RTP vs FedNow: What's the Difference?

The Difference Between RTP and FedNow

The rise of gig work and side hustles has paved the way to brand-new ways people can earn money, but it's also highlighted a glaring shortcoming in how people receive money: Lengthy payment processing times. As more and more people explore nontraditional ways to earn an income, the demand for instant payments continues to climb. Everyone, from independent contractors to marketplace sellers, wants ways to get paid on their time.

Thankfully, the financial landscape is working to keep up with that demand. In the last several years, two new payment rails have emerged, offering speed and convenience to payment recipients while giving businesses new payment method offerings to help them stand out.

In this blog, we'll explore real-time payments (RTP) and FedNow, two different payment rails for instant payments.

A Brief Overview

Conventional payout options are notoriously slow. ACH payments can take three days or more to process. Meanwhile, wire transfers take at least a day and can come with up to five days of processing if payers move money internationally. Digital wallet and mobile payment services like PayPal and Venmo are quicker, but they still take time and may come with other hurdles for payment recipients to navigate until funds reach their bank account.

RTP and FedNow trump all the alternatives in terms of speed and efficiency. While still relatively new by comparison, instant payment services provide ultimate control and flexibility. Any business that sends money to contractors or users can benefit from offering these instant payment rails.

Both RTP and FedNow are game-changers, but there are some differences in how they work and the benefits they offer.

What is FedNow?

FedNow is the newest instant payment rail to launch in the United States. The Federal Reserve announced its development in 2019, and FedNow began rolling out in July 2023.

The goal of FedNow was to offer instant access to funds around the clock. The great thing about using FedNow is that transactions can occur 24 hours a day, seven days a week, and 365 days a year! That means people can receive payment on nights, weekends, and holidays, times that often create delays for traditional payment methods.

To make FedNow possible, the payment infrastructure in the United States had to expand. FedNow is built on ISO 200022 standards, which improve transparency as money moves.

With FedNow, recipients can access their funds in seconds — 20 seconds or less, to be exact!

When transactions occur, the exchange of information happens instantly between the payer's and recipient's bank accounts. Interbank settlement happens once the recipient's bank confirms account information.

What's unique is that FedNow enhances liquidity management for participating financial institutions. Funds come out of and go into each bank's Federal Reserve master accounts.

Understanding Real-Time Payments (RTP)

Real-time payments (RTP) is a system that began in 2017. As the name implies, it processes U.S. domestic transactions in real-time, offering immediate settlement 24 hours a day, seven days a week and 365 days a year. Like FedNow, holidays, weekends, and closed banking hours don't affect RTP.

RTP payments are only available at banks that opt into the network, and it's accessible to financial institutions that hold roughly 90 percent of U.S. demand deposit accounts (DDAs).

Financial institutions must have a separate, pooled account for liquidity to use the RTP system. Just like FedNow, instant payments on the RTP network happen through messages using ISO 20022 standards.

To initiate an RTP payment, the payer has to make a credit push transaction. The payer's financial institute then authenticates the instructions and the availability of funds. The Clearing House's RTP network will validate the transaction and send information to the recipient's financial institution. When the recipient's bank accepts the message, the RTP network settles the payment, responds to the payer's bank, and confirms the settlement with the recipient's bank.

How These Two Payment Rails Differ

These payment rails are impressively quick, changing the financial landscape. Instant payment services are in high demand, and businesses can employ these methods through payment service providers to get money to people quicker than ever.

While the end result is the same, there are some major differences between these rails that you should be aware of.

1. Owned & Operated by Different Organizations

The first difference is who owns and operates the networks. Both play an important role in the larger U.S. financial system, but two different organizations were responsible for their creation and currently hold management duties to keep them operational.

The Clearing House

The Clearing House is responsible for RTP. The Clearing House owns and operates the core system infrastructure for payments in the United States. You may be familiar with other payment rails they operate, including ACH and wire transfers.

