Financial services need straight-through processing, say analysts

Straight-Through Processing (STP)

In April and May of 2003, analysts at GartnerG2, and the Securities Industry Association (SIA) conducted a joint survey by phone and e-mail in which they surveyed 184 financial services providers in 21 countries worldwide about their STP initiatives.

The survey revealed that although two-thirds of respondents have launched at least one STP initiative or are planning one by year-end 2003, manual processes are still prevalent. Forty-two percent of all transactions continue to be paper-based and almost 40% of firms manually enter data at least twice for the same transaction.

"STP makes sense for the industry and should be made a priority," said David Furlonger, vice president and research director for GartnerG2. "STP is much larger than just an IT issue. It directly impacts the bottom line of a financial services firm and ultimately defines its competitive positioning. Firms that pursue STP more aggressively will achieve a competitive advantage over firms that put implementation lower on the priority list."

Although slow to reach full implementation and meet industry milestones, STP investment will continue. The survey showed that some organisations, particularly in Europe and Asia/Pacific, plan to spend one-quarter of their total IT budgets on STP this year, and a majority of respondents anticipate STP-related spending will increase by 21% in 2004.

According to the survey, the results of which were published yesterday, the most influential of benefits gained by STP implementations are cost savings. Respondents projected that the average cost of doing business would drop by 33%, while average labour costs would drop by 39% due to reductions in workforce.

However, soft or secondary return on investment (ROI) was considered equally important, including improved customer service, improved internal information flow, faster query resolution and opportunities to cross-sell to existing customers.

Another finding of the survey was that 51% of respondents expect gross revenue to grow as a result of STP. However 35% were unsure of when ROI goals would be achieved.

"Firms implementing STP must establish and understand ROI expectations to be effective," said Furlonger. "The continual expression of concern raised by business leaders over the value of IT emphasises how dangerous it is for financial services providers to rely on perception of return rather than fact. Understanding and calculating ROI from both a business and IT perspective will help focus providers on their long-term value propositions and prevent expensive and potentially catastrophic mistakes."

The SIA defines STP as "the integration of systems and processes to automate the trade process from trade execution to confirmation and settlement without manual intervention or data re-entry."

In the global securities market, financial services providers recognise the effectiveness of implementing STP in reducing the complexity, cost and risk associated with processing domestic and cross-border trades and speeding the flow of standardised information to all parties involved in the securities markets.

Northern Bank's £1.25 million fine

On the same day that Gartner's report was published, the UK Financial Services Authority (FSA) fined Northern Bank £1.25 million for failing adequately to establish the identity of its customers, in breach of money laundering rules. This is only the second time the FSA has imposed such a penalty.

The FSA's Money Laundering Rules focus on client identification, record keeping and the reporting of suspicious transactions. Compliance with the identification requirement is among the obstacles that must be overcome for any financial services firm seeking to adopt STP.

In terms of the rules, companies are supposed to verify a customer's identity – his name and address – by obtaining and keeping copies of two documents, such as a passport, driving licence or a recent utility bill. For business clients, the identities of the principal beneficial owners/controllers should be verified, as should evidence of the trading address of the business. The copy documents are then to be kept for at least five years.

On this occasion the investigation found that Ireland's Northern Bank failed to obtain sufficient 'know your customer' information to prove customer identity in an unacceptable number of new business accounts opened across its retail branch network between December 2001 and September 2002.

The FSA found that the failure to adequately identify business clients was a major cause for concern given the fact that corporate entities have been identified by the financial services industry as among the most likely vehicles for money laundering.

As a result of the FSA's action, Northern Bank has put in place a comprehensive and effective action plan that has remedied these serious shortcomings and the FSA is now satisfied that the bank has dealt with the problem.

However, because the Bank did not act promptly in rectifying the situation, the fine imposed is substantially higher than a £750,000 fine imposed on the Royal Bank of Scotland in December last year – amounting to £1.25 million.

Carol Sergeant, Managing Director of the FSA, said:

"The FSA has made clear that we expect all financial firms to establish and maintain strong and effective anti-money laundering procedures. Firms that fail to do this significantly increase the risk of criminals misusing the financial system to support their criminal activities as well as failing to meet their legal obligations to prevent money laundering.

"The size of the fine in this case reflects the prevalence of the breaches, Northern Bank's share of the market it operates in and its failure to take prompt and effective remedial action after it had originally identified its own failings."

Complying with money laundering regulations is a headache for the industry, particularly if adopting an STP system without face-to face customer contact, as in on-line banking or other forms of e-commerce. But it can be done.