Instant Money: How Real-Time Payments Are Changing the Payment Processing Industry

Whether you call it Faster Payments, Immediate Payments, Instant Payments, or Fast Money, real-time payments technology has gained a solid foothold in the payment processing world.

What Are Real-Time Payments?

A real-time payments system is composed of technology that enables instantaneous money transfer between banks and banking systems. The first known real-time payments system was developed in South Korea in 2001, and by the end of the last decade, some forms of real-time payments technology were being used throughout the U.K. and parts of Asia.

With real-time payments, there is no “float,” which is the interval between when money leaves a payer’s account and becomes available in the receiver’s account. Payments can be made around the clock, 365 days a year—including weekends and holidays—and the funds are available immediately.

Although payments made with credit or debit cards, digital wallets, or P2P apps may seem like real-time payments, the funds transferred using these payment methods are not processed right away. Credit and debit card transactions go through a bank settlement process that can take up to 72 hours to clear and settle. And digital wallet transactions, like Zelle, are not true real-time payments because they are non-bank money transfers that occur between personal wallet accounts, not bank accounts. Online transactions made through the Automated Clearing House (ACH) system can process same-day and next-day payments, but payments are cleared in batches, which means that funds are not available until the settlement process is complete and the payments clear.

Real-Time Payments in the US

In November 2017, The Clearing House brought real-time payments to the U.S. by launching its RTP® (Real-Time Payments) Network, the first new payments system in the U.S in 40 years. The RTP network is a real-time payments system that all federally insured depository institutions can use to clear and settle payments in real time. Its network serves as a platform that allows banks and other financial institutions to create and deliver new innovative products and services to their customers. According to The Clearing House’s website, the RTP network currently connects over 50% of all demand deposit accounts, such as checking accounts in the U.S., and is expected to reach nearly all U.S. accounts in 2020.

Businesses and consumers who bank with financial institutions that support RTP technology can benefit in several ways. For example, they can:

• Send and receive payments around the clock, 7 days a week, 365 days a year.
• Initiate payments from their existing accounts—no need to set up a separate funding account.
• Receive payments within seconds of the sending bank initiating the transaction.
• Manage cash flow more easily.

Consumers, businesses, and government entities can use the RTP network. RTP technology was designed to facilitate payments across all payment categories, including business-to-business (B2B), business-to-consumer (B2C), consumer-to-business (C2B), peer-to-peer (P2P), government-to-citizen (G2C), and account-to-account (A2A) transactions. As more and more businesses, consumers, and municipalities embrace digital payment methods, financial institutions all across the US are utilizing the RTP network’s capabilities to create faster and safer payment processing services.

The FedNow Service

FedNowSM is another real-time payment and settlement service created by the Federal Reserve Bank that will incorporate clearing functionality into the process of settling payments. This functionality enables banks and financial institutions to exchange the debit and credit information needed to process payments and notify customers whether the payments were successful. FedNow is expected to go live in 2023 or 2024.

How Does Real-Time Payment Technology Affect Businesses?

Because funds are available much faster, real-time payments will likely have a significant positive impact on a business’s cash flow—which can in turn improve budgeting, financial projections, and overall cash management. In addition, real-time payments technology could also help improve operational efficiencies and boost customer engagement and satisfaction.

A 2018 survey conducted by Ovum and ACI Worldwide found that 77% of merchants surveyed across the globe expect real-time payments to eventually replace physical payment cards. The survey also revealed the following statistics related to business management and banking.

• At a global level, 51% of all merchants, billing organizations, and retail banks were expected to increase their I.T. budgets for payments-related projects in 2018.
• Real-time payments have become central to planned customer service improvements for the majority of merchants, retail banks, and billing organizations.
• Over three-quarters of organizations expected, or experienced, customer service gains from real-time payments.
• At a global level, 68% of merchants, 72% of billing organizations, and 78% of banks predicted that the combination of real-time payments will lead to a decline in the importance of payment cards over time.

Moving to real-time processing has a number of business advantages, such as increased speed in transferring money, improved cash flow, and minimizing fraud exposure. But in spite of the apparent benefits, U.S. businesses have been slow to embrace the real-time payments model. Some of the factors contributing to this include:

• The limited number of banks and other financial institutions that can currently send and receive real-time payments.
• Uncertainty within the payments industry about which real-type payment system will prove to be the most successful.
• The high cost of investing in new technology necessary to switch from batch processing to support real-time payment processing.
• Lack of awareness and information.
• Low business transaction limits (RTP’s limit is currently capped at $25,000).

What Lies Ahead for Real-Time Payment Processing

For the foreseeable future, real-time payment models will continue to exist side-by-side with existing payment systems as fintech companies invent new ways to move money. Although it’s unlikely that real-time payments will replace payment models that currently serve a specific function, such as regularly scheduled payroll payments made via direct deposit ACH money transfers, a business may decide to implement instant payments to pay suppliers when goods or services are delivered. Along with traditional payment methods like wire transfers, credit and debit cards, prepaid cards, digital wallets, and person-to-person (P2P) applications like Venmo, real-time payment technology will continue to evolve.

As more and more large and small financial institutions gain access to the RTP network—and the FedNow service when it is released—the popularity of instant payments could accelerate quickly, and both consumers and businesses will begin to understand the benefits of having one more payment option. Real-time payments technology provides businesses and customers with a variety of benefits, such as improved cash flow, simplified money management, reduced chance of fraud, and the peace of mind that comes with knowing that money transfers happen instantaneously.