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COLUMBIA, S.C. – Straight-through processing (STP) may get legs in 2004, but adoption of the system that some analysts say will represent a sea change in the financial services industry is expected to take place step by step in credit union land. The automated end-to-end processing of financial transactions is being pushed hard in the brokerage space, and e-commerce and retail banking are seen to be next. While significant roadblocks remain – including adoption of data transfer standards and integration of legacy systems that may resist – the effort may well be worth it. “If we define STP as the ability to move transactions from inception to completion without human intervention, then the impact on financial institutions are enormous,” says Mike Scheuerman, senior vice president and CIO at Northwest Corporate FCU in Portland, Ore. “The folks in the back office either go away or become auditors of transaction activity. Assuming that no changes are made in the fee structure, once the initial technology investment is recouped, the bottom line for that product becomes a lot better,” Scheuerman says. “The float that folks are used to taking advantage of also goes away, because transactions are essentially completed at electronic speeds. Transactions can be processed on an `as-needed’ basis rather than piling up a bunch and batching them,” he says. While moving funds in real time is seen as a crucial next step in the securities trade, it may not be quite as critical in credit union land, and at least one industry leader would question the assertion by some research and analysis firms that batch processing will soon be a thing of the past. “There are a number of batch processes that we don’t expect will go away anytime soon,” says John Schooler, CEO of USERS Inc. in Valley Forge, Pa. “For instance, check processing will continue to require some physical reading of the check and credit card transaction processing will continue to require reconciliation of paper, at least for some time,” Schooler says. “Processes like these aren’t going to transform to real-time overnight. While it certainly may be `nirvana’ for the players involved, the path to nirvana isn’t clear or straight,” he says. Indeed, that path will have to go through existing processing and payments systems that will have to be integrated or replaced. Data Junction Corp., a Texas-based provider of integration services to more than 40,000 clients worldwide, cites three major challenges to STP adoption: exception management, moving from batch to real-time processing, and creating and complying with the wide array of ever-changing standards for data formats and transfer. Error management, in particular, has always been handled by staffers, and in a recent white paper, Data Junction says “unless this important function can be executed effectively and reliably by an integration tool, the transition from manual to automated processing is incomplete and unsuccessful and STP will remain more of an ideal myth than an achievable reality.” QUESTION OF DEMAND There also has to be demand beyond the securities industry. “Since brokerage services typically involve systems that reside outside a credit union’s core processing system, USERS isn’t seeing tremendous demand for STP among our clients just yet,” says Schooler, whose company serves more than 400 credit unions. “But if you look at what’s happened over the past several years, with ATMs and debit card processing moving to real time, the use of STP in the brokerage field is a natural next step,” he says. “And as core suppliers like USERS look at the possibility of account-to-account transfers, which are currently handled as ACH transactions, the STP concept may be appropriate here as well.” And for STP to really take hold, “I think it’s important to recognize that the evolution will have to be driven by the major players in the financial services industry – companies like MasterCard and VISA, and even the Federal Reserve,” Schooler says. The credit union industry veteran, meanwhile, expects e-commerce to be another “good fit” for STP eventually. “In our discussions with suppliers like Online Resources, which provides back-end remittance services for USERS’ Internet BillPayer product, and others in the industry, they’re expecting online bill payment to evolve in the real time direction,” Schooler says. But he, like others, expects standards to be the big hurdle and notes that even when big players are involved, adoption can be haphazard. “For instance, even though the OFX (Open Financial Exchange) standard was adopted by major players like Microsoft and Intuit, it only achieved limited adoption. So I would expect that any changeover to STP would be incremental, as adoption of standards is likely to be a considerable challenge,” the USERS CEO says. That incremental change is now occurring at some credit unions used to working on the leading edge. At Boeing Employees Credit Union in Seattle, for instance, staffers are “working towards a form of STP through a consumer wire transfer application via the Web,” says Melanie Walsh, director of member services support. Walsh, whose responsibilities at $4.5 billion BECU include item processing and account servicing, says she’ll be watching what leading cash-management firms such as CheckFree develop but that as far as the core management of money, “the primary focus has been on trades, so there hasn’t been a significant movement towards batch processing using the STP model.” STANDARD BENEFITS Speed isn’t the only beneficiary of the STP model. “The member benefits from quicker completion of the transaction at lower cost, assuming the CU passes along some of the savings,” says Scheuerman at Northwest Corporate. “The member also benefits from being able to control the transaction timing a little better. “For example today, if you’re using electronic bill payment, the funds are probably withdrawn from your account anywhere from three to 10 days before the money actually reaches the intended recipient. In an STP environment, the money could come out the same day and still get delivered on time. So, you’ll be able to collect a few more mils of interest before you absolutely have to pay that bill,” he says. “Meanwhile, the CU benefits from lower transaction costs and probably lower labor costs as well. The downside is that the CU will probably lose some interest on the money because it doesn’t stick around as long and the CU can’t play with the float like they can today,” Scheuerman says. Meanwhile, once the standards are reached (and groups like the Institutional Transaction Processing Committee have been hard at it already), the rest of the tools are there, Scheuerman notes. “The technology foundation is readily available to do all this today in the form of Web services. The biggest challenge to implementation is, as always, the lack of standards,” the Northwest Corporate CIO says. “At issue is how to define a particular transaction type. In other words, what data elements are required to successfully complete the transaction? The standards groups have been wrestling with this problem for years,” Scheuerman says. He notes that the widely used OFX standard, for example, “dedicates an enormous amount of energy to defining the transmission protocol and very little to the actual transaction set.” Web services use the W3C standard for transmission protocols, resolving that part of the equation and allowing the standards committees to concentrate on transaction data issues. Even so, Scheuerman notes, “Working through that transition is going to cause some upheavals since there are many in the industry that have a vested interest in proprietary protocols and transmission schemes. It would almost make sense to throw out the vast majority of what’s been developed to date and start over.” -

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