# Understanding Straight-Through Processing (STP): Automation in Finance

![Straight-Through Processing](https://www.investopedia.com/thmb/drRuCxpqI2YURB_XMe5sjii7Wi8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/straightthroughprocessing.asp_recirc-blue-7bef7bf0e6864a11a70766459bca6d78.jpg)

*— Investopedia / Dennis Madamba*

## What Is Straight-Through Processing (STP)?

Straight-through processing (STP) is revolutionizing financial transactions by automating electronic payments and [securities](https://www.investopedia.com/terms/s/security.asp) trades, eliminating manual intervention. Corporations and banks leverage STP to improve efficiency and accuracy, paving the way for faster and more reliable financial operations. Explore how computers, electronic exchanges, and the internet fuel the growing capabilities of STP, making it a keystone in modern financial technology.

### Key Takeaways

*   Straight-through processing (STP) automates payment and securities trade transactions electronically with no manual intervention, streamlining the process and reducing errors. 
*   The introduction of Automated Clearing Houses (ACH) and the SWIFT network in the 1970s revolutionized the banking industry by enhancing the speed and efficiency of payment transfers. 
*   STP improves business operations by reducing costs, enhancing cash flow, and providing advanced analytics, allowing firms to track spending patterns and minimize costly errors. 
*   In securities trading, STP enables a fully electronic T+2 trade settlement cycle, reducing human intervention and increasing efficiency in back-office processes. 
*   New technological advancements continue to enhance STP in areas like cryptocurrency transactions, underwriting, and payroll, leading to faster and more reliable financial processes.

## How Straight-Through Processing (STP) Works

Generally, straight-through processing is most well-known in the areas of payments and securities trading. However, in general it is a methodology that could be implemented in a variety of technical scenarios. In all areas of STP, the technology for STP is constantly evolving. In payments, cryptocurrencies and fintech providers have introduced much faster types of straight-through processing, particularly as alternatives to [banks](https://www.investopedia.com/terms/c/commercialbank.asp).

## STP in Payment Processing: Evolution and Impact

Straight-through processing is an innovation that has developed alongside the integration of computers and computer programming. In the early 1970s, Automated Clearing Houses (ACH networks) began development. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) was also founded around this time. SWIFT and ACH significantly upgraded banking payment transfers from a previous [telegraphic system](https://transferwise.com/us/blog/telegraphic-transfer-vs-wire-transfer), which involved a single operator typing telegraphic transfer orders through Morse code. ACH was first introduced in the United States by the Federal Reserve Bank of San Francisco, mostly as a solution for payroll direct deposits.

> **Fast Fact**
>
> The 1970s brought about the first efforts for STP in bank payments.

Since the 1970s, ACH and [SWIFT](https://www.investopedia.com/articles/personal-finance/050515/how-swift-system-works.asp) networks have formed the main framework for most domestic and global payment transfers. Any financial service provider who wants to be in the payment processing business will need to link up with a payment processing network for facilitating electronic STP.

Most electronic payment processing qualifies as STP, but advanced coding can flag or stop suspicious transactions for security specialists.

[ACH](https://www.investopedia.com/terms/a/ach.asp) and SWIFT were groundbreaking introductions that changed the capabilities for banks and also created a vast array of opportunities for financial technology platforms. STP has increased payment efficiency and speed both domestically and globally. STP simplifies payment and routing information use, eliminating the need for manual entry.

## Comparing STP and Traditional Payment Methods

Traditional money transfers involved multiple departments on both the sending and receiving ends, often taking days to complete. Payment would first be initiated [via the phone](https://www.investopedia.com/articles/personal-finance/040616/best-mobile-payment-apps-tap-and-pay.asp) or a software program. The payment settlement details would have to be confirmed by a person at both companies via the phone, email, or fax. The settlement details were then manually input into a payment system and later confirmed either by a supervisor to ensure accuracy before releasing the payment. Before ACH and SWIFT, payment transactions were then sent via telegraphic message using a special code. The process could take anywhere between several hours to a few days to even initiate, depending on the details involved.

[International payments](https://www.investopedia.com/articles/personal-finance/093015/best-ways-send-large-sums-money-abroad.asp) to emerging economies must often meet strict criteria and local regulatory requirements before completion. As a result, several people may have been involved both on the initiating and receiving end of the payment as well as employees from any intermediary banks involved. Telegraphic transfers had a higher propensity for errors, delays, and increased costs. Also, the lack of automation caused instability as well as lack of exact processing expectations, which created problems for suppliers and customers trying to make timely business payments.

As you can imagine, STP was a big help for businesses. It could streamline the accounting process for companies, particularly in accounts payable and accounts receivable. It helped in the tracking and collection efficiency of money to and from business partners and customers. It reduced the number of errors involved with accounting functions and improved [working capital](https://www.investopedia.com/ask/answers/100715/why-working-capital-management-important-company.asp), cash flow efficiency. It also aided in improved business analytics, since companies can track client behaviors and spending patterns as well as costly delays or errors by the customers or the system.

## Implementing STP in E-Commerce Transactions

STP allows businesses to authenticate their customers on the web, sell them a product, initiate a payment, and set delivery of the product, all with just a few clicks. E-commerce sellers must have a transaction solution, which may be multi-faceted. E-commerce platforms can partner with brand providers like Visa, [Mastercard](https://www.investopedia.com/terms/m/mastercard-card.asp), American Express, or Discover. They may also partner with a fintech like PayPal. The offering of payment plans and installment credit is also becoming more popular through fintechs like Affirm. [Sales](https://www.investopedia.com/articles/personal-finance/121615/pros-and-cons-internet-sales-tax.asp) efforts can be enhanced since online systems have the potential to offer products and services to a customer automatically through a single point of sale with a multitude of payment choices all done online.

