The Ultimate Guide to Real-Time Payments (RTP)
Until recently, processing financial transactions was relatively slow. While businesses and consumers could initiate transactions quickly and efficiently through bank-to-bank transfers, debit cards, and credit cards, money transfers took much more time to settle. Depending on the payment method and bank communication, transactions would take hours or several business days to process fully! Fortunately, we now have the technology to settle transactions instantaneously, shaking up how businesses perform financial transactions.
We're talking about real-time payments (RTPs). Also known as "instant payments" or "immediate payments," real-time payments ditch lengthy settlement times in favor of round-the-clock processing, allowing small businesses to move funds faster than ever before. These instant payments are revolutionizing financial transactions across industries, improving corporate cash flow, ensuring payment recipients have faster access to their funds, and more.
Let's explore what real-time payments are and how they can benefit your business.
A Quick Definition
First things first: What are real-time payments?
It's all in the name! RTPs are account-to-account transfers that process in real time. These transfers settle immediately and continuously, 24 hours a day, 365 days a year. RTP systems provide immediate fund availability to payment recipients, removing the old standard of waiting several business days for transactions to settle. Exact timing varies, but most RTPs process within seconds, and account balances typically reflect changes just as quickly.
Because RTPs are so fast, these transactions are irrevocable. That means payees can't deauthorize or cancel transfers. Once you initiate them, they go through fast.
Evolution and Relevance in Modern Financial Ecosystems
The modern financial transaction landscape looks nothing like it did in decades past. Businesses and consumers went from relying on cash and paper checks to debit and credit cards to perform transactions. Now, we have secure chip technology and the ability to send money in numerous ways. Not only can you turn to a bank to initiate transfers, but you can do it all from a smartphone, use digital wallet services, and more.
RTPs are the newest evolution in financial transactions, and it's a long time coming. In the United States, it's still young. However, the roots of this technology go back several decades. The earliest RTP systems date back to the 1970s and 1980s in countries like Japan and Switzerland.
True real-time payments weren't available for the United States until well into the new millennium. The Federal Reserve announced plans to improve the speed and efficiency of payment systems in the United States in 2012. It took several years for the organization to develop strategies and form a task force to make it happen. Meanwhile, The Clearing House led the charge in the private sector. In 2017, The Clearing House launched its real-time payments platform, the RTP network. The Federal Reserve went live with its RTP rail, FedNow, in 2023.
The technology evolved significantly in the last decades. Earlier networks were capable of processing and settling transactions at real-time speeds. However, they faced limitations outside business hours, weekends, and holidays. Today, RTP networks largely operate around the clock, allowing small businesses, large enterprises, and individual consumers to send funds instantly at any time.
More than 70 countries across six continents support real-time payments today. Comparatively, the United States lagged in adopting a true RTP network. Governments in several countries created networks well before the U.S. However, the U.S. is catching up. In 2023, roughly 3.5 billion RTP transactions occurred in the United States, a big jump from the year prior. Forecasters expect annual RTP transactions to reach nearly 14 billion by 2028 as more banks, credit unions, and other financial institutions opt in. Globally, there were over 266 billion real-time payments worldwide, and projections show that real-time payments rails will move a staggering $58 trillion by 2028!
RTPs are becoming more relevant with every passing year, and it's not hard to see why. From a consumer perspective, RTPs provide convenience and accessibility, eliminating the multiday wait periods of yesteryear. Meanwhile, businesses have much to gain from RTPs. Whether performing business-to-business transactions or paying contractors, the speed of RTP networks is a game-changer in countless industries.
How Do They Work?
Real-time payments operate on advanced networks. Transactions occur on entirely new infrastructure built for the digital world, processing transactions far faster than standard electronic fund transfer (EFT), ACH transfer, or even same-day ACH. So, how do real-time payments work?
To understand how RTPs are possible, you need to understand the parties involved.
• Payer: The payer is the individual or company that initiates the funds transfer. This party is sending money to a recipient and must start the transaction.
• Payer Financial Institution: The payer's financial institution is responsible for authenticating and authorizing the RTP.
