Real-Time Payments And What You Need To Know About It!
Updated: Nov 13, 2021
The modern financial landscape is evolving fast due to the recent surge in technology in the financial sector. People can now do a lot more things than they were able to only a few decades ago. One such concept that has seeped into the mainstream landscape is real-time payments. It has made it vital for businesses to integrate the feature in their payment infrastructure to facilitate and create efficient payment processing. We here at the Zed Network work with FX firms, Fintech and Legal Tech companies, Crypto trading firms, and other multinational companies to create comprehensive payment orchestration platforms.
Due to our close ties with the financial world, we’ve witnessed the rise in the popularity of real-time payments or RTPs. So we know all there is to know about it, and we thought you should too. In the following passages, we will talk about real-time payment networks, banks, and other services and how it’s impacting the world around us. The first thing you have to know, however, is what real-time payments are? Well, let’s talk about it!
What Is Real-Time Payment?
Alan Safahi, the founder of Zed, explained real-time payments in the simplest terms. It’s the type of payment that is initiated and settled instantly. According to Alan, real-time payment networks should provide 24x7x365 access, and it includes weekends and holidays. In short, these networks are always online to process transfers. In the US, the most prominent RTP network is The Clearing House’s RTP Network. The highly anticipated FedNow service from The Federal reserve will also fall under the category of real-time payment network. The service is currently slated to launch in 2023.
What’s The Difference Between RTP and Faster Payments?
Often we see people confuse faster payments with real-time payments, and you should know they are not the same thing. While they may be similar in some regards, they do have some key differences. For example, popular faster payment service providers like Nacha’s Same Day ACH post and settle payments faster than traditional payment rails. Still, the critical difference here is that they do not do it instantaneously.
Another faster payment example that isn’t a real-time payment solution is Mastercard’s and Visa’s push payment solutions. While the service does message transactions within seconds or minutes, they do not immediately settle them, making them a faster payment service rather than a real-time payment solution. So the gist of it all is that, while all real-time payments can be considered faster payments, not all faster payments can be regarded as real-time payments.
Real-time payments offer several upsides, the most significant being that they are done instantly. It’s a game-changer for those individuals or businesses that need the funds as soon as possible. Another upside to real-time payment networks is that it brings end-to-end communication in a space that usually saw one-way communication before.
Before, two parties had to go outside of the payment system to exchange information back and forth. Still, with real-time payment networks, you can connect the payment with payment data together in a single transaction. Add to the fact that it eliminates lag times and a lack of transparency surrounding the arrival of funds that usually hindered communication before. A fragmented communication process comes with challenges that impact everything from business flow to liquidity and risk management, and real-time payments help to alleviate these hindrances.
Real-time payments are the efficient payment journey where Bilateral communication through integrated information flows, instant payment confirmation notifications, and settlement finality ensure better financial control, cash positioning, and liquidity management. Along with that, The Clearing House’s RTP network has shown there several use cases exist for making payments in real-time. Also, real-time payments are irrefutable, meaning that the sender cannot reclaim the transaction once it goes through.
Key RTP Players
While it broke into the mainstream in recent years, real-time payment isn’t a new concept at all. It was first developed in Japan in 1970, and within 2010, countries like the United Kingdom, China, and India had their own RTP rails. By 2019 FIS calculated that around 54 countries had their RTP networks and systems, which was a significant jump from 2014. The US, however, lagged in real-time payment network integration, and till now, it only has two major players, The Clearing House’s RTP and The Federal Reserve’s pilot program FedNow.
The Clearing House’s RTP network
When The Clearing House announced its RTP network, it became the first new payment system to be announced in the US in forty years. TCH RTP network works across several niches providing efficient payment solutions for B2B real-time transactions, P2P real-time transactions, Payroll, Request for Pay (RfP), and many others.
One reason why real-time payments have made such headway in the US recently is because of the role technology providers play in the process. Tech providers usually help banks connect to an RTP network with a streamlined process that makes things much more efficient. Companies like FIS, Sherpa Technologies, PayFi, ACI Worldwide, Fiserv, Volante, Jack Henry, and Alacriti have played vital roles in making this integration happen. According to Alan, enabling the providers is the only way to help all those banks use those providers right now effectively.
