In a time of whirlwind change within the payments landscape, one thing is certain: Fast transactions are a must.
So how can everyone from small business owners to gig workers and multinational corporations meet the demands of commerce in the digital age? Increasingly, they turn to real-time payments (RTP).
What are real-time payments?
Real-time payments refer to transactions between bank accounts that are initiated, cleared, and settled instantly (or, more accurately, in just a few seconds). Unlike other electronic transfers, RTP systems also function 24/7/365 regardless of a financial institution’s operating hours. Real-time payments in the U.S. run through the RTP network developed by The Clearing House, with alternative platforms available across fifty-plus countries.
Yet the benefits of RTP extend beyond just speed, and instant payments technology is set to become even more widely available in the coming months. Let’s take a closer look at the ways real-time payments simplify financial operations and how new players in the space could accelerate uptake.
What can real-time payments really do?
Although online payments have now existed for decades, real-time payments platforms solve issues ranging from cash flow management to security and reconciliation—all of which can slow a growing business down.
Faster than ACH payments, cheaper than wire transfers
To illustrate why many organizations see instant payments as a modern solution well worth the investment, it’s helpful to compare RTP with two of the most common transfer tools: ACH transactions and wire transfers.
ACH transactions are a reliable and affordable way to send money between accounts in the US but often take one to three business days to clear. This adds in more time and uncertainty while businesses and banks wait for a payment to appear.
When it comes to wire transfers, international payments are finalized in as little as a few hours but they also carry service charges between $25 and $50. For businesses that frequently conduct lower-value transactions, these fees are likely unsustainable.
Streamlined cash flow management
Proponents of RTP also cite it as a way to more easily manage cash flow, a concern that’s particularly important for small- and medium-sized businesses.
Because RTP are processed instantly, there’s no need to wait for funds to become available. This reduces the lag time that was once a cumbersome reality of liquidity forecasting, decreasing lean firms’ reliance on credit and taking the guesswork out of sending or receiving vendor funds.
Additionally, RTP data is submitted in accordance with ISO 20022, the global standard for payments messages. That brings real-time transparency for reconciliation and bookkeeping within reach.
A modernized payroll system
Finally, there’s a growing use case for RTP in payroll.
Rather than a traditional fixed payroll schedule—bi-weekly in the U.S. or monthly in most other countries—RTP provides employees their earned income at any time. For instance, gig employees who may log most of their hours in a short period can use instant payments to access funds with more flexibility.
In emergencies, too, RTP networks allow companies to make payments to employees or contractors on weekends, nights, and holidays.
The Federal Reserve enters the world of instant payments
Analysts are optimistic about RTP’s global uptake, with a recent McKinsey report expecting instant payments to “continue at double-digit rates, even faster than the healthy 10 percent growth rates for cards over the past two years.”
A crucial catalyst could be central banks—none more high profile than the Federal Reserve, which recently developed its own alternative to RTP. Dubbed FedNow, the service will officially launch in July with a core clearing and settlement functionality plus value-added features. Tom Barkin, president of the Federal Reserve Bank of Richmond and FedNow Program executive sponsor, describes this as “an important milestone in the journey to help financial institutions serve customer needs for instant payments to better support nearly every aspect of our economy.”
FedNow vs. RTP
The FedNow service and its real-time payments predecessors both provide instant transactions, but there are a few key differences.
As mentioned, RTP in the U.S. runs on a network provided by The Clearing House; today, this network reaches 65% of demand deposit accounts (DDAs) and has 274 participating banks and credit unions. FedNow is linked to the Federal Reserve’s FedLine Network, which serves more than 10,000 financial institutions.
Both instant payment methods have low fees—FedNow’s is set at $0.045 per transaction, to be paid by the sender—and, just like RTP, FedNow is backed up by ISO 20022. As of FedNow’s launch, though, the transaction limit is comparatively low. While The Clearing House’s RTP lets businesses send up to $1 million, FedNow will be capped at $500,000.
The future of real-time payments
As it stands, RTP only makes up a small portion of the overall payments pie globally. Yet despite lingering hurdles of adoption and accessibility, projections put the compound annual growth rate of real-time payments at 33.5% over the next five years.
Efficiency and speed are defining the next generations, and RTP is emerging as one solution that could meet the demands of an increasingly global economy.
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