In terms of payment strategies, straight-through processing refers to any automated, wholly electronic method used to conduct a financial transaction from initiation to completion. An STP system might include some manual action, such as investigating and resolving process errors or irregularities, but, in theory, if everything works as intended, the entire transaction will be completed independently of human involvement.
In this article, we’ll examine STP in more detail, outlining how it operates and its overall value.
How does straight-through processing work?
The intricacies and involved parties of a given STP setup will vary depending on the payment type being used. For example, with an Automated Clearing House (ACH) transaction, your solution would coordinate routing and processing through one of the two ACH operators in the United States. Whereas for a Swift transaction, these functions would be performed by member banks within the Swift network.
In general, though, the structure of your STP will look something like:
Step 1: Customer initiates payment
Upon receiving an invoice or as part of an established payment plan, one of your customers initiates an electronic payment to your business. This payment will be made through digital channels (e.g., mobile banking apps, e-commerce sites, and online payment portals).
Step 2: System verifies transaction details
The system will confirm the transaction’s key details (e.g., account numbers, bank details, currency conversion rates). And once validated, this information will be formatted into a standardized message format.
Step 3: The payment message is routed
The payment message is then processed and transmitted to all interested parties via an established processor (e.g., ACH operator, Swift member, fintech business). Depending on the payment channel, this stage will typically include some form of authorization and anti-fraud measures.
Step 4: The payment is settled
The relevant financial institutions will debit the sender’s accounts and credit the same amount (minus any relevant fees) to the receiver’s accounts. Upon completion, both the sender and receiver should receive settlement confirmations.
Step 5: Exceptions are resolved – errors and investigations
If a problem or error is detected, these transactions will be automatically flagged and set aside for further review by the STP software or the corresponding payment platform. And as previously mentioned, these investigations and resolutions will typically be handled manually.
How does STP differ from traditional payment methods?
The two defining characteristics of straight-through processing are that the payment is made electronically and through an automated process. This approach stands in stark contrast to more traditional payment methods that predate electronic data exchanges and typically rely on physical paperwork, direct human involvement to complete core tasks, or both.
As such, any payment made using paper (e.g., cash, physical checks, money orders) or that involves physical documentation, like a receipt, would fall into the traditional category. Similarly, traditional payment methods will lean heavily on manual processes, such as:
- Transcribing invoice details into a payment system
- Calling a bank to verify a transaction
- Requiring physical signatures for authorization
- Comparing invoices against purchase orders by hand
- Initiating credit card transactions from paper order forms
An STP example
Consider the made-up case of Factor Friction, LLC, a business that fabricates frictionless surfaces for use in American schools. Mothballing its outdated, paper-based accounts receivable (A/R) solution, Factor Friction instead deployed an automated platform, establishing straight-through processing for its customers via an online payment portal.
So later, when the Doc Brown Institute for Gifted Youngsters purchased a Friction-Free Table for its new physics lab, the school, after receiving an e-invoice, could pay for their purchase via an ACH transaction initiated from the portal.
The A/R solution subsequently verified the submitted payment details and routed the transaction through the ACH process with the ACH operator and relevant banking institutions managing, confirming, and finalizing the transaction without direct human intervention.
Understanding the benefits of STP
Accelerated processing and shorter payment cycles
One of the primary advantages of STP is the shorter payment cycle it delivers. While traditional methods commonly rely on physical mail to be delivered—a process that might take days or even weeks to complete—electronic exchanges can be done in seconds. Similarly, automated workflows offer a clear time savings over manually driven efforts, working around the clock instead of requiring staff to be physically present at their desks.
Enhanced accuracy via automation
Humans tend to be much more fallible than technology. We unintentionally switch digits when transcribing account numbers. We leave off important details when copying and pasting. We get distracted. And each of these mistakes can have a negative impact on your payment timelines, your available working capital, and your overall reputation.
Fortunately, automated software processes can bypass many of these human foibles, leading to more accurate data and fewer processing errors.