The banking association and payments company are under the ownership of a consortium including more than 20 of the world's largest commercial banks.

Federal Reserve Bank

The Federal Reserve created and operates FedNow. The Federal Reserve is the central bank of the United States. It regulates financial markets, sets interest rates, and more.

While the Reserve is responsible for many financial matters in the United States, FedNow was a substantial investment. The FedNow Service was a much-needed expansion of the country's payment infrastructure, and the Federal Reserve invested over half a billion dollars to make it happen.
2. Limits Per Transaction

These payment rails also have different transaction limits. For the RTP system, payers can send up to $1 million. FedNow has a lower transaction limit of $100,000, but financial institutions can request up to $500,000

3. Service’s Cycle Date

RTP and FedNow process transactions uninterrupted, settling them 24 hours a day. However, the service cycle days are slightly different.

FedNow's cycle day begins at 7:00 A.M. and ends at 7:00 P.M. the next day. For RTP, the cycle day is 12:00 A.M. to 11:00 P.M. the next day. Both cycle dates are in Eastern Time.<p>

4. Access (write about how fednow is accessible to smaller local banks in communities across the U.S., also write about how most banks are only currently implementing fednow receive not send)

FedNow and RTP aren't available at all financial institutions.

In the case of RTP, the payment service is only available to financial institutions that hold about 90 percent of the United States DDAs. The latest Clearing House estimates show that the network only reaches about 62 DDAs. Financial institutions, even those with access to the RTP network, must opt in.

FedNow has a slight advantage over RTP in terms of access. Because it's owned and operated by the Federal Reserve, it's accessible to more financial institutions. FedNow integrates with the Federal Reserve's network, making it accessible to smaller banks, credit unions, and communities across the United States.

Currently, most banks only implement FedNow receive but not send. However, the number of institutions that are adopting FedNow is increasing.

5. Interoperability Between Services is Not Possible

The RTP and FedNow networks can't communicate with one another. There is zero interoperability between them. Despite using similar ISO standards, the payment rails run on entirely different infrastructure. That means banks can't send a FedNow message on the RTP network or vice versa.

That can be challenging, especially as both rails are still relatively new. Banks may offer one or the other, but the inoperability creates issues for institutions that want to provide both.

6. Authorizes Bank-to-bank Funding

Bank-to-bank funding refers to the ability of financial institutions to send funds to each other, either directly for liquidity management or through payment service providers. This type of funding is important because it helps financial institutions maintain enough liquidity in their accounts to support instant payments.

Currently, RTP doesn't support bank-to-bank funding.

FedNow, however, does. FedNow supports transfers between financial institutions either through their respondents or for internal purposes. These transfers are called liquidity management transfers (LMTs). FedNow LMTs are possible because funds for transactions come from and go into the Federal Reserve master accounts of each financial institution.

Meanwhile, financial institutions using the RTP payment must have separate pooled accounts for liquidity.

7. Authorizes Correspondent Banking

Correspondent banking is a process that allows one bank to provide services to another. Generally, this type of banking offers access to services in foreign markets.

A correspondent bank acts as an intermediary between domestic and international banks to conduct transfers.

FedNow does authorize correspondent banking. However, the RTP network does not.

Get Started With Dots Today

As you can see, RTP and FedNow are different but provide the same instant results. The differences between these payment rails impact access, availability, transaction limits, and more. Therefore, payers and recipients must choose which is right for their needs.

Businesses can benefit greatly from sending payments via these instant payment systems. They offer more control and versatility than ever before, allowing customers, app users, and recipients to get their funds in the most convenient way. Instant payment services are in high demand, and businesses offering them as payment options can stand out while providing the best experience possible.

If you're considering using RTP and FedNow, turn to Dots. Dots is a payment processing solution that simplifies how you send payouts. With Dots, you can send instant payments and offer several other options to meet the needs of your recipients. Utilize powerful features like customizable reporting, automated batch payments, and more.

Reach out to schedule your Dots demo today to learn more!