Why straight-through processing is the holy grail for banks
Stripping away human intervention
Big benefits from stripping away human intervention and digitising processes.
When the federal treasury published its long-awaited financial system inquiry report in November 2014, it put down on paper what many in the banking industry had been observing for nearly two decades.
It demonstrated that consumer adoption of the internet and the increasing digitisation of the economy had made financial services a broad target for disruption.
As the report’s authors noted, with no physical product to manage, bank processes “readily lend themselves to improvements via digital technologies”.
With billions being invested in financial services start-ups, the report found Australian banks have invested heavily in digitising their retail products. Core to the digitisation effort is what bank technologists refer to as “straight-through processing”.
Straight-through processing broadly refers to the means by which organisations strip manual or physical activities involved in vending or providing services so they can be digitally automated end-to-end.
Former Westpac chief technology officer Jeff Jacobs said straight-through processing can also be referred to as “exception-based processing” - in other words, human intervention is only called on if an organisation's automation engine flags something unusual during a transaction.
It’s by no means the exclusive domain of the finance sector. State road authorities are gradually phasing out registration stickers in favour of electronic notification of vehicle safety checks, which allows motorists to renew their registration online.
It’s also catching on with immigration authorities. Last year India began offering online visa applications in Australia, relieving travellers of the need to march into the embassy clutching passport photos.
Similarly, Australian customs is gradually rolling out passport scanners at international ports that automate and replace the role of their human officers.
For these organisations, straight-through processing is a by-product of making fairly radical departures from pre-internet era business processes that had, in some cases, changed little in decades.
Inevitable path?
However, it’s arguable that the arrival of the internet merely accelerated banks and financial institutions along an evolutionary arc already being inscribed.
In 1969 Australian banks started rolling out their first automatic teller machines.
ATMs were early examples of straight-through processing, and provided consumers with a new way to interface with banks that would eventually relieve thousands of staff in hundreds of branches of the need to partake in millions of small daily transactions.
The internet has effectively given banks the potential to put an even more sophisticated interface into the hands of every consumer virtually anywhere.
National Australia Bank digital boss Adam Bennett told iTnews late last year that around 80 percent of the bank’s retail customers use digital channels to transact. The rest of the big four and their second-tier rivals frequently offer similar statistics.
“What customers want to do today is to self-serve - to transact,” Bennett said.
This has fired the starter gun on a race to take the most complex and manual intensive financial products and squeeze them through the internet to consumers safely, former Westpac CTO Jeff Jacobs said.
“The bottom line is with any transaction that has a customer touch point, every bank will have a goal to digitise it," he told iTnews.
"Whenever you say you digitise you’re inevitably talking about straight-through processing because you’re talking about catching data. You’re then putting it into a form that lets it be automated to work with backend systems."
Former Bank of Queensland CIO Julie Bale last year told iTnews straight-through processing was behind the bank’s decision to overhaul its financial products.
The challenge, she said, was making sure customers didn’t have to trip over any seams in the end-to-end process.
"The one thing that winds any customer up is thinking you’re on a digital journey and then coming to a halt and being sent back into the old world,” Bale said.
"Could you imagine if you were asked to fax in details to change your name on Facebook?” Bankwest CIO Andy Weir has previously said.
Former CUA CIO David Gee says banks have the potential to strip significant dollars from the cost of originating new financial products.
But more complex loan transactions remain a challenge for banks and credit unions, he says - they’re still paddling in the shallow end of the digital processing pool.
Read on to find out what's holdings banks back
“They’ve all got the right strategy, but it’s a lot harder to do in the retail channel and I wouldn’t say that any of them have nailed it yet except in certain domains,” Jacobs agrees.
“That sort of stuff is still held together behind the scenes, whether they’re doing it offshore in India or in Australia, it doesn’t matter – there are still manual processes and people involved,” Gee says.
The white whale
Arguably, the banks’ straight-through processing white whale is the mortgage. Gee says this is the most expensive product for banks to vend and digitising it would pull both banks and consumers out from under a mountain of paperwork.
“All that paperwork that’s done is kind of wasteful because no one reads it - not even the lawyers read it, right?”
However, issuing new credit cards and opening new accounts is relatively simple compared to mortgages.
Banks can draw on readily available risk management systems and well-stocked consumer credit checking databases.
But mortgages have even more moving parts and could require valuation certificates, input from lands and titles offices and other asset registers.
Following from its core banking upgrade in October 2013, CUA has established a personal lending platform and it’s working on the mortgage platform.
However, CUA chief operating officer Steve Chugg says it won’t be a pure digital offering for the foreseeable future.
“There are technology solutions that will allow some degree of verification. From a CUA point of view, there is a need to have information confirmed or verified manually," he says.
“So to answer whether you could originate without any human intervention, that’s certainly not on CUA’s radar today."
Hampered by regulation
It’s not hard to understand why the banks are taking a cautious approach: bank regulators appear to be struggling to keep pace with the technology.
To verify the identity of their customers, banks are required to carry out 100-point evidence checks.
It's a requirement that halts the flow of what could otherwise be an entirely digital process.
"As regulated entities, there are some boundaries we can’t cross," former BoQ CIO Bale said last year.
She raised the option of using digital certificates or some other digital mechanism of trust, potentially combined with a social log-in, to replace this onerous verification process.
The federal government’s financial system inquiry, while warning of the regulatory challenges from technology-driven change, indicated such a vision might not be too far off.
The paper devoted an entire chapter to innovation, recommending the establishment of a trusted digital identities token for consumers, which would remove a large number of digital processing bottlenecks.
The report's authors also said that while the benefits of innovation were hard to quantify, efficiency gains and improved customer convenience in areas like online banking were obvious.
"As the pace of technology-enabled innovation accelerates, it is crucial that government and regulators be aware of, and enable, the benefits of innovation to flow through the financial system while appropriately managing risks," the report recommended.
