Benefits and Drawbacks of Straight-Through Processing

In the previous article, we have already seen what straight-through processing is and how it is different from the usual commercial lending processes adopted by commercial banks. We now know that straight-through processing is a futuristic technology-based business model which all commercial banks are working towards.

Right now, the model is not used in many places. However, given the speed of technological advancement, it is highly likely that this model will gain traction within a short span of time.

Hence, it is important for the commercial banking industry to be completely aware of the functioning of this technology. The straight-through processing model needs to be scrutinized before it is adopted.

Before any commercial bank decides to adopt straight-through processing, it is important for them to understand the pros and cons of adopting this model.

Benefits of Straight Through Processing

1. Reduced Operational Costs: Straight-through processing is a mechanism that allows for the automation of commercial lending. Any kind of automation always helps in getting rid of human error. This reduces the expenses related to quality checks. Also, automation enables the process to run continuously instead of being restricted to working hours. This also means that the operations are not affected by the variations in human productivity.

   The end result is that the operational cost is significantly reduced. This reduction in operational cost either allows the commercial bank to increase its profits or they can reduce its lending rates and capture a larger market share! Hence, straight-through processing plays an important role in the strategic management of commercial banks.

2. Better Risk Management: A detailed log of activities and the decision-making process is a very important tool when it comes to risk management. Straight-through processing systems are completely automated. Hence, these systems allow for complete logging of each and every activity conducted by the system as well as by humans.

   Also, straight-through processing requires the creation of a single database. Hence, the system supports data coherence. Also, regulatory compliance can also be automated by enabling sharing of data.

3. Enhanced Lifetime Customer Value: Corporate customers have faced a lot of issues related to the quality of the services that they receive in the past. This is because a lot of times, there are delays in the process. These delays are generally due to the unavailability of proper information or the negligence of the banking officer. Straight-through processing solves both these problems.

   The process is designed to be touchless and automated. Hence, the system is designed in such a way that it can obtain the required information from a centralized database and can function without human intervention.

4. Research and Product Development: Commercial banks are interested in developing newer and better products for their clients. They can only do so if they have extensive data about their customers’ transactions. This data is then mined in order to uncover meaningful patterns which can be addressed by developing a new product.

   Since straight-through processing allows for extensive capturing of data, it can be said that it plays an important role in the research and development process as well.

5. Shorter Cycle Times: The turnaround time i.e. the amount of time which is spent in processing transactions is an important barometer in the commercial banking industry. If a commercial bank can have a shorter processing time, it becomes more efficient as compared to other banks. As a result, it becomes more effective for its customers.

   Straight-through processing is associated with a significant reduction in the processing time required by commercial banks. It is for this reason that straight-through processing is considered to be a competitive advantage by many commercial banks.

Drawbacks of Straight Through Processing

Straight-through processing is a marvelous technological innovation. However, it also has its own drawbacks. Some of these drawbacks have been discussed below:

1. Expensive: Straight-through processing is an expensive process to implement. Since the entire process is automated, it requires a lot of investment in the software which enables such automation. Also, the software needs to be integrated with the software at the client’s end. The maintenance of this software can also be an expensive affair since it requires the services of highly skilled personnel. Overall, it can be said that straight through processing systems burn a hole in the budget of the organization.

2. Risk of Human Error: Straight-through processing is highly automated. However, when some exceptions do occur, the process may fail. In such a case, the failed process has to be executed manually. The problem is that manual intervention can expose commercial banks to a lot of risks.

3. Increased Complexity: A straight-through processing system might sound good in theory. However, in practice, it significantly complicates the software architecture of any commercial bank.

   The commercial bank is expected to add several layers of software to integrate the system and allow for smooth transmission of data between the different systems. The problem with a complex system is that it can be expensive and time-consuming to fix once it breaks down. Hence, outages in the commercial banking system can prove to be very difficult to handle.

The fact of the matter is that straight-through processing has more pros than cons. This is the reason that this technology is likely to flourish and become mainstream in the near future. However, this does not mean that there are no issues.

Commercial banks will have to ensure that the significant drawbacks associated with straight-through processing have been mitigated before it is rolled out on a large scale.