Straight Through Processing in Commercial Lending

Commercial banks all over the world have been forced to adapt to increasing changes in technology. This is because technological changes are shaking the very foundation of the commercial banking industry. However, since commercial banks have been reactive i.e. they have been responding to changes in the environment instead of proactively accepting them, a lot of them do not have well-developed systems.

Commercial banking systems have been automated on a piecemeal basis. This means that as and when there was a need to automate a particular process, such automation was done. However, there was no attention paid to the big picture i.e. how all these processes would work together in tandem. This is why today commercial banks have a web of applications that cater to their front office, middle office, or their back office. However, straight-through processing i.e. touchless processing of a commercial loan application is still a distant dream.

In this article, we will understand how commercial banks currently manage information related to their corporate loans and how this can be better managed in order to achieve straight-through processing.

The Fragmented Automation of Commercial Banking

Commercial banks have approached technology from a functional point of view. This means that during the first wave of mechanization, they automated the transaction processing which happens in the back office.

Front office operations such as lending, sales, and related functions were deliberately kept separate and not automated during that phase. With the passage of time, more advanced technology became available. Hence, a different set of systems were developed which dealt exclusively with front office functions and lending was one of them. Also, lending systems were very different from one another.

For instance, real estate lending had completely different parameters and risk factors as compared to lending for small and medium enterprises. Now, since the bank had two disparate information systems, the third category of tools for the so-called “middle office” were also created.

The final result is that the systems operated by commercial banks today are disintegrated, operationally conflicting, and do not enable complete and seamless processing of information from one system to another.

The scattered nature of the information held by the bank and the incoherent architecture is a huge impediment when it comes to achieving end-to-end automation i.e. straight-through processing.

How Straight Through Processing Works?

Straight-through processing has been conceptualized in order to completely automate the end-to-end process of commercial lending.

From a technical standpoint, straight-through processing involves having a centralized database where all the information related to a particular customer is stored.

Hence, if a bank wants to know about past repayments, the current cash balance, and such other information for the customer, they can obtain it from a centralized location. Hence, the different applications have to be designed to routinely transfer their data into a centralized database.

Straight through processing first consolidates all the data and then builds business rules or complex algorithms to analyze this data and compare it with a set of successful loans that the banks have made and also a set of unsuccessful loans. Big data techniques are identified and the system is able to gauge the probability of a successful loan being made.

Straight-through processing aims at complete automation of the data collection and analysis stage. However, when it comes to the disbursement stage, the commercial bank may want to put in place certain manual reports. All the information required for manual decision-making should be made available so that the workflow is not sent back and forth again and again.

How is Straight Through Processing Different?

Straight-through processing is different in many ways. One of the important ways in which straight-through processing is different is the way in which it looks at the loans being made.

Straight through processing looks at every loan which is being made as an asset that is being included in the overall lending portfolio of the bank. Hence, it is possible that a loan may be approved via straight-through processing at one stage but the same loan may not be approved at a later stage since the other loans in the bank’s portfolio have changed and the addition of this loan may take the banks overall risk to unacceptable levels.

Hence, it can be said that straight-through processing is not agnostic of the asset management strategy which is used by the commercial bank. When the loan is being made, the system is able to identify the best strategy and commercial loans are then securitized, hedged, or included in the bank’s portfolio of long-term assets.

Straight-through processing systems are also capable enough to obtain real-time information about the loans that they have made earlier. They are also able to ascertain the current valuation of the loans which they made in the past and make changes to the loans accordingly.

The fact of the matter is that straight-through processing is a revolutionary concept in commercial banking. Right now, this concept is still at a nascent stage. However, over time it is likely to become well developed

At first, commercial banks will be able to use straight-through processing as a source of competitive advantage. At a later stage, this will become a constant and is likely to be available with every bank.