• Payee: The payee is the individual or company set to receive funds through an RTP.
• Payee Financial Institution: The payee's bank, credit union, or other financial institution receives payment information for the RTP and makes funds available to the recipient.
• Real-Time Payment Network: The RTP network is where data exchange occurs. It's a central network operated by a group of banks or a financial authority and is how financial institutions communicate to process real-time payments.
Let's demystify the process of real-time payments step by step.
• Step 1 - Initiation: RTPs start with initiation. The payee must initiate a real-time payment where accepted. That can be at a physical bank branch or a financial institution's online portal/app. Like any other type of financial transaction, payees can provide personally identifiable information like bank account numbers and names. However, payees can also set up RTP transactions via more modern methods like QR codes.
• Step 2 - Authentication: After initiating the RTP, the payee's bank authenticates several details. First, the financial institution verifies the payee's identity. Then, it verifies that the payee has enough funds in their account to perform the transaction.
• Step 3 - Transaction Authorization: If authentication is successful, the payee's financial institution authorizes the transaction. It sends payment instructions to the payee's bank via the RTP network. While banks authorize other transaction methods in batches, either once at the end of the day or several times during business hours, they authorize RTPs individually and in real-time.
• Step 4 - RTP Processing: Next, the financial institutions for the payer and payee communicate through the RTP network. The payee's bank receives payment instructions, validates the message, and accepts the payment.
• Step 5 - Notification and Settlement: Once processing in the RTP network is complete, the transaction settles. The payer's bank removes funds from their respective accounts. Meanwhile, the payee's bank transfers funds into the recipient's account for immediate access. Both payee and payer receive confirmation. Notifications can occur via text message, email, or smartphone push notification to confirm the financial transaction was successful.
What are the Benefits?
Real-time payments are beneficial in many ways. They provide advantages to consumers, businesses, and even financial institutions.
The biggest perk is the faster availability of funds. For consumers, this is a game-changer. You can send or receive money instantly; recipients can access those funds without lengthy wait times. It's as fast as physically handing cash to others! Businesses benefit from that accessibility, too. Companies can enjoy stronger cash flow management. As recipients, businesses can use money as soon as it's available. As payers, companies can improve the customer experience. Imagine paying contractors, freelancers, gig workers, and other recipients worldwide in real-time. It's a great way to build a better experience, retain talent, and keep your recipients happy.
RTPs also help improve productivity and overall payout efficiency. Companies like yours benefit from reduced manual work and better operational efficiency thanks to the immediacy of RTPs. RTPs can streamline how you send money, possibly unveiling new opportunities to expand your business and optimize productivity.
Finally, RTPs offer stronger transaction certainty. Real-time payments are data-rich and come with immediate confirmation after processing and settlement. There is no more waiting around to ensure money gets to its destination successfully. Furthermore, the amount of data accompanying RTPs makes tasks like accounting, invoice fulfillment, and payment reconciliation far easier.
Exploring Various RTP platforms
Currently, there are over 50 different real-time payments rails worldwide. It's important to note that consumers and banks can't access RTP networks directly. Instead, they must initiate these transactions through a participating financial institution.
In the United States, there are two RTP platforms. These include The RTP Network, owned and operated by The Clearing House, and The FedNow Service from the United States Federal Reserve.
The RTP Network
The Clearing House's RTP Network launched in 2017 and was the first instant payment rail available in the United States. It led the charge for RTPs throughout the country, causing a significant rise in demand.
This platform allows participating financial institutions to integrate their infrastructures into the network. Transactions through this RTP rail settle through a pre-funded joint master account held at the Federal Reserve Bank of New York. What's unique about The RTP Network is that it requires all participating institutions to pre-fund the joint account and maintain a sufficient balance to meet liquidity needs.
The FedNow Service
FedNow went live in 2023. The United States Federal Reserve owns and operates the network, which facilitates instant payments all day, every day. FedNow guarantees transactions within 20 seconds.
