and automates data-sharing operations
• Facilitates effective, wide-ranging business analytics functions
• Minimizes repetitive tasks and potential errors

Cons of Straight Through Processing

• Client data omissions can cause delays in payment processing
• Lack of interface coordination can turn supposedly automatic functions into slower manual processes
• Insufficient client funds can prevent automated payments from going through
• Financial institutions often generate income via automated enrichment protocols
• Unfavorable for small businesses due to high payment processing automation costs

Payment Processors’ STP Can Enable Small Business Growth

With Payment Depot, brick-and-mortar and eCommerce merchants can benefit from STP processing systems’ efficiencies. At the same time, merchants enjoy affordable processing rates and no nuisance or cancellation fees. Equally importantly, Payment Depot’s customer support consistently gets rave reviews from satisfied small businesses. Contact our award-winning customer service team today to learn more.