Gauging the upside of straight-through processing in FX

June 11, 2024

Key Takeaways

  • Markets and regulators are pushing for real-time payments
  • Firms must shed less efficient manual tasks to keep up
  • Challenges remain but the benefits of STP are great

Financial markets, which are more integrated and complex than ever, require efficiency when it comes to payments.

None more so than foreign exchange. It’s the largest asset class in the world, an over-the-counter market running 24 hours a day where companies can convert currencies for their international trade settlements and investments.

Real-time transactions are increasingly in demand and a regulatory requirement globally. In this context, firms need to replace less efficient manual interventions with automation. More straight-through processing (STP), a fully automated procedure that is completed exclusively via electronic transfers, means fewer costly errors.

STP has its challenges too, but let’s first examine recent developments aimed at boosting its adoption in the payments industry.

Moving to a global payment standard: ISO 20022

As we wrote previously, navigating the cross-border landscape has long been a challenge. Despite an anticipated value of USD 250 trillion by 2027, the existence of several payment standards creates unnecessary complexity for business areas such as payments and securities trade services.

The industry is now reaching a tipping point as payment systems worldwide adopt ISO 20022 as a common messaging standard.

SWIFT, the backbone infrastructure of the global payments industry, will complete its migration to the new ISO 20022 formats in November next year through its cross-border payments and reporting (CBPR+) initiative.

The new format supports STP by automating the end-to-end processing of financial messages.

The benefits of the new standard are well-reported and include:

  • greater transparency and information for customers
  • improved analytics
  • less manual intervention
  • more accurate compliance processes
  • improved fraud prevention

Significantly, experts say that ISO 20022 helps reduce false positives during sanctions screening by 25-30%. The structured format of the messages allows for clear identification and reduces the need for manual investigations. It can automate up to 84% of message sorting. The enhanced data element of ISO 20022 improves reconciliation processes, which is particularly beneficial for large corporations with complex payment structures.

The challenges

While the benefits are obvious, achieving them requires effort and planning, given that not all banks have the infrastructure to support structured data and that the pace of implementation may vary across jurisdictions.

Financial institutions must also ensure that their application of ISO 20022 aligns with relevant regulatory frameworks, such as anti-money laundering (AML), know your customer (KYC), and data protection regulations.

The transition to ISO 20022 has the potential to streamline payment processing. However, it also introduces operational hurdles, compelling banks to reevaluate their back-office payment systems. This shift frequently demands updates to technological infrastructure, entailing significant expenses and extensive overhaul efforts.

SEPA also fosters efficiency

Regulators, market demand and technological developments are converging, pushing payments towards more automation and real-time transactions.

A significant example here is the Single European Payments Area, or SEPA, a European Union (EU) initiative that enables efficient, reliable, and cost-effective payment transactions. It was fully implemented in 2014 in the euro area and by 2016 in non-euro area SEPA countries.

SEPA standardizes the way cashless euro payments are made across Europe, creating a single market for euro-denominated banking transactions. It aims to foster innovation in the payments market by providing a consistent framework for new payment methods and technologies to emerge and integrate.

The standard processing speed is no longer than one business day for electronic payment orders or two business days for paper-based payments. But for smaller amounts (up to EUR 100,000), the SEPA Instant Credit Transfer completes transactions in seconds and is available 24 hours a day, 365 days a year.

STP has risks but the upside is clear

While developments are unfolding in STP and the electronification of markets gathers pace, a fragmented regulatory framework, regional disparities in infrastructure, and working across different time zones remain a challenge.

Data and integrity are fundamental. The consequences of any inconsistencies or errors in data where transactions are carried out automatically can be serious. It is, therefore, imperative for market participants to have systems to accurately verify data and head off discrepancies. For securities transactions with a foreign currency component, this is even more critical as compressed settlement periods (T+1 and instantaneous settlements) become more widespread.

Key Takeaways

Learn more about adapting to T+1 settlement including the benefits and the challenges.

Nevertheless, with the appropriate risk management and high-quality technology infrastructure in place, STP provides great benefits.

ION Markets

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