Another key player that emerged in the real-time payments landscape is the Federal Reserve. Back in 2019, The Federal Bank announced that Federal Reserve Banks were developing an RTP rail of their own. At first, the tentative release date for the service was 2023 or 2024, but it was later updated to 2023.
In 2021, the Fed has already launched a FedNow pilot program that consists of more than 200 financial institutions and processors and aid in the development, testing, and adoption of FedNow. Several high-profile providers such as ACI Worldwide, Finastra, Finxact, Fiserv, Jack Henry, and Shazam are already working on the project. If you want to check out the complete list, you can check FedNow’s Participant List for more details.
P2P And Its Relation With Real-Time Payments
P2P or peer-to-peer payment services have been on the rise for some time now, with popular companies like Zelle, Venmo, and PayPal dominating the sector. These companies have somewhat successfully replaced cash, checks, and IOUs as the primary method for transferring funds for people. Now, if you want to split the cost of dinner, rideshare, or rent and utilities, you can simply send it to one person instantly. The Mercator Advisory Group has found that people are fast adopting P2P payment apps, with PayPal leading the sector in market share. According to a recent study, around 54% of consumers have used PayPal within the past year, up from 47% back in 2017.
While Venmo comes in at second with 14% of consumers in 2020 and 13% used Zelle in 2020, which is up from 1% back in 2017. But what does it have to do with real-time payment networks? Well, with their integration into The Clearing House’s RTP network, multiple P2P payment apps can transfer the money instantaneously from the app to a bank account. Back in 2019, Venmo announced that it’s joining the TCH RTP network meaning it can now issue instant transfers routed through the network to the banks.
According to Alan, it’s a welcome change for the P2P payment company. It will allow individuals to input their checking account details and the transaction through The Clearing House’s RTP network. Earlier in 2021, the Early Warning Services and The Clearing House announced that Zelle’s transactions could officially be cleared and settled over the RTP network. The Bank of America and PNC Bank were the first to send Zelle payments over the RTP network.
Real-Time Payments And Its B2B Uses
The implication of real-time payments has gone way beyond P2P payments. Companies that once relied on outdated manual processes to make business-to-business (B2B) payments are now utilizing the RTPs available on P2P apps. One Mercator Advisory Group Viewpoint stated that 60% of respondents surveyed by the Association for Financial Professionals (AFPs) for its 2019 payments study said that B2B transactions would benefit the most from faster and RTP compared with other types of transactions systems. There are several perks to using RTPs for B2B payments like:
The ability to move rich data that provides actionable insights into corporate client needs.
Improved control over payments timing
Instant bill payment
Remittance data availability
Recognizing The Value Of Real-Time Payments
Merchants all over the globe are fast adopting real-time payments, and its adoption will only continue to rise as more and more uses pop up. Companies have already started to recognize the viability of real-time payments within their existing payment infrastructure. One recent Citizen’s Bank report stated that 90% of business leaders are interested in real-time payments. At the same time, another 2018 study by Ovum and ACI Worldwide found that 80% of merchants, retail banks, and billing organizations favored real-time payments and open banking.
It also stated that 92% of merchants and 82% of billing organizations with revenues of at least $5 billion expect to see customer service improvements due to real-time payments. While 84% of regional merchants, retail banks, and billing organizations anticipate customer service improvements from real-time payments. All in all, organizations of all types welcome the change real-time payment networks can bring and are eagerly adopting it into their existing payment infrastructure.
The Future Includes RTPs
As you can see, real-time payments are here to stay. RTP networks are changing how we do business and are creating an efficient business environment that impacts the level of services provided significantly. If you are looking to know more about the real-world implications of RTPs, then check out Zed’s take on RTP & Its numerous uses! And if you are a business looking to integrate RTP into your payment orchestration infrastructure, then contact us, and we can help you out. Finally, make sure to any questions regarding real-time payments or any other type of payment services you have or send them on our socials, and we will answer them all. And with that being said, that’s about all we have for you today. We will come back with something new for you soon. Until then, see ya!