Amazon.com is a leading company using STP, focused on removing obstacles to customer purchases. Amazon has excelled in making use of automation technology and sophisticated algorithms to serve its customers and drive revenue.

## Utilization of STP in Cryptocurrency Transactions

[Cryptocurrencies](https://www.investopedia.com/terms/c/cryptocurrency.asp) are electronic transfers that don’t require manual intervention. Cryptocurrencies, an emerging form of STP for transactions, allow electronic transfers without manual intervention. The greatest benefit of cryptocurrencies is that they remove the need for a holding company intermediary. Crypto funds can be transferred from one person to another directly on a unique network.

## Cost Savings Through STP: A Practical Example

Suppose Bank ABC processes 200 fund transfers daily without a straight-through processing system. Through analysis, the [bank](https://www.investopedia.com/articles/personal-finance/111416/6-features-your-primary-bank-should-have.asp) has calculated that for every 200 payments processed, 20 payments are processed incorrectly or 10% of the payments. The bank is charged $20 for each payment that is not processed properly. The fee is assessed by the receiving bank or correspondent bank since they have to correct the payment instructions or perform manual entries to fix the error.

Here are the numbers:

*   200 payments are processed per day or 4,000 payments per month
*   A 10% error rate equates to 20 payments per day or 400 errors per month
*   At a $20 fee per error, Bank ABC is charged $400 per day or $8,000 per month

After implementing STP, payment errors decreased to 1% per 200 payments.

*   At a 1% error rate, only two payments per day or forty payments per month were processed incorrectly
*   At a $20 fee per error, Bank ABC reduced the cost of errors to $40 per day or $800 per month

With a STP system, accurate settlement and routing information can be saved in the system [avoiding manual entry of payment details and costly errors](https://www.investopedia.com/ask/answers/06/chipsuid.asp) for the bank and customers.

## Leveraging STP in Securities Trading for Efficiency

In the modern day, nearly all secondary market securities trading involves electronic processing. There can be some human intervention on the front end in placing trades but for the most part electronic systems do all the work. This is where STP comes in. Any transaction in the secondary market requires a trade settlement process, which is associated with STP. This means millions of STP transactions per day for stocks, bonds, mutual funds, exchange-traded funds, pink sheet trades, etc. All financial service companies have some form of [back office staffing](https://www.investopedia.com/terms/b/backoffice.asp) responsible for the management of trade settlements done through STP.

### 1971

The Nasdaq was launched as the first electronic stock exchange.

Like at a bank, electronic trade transactions are monitored by back office employees. Trades may be flagged or stopped due to coded security measures, which then may require the intervention of a human. For the most part, securities trades are completed, including the exchange of an actual certificate, within two days. In 2017, the Securities and Exchange Commission mandated a T+2 settlement for securities trades.

In [securities trading](https://www.investopedia.com/terms/i/isitc.asp), the STP process refers to the full [T+2 cycle](https://www.investopedia.com/ask/answers/what-do-t1-t2-and-t3-mean/). With STP the entire process from start to finish can be done electronically without human intervention. STP for securities trading requires the need for securities codes as well as the use of brokerage accounting codes, similar to the coding needed for bank and routing numbers. Electronic systems operate through code identifiers, which facilitate a full electronic processing cycle.

## Technological Innovations Enhancing STP

Computers, mainframes, electronic exchanges, and the internet are all improving the opportunities for STP processing and innovation. Technology is also helping to improve the actual processing time of a full STP cycle. Some areas that are benefiting from improved technological advances for STP include [underwriting](https://www.investopedia.com/terms/u/underwriting.asp) and payrolls.

Creditors have the opportunity to fully automate underwriting using STP. To do this, coding is used to set lending parameters, authentications, and approvals. This can make credit extension nearly instantaneous upon submission of an online application.

Payroll systems also benefit from STP. Electronic time tracking logs allow for an easy flow through of authorization and approval, which can then be followed by direct deposit. In the payrolls business, many fintechs are partnering with businesses to provide workers with options for daily direct deposit payments, which helps solve cash flow challenges. 

## The Bottom Line

Straight-through processing (STP) revolutionizes payment systems and securities trading by automating transactions to eliminate manual intervention, enhancing speed, accuracy, and efficiency. Originally facilitated by ACH and SWIFT systems, STP has modernized financial exchanges and paved the way for innovations like cryptocurrency transactions. Businesses, from banks to e-commerce platforms, benefit from reduced errors, improved cash flow, and streamlined operations, while ensuring secure and swift processing.

As technology continues to advance, STP's role in automating complex financial operations is likely to expand, offering significant advantages across multiple sectors.

> **Article Sources**
>
> 1.  Nacha. "[History of Nacha and the ACH](https://www.nacha.org/content/history-nacha-and-ach-network)."
>     
> 2.  SWIFT. "[SWIFT History](https://www.swift.com/about-us/history)."
>     
> 3.  Economic Review. "[The ACH: An Elusive Dream](https://fraser.stlouisfed.org/files/docs/publications/frbatlreview/pages/67002_1985-1989.pdf)," Page 5.
>     
> 4.  U.S. Securities and Exchange Commission (SEC). "[SEC Adopts T+2 Settlement Cycle for Securities Transactions](https://www.sec.gov/news/press-release/2017-68-0)."