Streamlined compliance and automated reports for audits
Manual documentation requires a lot of time and labor. Conversely, with STP solutions, much of this vital information and related metadata is securely stored and can be compiled into routine reports. And these reports, in turn, can help create clear audit trails to verify compliance.
Reduced time spent on tedious work, more time spent on strategy
Traditional payment strategies rely heavily on direct employee labor, requiring constant involvement to keep cash flowing into your business. But with automated A/R and payment processes, you can instead free your staff from these routine drudgeries, reinvesting them into more strategic and profitable endeavors.
Hardened security via software-empowered pattern recognition
Social engineering attacks — those targeted at human employees — are a common vector for financial fraud, so the fewer workers involved in the payment process, the less risk. Similarly, STP software tends to be much more effective at pattern recognition, particularly in identifying payment irregularities suggesting malfeasance, than the human eye.
Improved scalability for your team
With traditional payment methods, when the number of transactions increases dramatically, you’ll likely need to hire and train new staff. However, with an STP solution, assuming your current platform can’t accommodate the increased workload, you’ll typically only need to invest in a one-time purchase of additional processing power.
Capabilities of Traditional Payments vs. Straight-Through Processing | ||
| Traditional | STP |
Processing times | Completed in hours to days | Completed in seconds to hours |
Payment accuracy | Vulnerable to human errors | Minimizes inaccuracies with automation |
Compliance efforts | Labor intense | Captured and reported independently |
Labor required | Heavy staff involvement | Minimal human interaction |
Anti-fraud measures | Human analysis | Pattern-detection algorithms |
Scalability | Requires more people | Requires more processing power |
What types of businesses benefit most from STP use?
In general, the organizations that reap the most benefit from straight-through processing deal with high transaction volumes or handle sensitive data that requires an extensive audit trail to document compliance. And while any-sized organization can cut costs and accelerate its payment processes with this electronic approach, STP solutions tend to be more common among midmarket and large-scale businesses.
Some sectors that tend to profit from the switch to STP significantly include:
- Marketing agencies: deliver consistent processing for complicated, irregular billing cycles that need to align with shifting project budgets
- Education institutions: protect sensitive student data and records with built-in validation processes
- Financial services: rely on automation to complete payment processing, trade settlement, account reconciliation, and more in a matter of seconds
- Healthcare providers: create clear audit trails to verify proper handling of patient health information
- Insurance companies: automates overly-complex workflows like claims processing and policy creation
- Legal firms: accommodate detailed invoices, variable payment terms, prorations, and adjustments without additional labor
- Technology providers: streamlines the management of recurring payments, renewals, and other facets of subscription-based billing
Compliance considerations for STP
When dealing with financial matters, there is always red tape. Given the increased data collection and usage common with STP, we expect to face higher compliance burdens from data privacy laws, payment channel requirements, and industry expectations.
You should check with legal and financial professionals to ensure you are familiar with all outstanding expectations, as these can vary based on your location and industry. For instance, if you’re dealing with payments as a school or university in the US, you’ll likely need to meet privacy guidelines aligned with the Family Educational Rights and Privacy Act of 1974 (FERPA). Similarly, if credit card transactions are part of your payment efforts, you’ll want to store information in compliance with the Payment Card Industry Data Security Standard (PCI DSS).
Ideally, whatever STP infrastructure you put in place will help to simplify your compliance workloads, and our Accounts Receivable Automation software does just that. We offer pre-built dashboards alongside our Advanced Reporting add-on, which empowers you to build custom reports and audit trails based on hundreds of object and field types. Similarly, we’ve augmented our platform with the global capabilities of Flywire software, making it easier to manage transactions and fulfill reporting and tax obligations in 140 currencies.
How Invoiced helps businesses achieve straight-through processing
No matter how simple or complicated your payment processes are, Invoiced (a Flywire company) has the right solution. Our Accounts Receivable Automation platform delivers centralized, automated workflows that can accelerate your payment processes and simplify the entire A/R cycle — from invoice creation to cash application. We also offer a self-serve payments portal that empowers your customers to make payments, manage subscriptions, set up AutoPay, download receipts and statements, and update payment information.
Schedule a demo of our software today to make setting up STP for your business much simpler.