This payment rail also offers better liquidity management for participating financial institutions. FedNow has no funding requirements, either. Transactions through this rail settle between Federal Reserve Bank master accounts. Financial institutions can also do liquidity management transfers (LMTs) for bank-to-bank funding.
Comparison of Popular Systems and Their Features
Let's look closer at the difference between FedNow and The RTP Network.
Both rails offer instant processing and immediate availability of funds. There are some differences between the two for participating financial institutions, particularly regarding pre-funded accounts. However, the two networks operate identically from a consumer or business standpoint. That said, there are a few differences you should know about.
Cycle Day
FedNow's cycle lasts from 7:00 A.M. to 7:00 P.M. the next day. Meanwhile, The RTP Network is from 12:00 a.m. to 11:59 p.m. the next day.
Capabilities
Consumers and businesses can use both rails to send money, request payment, or request the return of funds. However, only FedNow can do liquidity management transfers for bank-to-bank funding.
Max Transfer Amounts
By default, FedNow limits transactions to $100,000. However, financial institutions can request an increase to $500,000. The RTP Network caps transactions at $1 million.
Common Challenges and Strategies for Overcoming Them
There's much to love about real-time payments. However, this newer payment rail does come with some challenges.
The biggest is an increased risk of fraud. This challenge exists because RTPs process so fast. They're irrevocable for a reason. Payments settle so fast that it's impossible to cancel or deauthorize them after initiation.
That's a problem because it leaves little room for businesses and financial institutions to detect fraudulent activity. Companies must adopt strong fraud prevention strategies to mitigate risks. Comprehensive security protocols and advanced fraud management technologies are paramount. Investing in security and fraud mitigation tools can prevent criminal activity before RTP initiation begins.
Another challenge is evolving regulations. This problem affects businesses operating in different jurisdictions, facilitating RTPs across borders. Because rules vary worldwide, it's important to understand regulations and take steps to comply fully. That may mean working with attorneys and regulators to ensure full legal compliance for businesses.
Innovations in Instant Payment Technology
Widespread adoption is still early. More people are realizing RTP's potential and applying it to many use cases, and the growth will only continue. However, that doesn't mean innovation is stopping.
New technology is on the horizon to improve instant payments. The biggest innovation in the financial world is full interoperability with different systems. Currently, the two available payment rails operate independently in the United States, and financial institutions must participate in the networks to make the service available to members. RTP systems struggle to interact seamlessly with other payments domestically and internationally.
Efforts from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) will soon change that. SWIFT is developing technology that aims to open instant payment systems across borders
Compliance Requirements for Real-Time Payment Providers
As mentioned earlier, financial institutions must participate in networks to provide access to RTP payment rails. However, they must meet certain eligibility requirements to become real-time payment providers. The compliance requirements for the RTP Network and FedNow Service are similar.
The Clearing House only allows federally insured U.S. depository institutions to join the RTP Network. Qualifying institutions may connect to the network directly or through third-party service providers.
Institutions must be eligible to maintain a master account with a Federal Reserve Bank to join FedNow. Payment companies and other non-bank organizations can't participate in FedNow directly but can become service providers or agents for qualified financial institutions.
International Collaboration and Interoperability
Instant payments are available in many countries around the world. Next to FedNow and RTP in the United States, widely used networks in other countries include:
• The Faster Payment System (FPS) in the United Kingdom
• Immediate Payment Service (IMPS) in India
• Pix in Brazil
• Swish in Sweden
• New Payments Platform (NPP) in Australia
• The Zengin System in Japan
• PayNow in Singapore
• PesaLink in Kenya
RTP payment rails are becoming more prominent. However, governments develop systems and networks to operate domestically. Currently, these networks have no true interoperability. Even in the United States, the two available rails have no interoperability. You can't facilitate transactions between the RTP Network and FedNow service. It's either one or the other.
That lack of interoperability also means you can't initiate RTPs internationally. However, that may change in the not-too-distant future. Collaboration among countries may pave the way to global real-time payments. Many organizations, including SWIFT, are actively developing technologies to facilitate instant payments across borders.
Get Started With Dots Today
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