Open Banking
Open Banking
July 8, 2024
5 min

Understanding Instant Payouts: A Complete Guide for Businesses


Would you rather get paid today, tomorrow, or 10 days from now? Our guess is that you’d choose the quickest option.

Unfortunately, that option doesn’t always exist as most standard payouts take at least a few days to be processed appropriately. However, instant payouts allow you to transfer funds to an eligible debit card or bank account within minutes of a transaction.

Whether you're a new startup founder that needs quick access to your earnings to bolster your available balance or an existing business looking to streamline cash flow, this technology could help you (and your customers) realize massive benefits.

But what exactly are instant payouts, and how do they work? Throughout this article, we'll cover:

  • What instant payouts are
  • The 6-step instant payout process
  • 2 challenges of instant payouts
  • 3 benefits of instant payouts

What Are Instant Payouts?

Instant payouts are funds transfers that happen within a few minutes after a transaction has been made. Unlike traditional payment options that can take days to process, instant payouts leverage application programming interfaces (APIs) to connect to real-time payment rails like RTP and FedNow, which enable faster payment processing times.

However, to truly understand the importance of these payouts, we need to take a look at their historical background. 

More traditional payment methods like bank transfers and paper checks often have longer processing times due to factors such as interbank procedures, manual verifications, and the batch processing of payments. But as technology progressed—thanks to electronic funds transfer (EFT) systems—so did the way money was able to be transferred back and forth between associated bank accounts.

How Instant Payouts Work

The instant payouts process is mostly enabled by APIs that expedite communication between financial systems. However, the payment processors themselves play a vital role in guaranteeing that funds are transferred securely and efficiently. Specifically, these processors use advanced algorithms to authenticate transactions, confirm fund availability and execute transfers.

Networks like the Real Time Payments (RTP) network in the U.S. form the foundation for immediate money transfers. These networks are designed to handle large transaction volumes swiftly and securely, ensuring funds reach their destination almost instantly.

Banks are the last piece of the puzzle in these fund transfers as they need to be ready to process real time transactions. But there are many more key players involved in the instant payout ecosystem than just the banks themselves. Instant payouts are also supported by technology and businesses.

  • FinTech companies are often the innovators behind many instant payout solutions, and often use instant payout solutions themselves. They develop the APIs and platforms that facilitate real-time transactions, offering these services to businesses and individuals.
  • Open Banking Payment companies like Trustly handle the entire account-to-account payment journey to ensure funds are transferred securely and quickly.

The 6-Step Instant Payout Process

Now that we’ve covered who is actually involved in sending and receiving instant payouts, the process itself should start to make more sense. But we still need to cover what this process actually looks like from start to finish so you have a sense of how these transactions are being handled behind the scenes.

Here’s how instant payouts are initiated and completed step-by-step:

  1. The process kicks off when the sender makes a transfer request through their preferred payout method. For example, this can be done through platforms like a gig economy app, a freelance marketplace, or a company's payroll system.
  2. The request triggers an API call to the payment processor sharing details like the transfer amount, recipient’s account info, and any required authentication. credentials, including credit card or debit card details if applicable.
  3. The payment processor checks and verifies the transaction details to ensure there are funds from the sender and that the recipient's account information is correct. This step often includes security measures to prevent fraud.
  4. Once everything is verified the transaction is processed. The payment processor connects with the real time payment network and the recipient's bank to kickstart the transfer.
  5. The real time payment network processes the transaction promptly by debiting funds from the sender's account and crediting them to the recipient's account instantly. This involves updating both sending and receiving bank ledgers. Instant payout amount limits and daily limits are also checked at this stage.
  6. Both the sender and recipient receive notifications about the completed transaction. The recipient can then access funds for instant liquidity.

2 Challenges of Instant Payouts

The speed and convenience of instant payouts can help businesses realize significant benefits in how they send and receive transactions—but this convenience could come at a cost if not done correctly. Like any technology, instant payouts come with their own set of challenges that you’ll have to consider before you decide to go all-in.

Here are some of the limitations of instant payouts.

1. Security Concerns

One of the biggest challenges with instant payouts is making sure that the transactions are actually secure. 

The instant nature of these transactions can give potential bad actors a window to exploit weaknesses before any suspicious behavior is noticed. More specifically, the financial data involved in these payouts is a prime target for cybercriminals. 

Fortunately, there are plenty of protective measures that businesses and financial institutions can take to ensure that their sensitive data is secure. For starters, businesses can tackle these data security issues by adding multi-factor authentication (MFA) and asking users to confirm their identity before a transaction is made.

Using advanced fraud detection algorithms to monitor transactions in real time can also help spot and highlight suspicious activities before they happen. And finally, it's crucial to ensure that all your transmitted data is encrypted to prevent any potential data breaches.

2. Regulatory Hurdles

Government regulators, like the U.S. Consumer Financial Protection Bureau, also pose a significant challenge to businesses who want to realize the full benefits of instant payouts. While the goal of these regulations is to prevent money laundering, fraud, and other illegal activities, they also have significant impacts on the implementation and management of instant payouts. 

Fortunately, there are clear guidelines for what businesses need to do to navigate these regulations.

For example, financial institutions are required to confirm their customers' identities to ward off behavior through a process known as Know Your Customer (KYC). Similarly, compliance with Anti Money Laundering (AML) regulations involves monitoring and reporting transactions to authorities. 

Businesses and financial institutions can also leverage Open Banking technology to automate these compliance procedures, streamline adherence to KYC and AML rules, and efficiently manage instant payouts.

3 Main Benefits of Instant Payouts

If you’re able to put solid security measures and place and ensure compliance, instant payout technology can really boost your business. Here are just some of the ways that these payments can benefit your business and customers alike.

1. Rapid Payment Processing

Unlike bank transfers or checks that can take several business days, these payouts transfer money within seconds. Instant payouts are incredibly fast. And instant payout fees are often less than other payment methods, maximizing value for both businesses and individuals. Businesses benefit from smoother operations and better relationships with workers, freelancers, and suppliers. And for the individuals, getting earnings, refunds, or payouts ensures they’ll have access to cash when they need it.

2. Streamlined Cash Flow Management

Instant payouts help businesses manage their cash flow by providing immediate access to funds. These funds can then be used to cover expenses, invest in growth, and handle emergencies more efficiently. Small businesses and startups can especially benefit from this quick access to revenue by ensuring that they'll never experience cash flow delays due to pending transactions. Similarly, having funds readily available in a payout account or setting up a regular payout schedule can safeguard your business in the cases of any crises or major disruptions to your daily operations.

3. Enhanced User Experience

Regardless of what industry you’re in, customers love getting refunds, rebates, and payouts. Even better, instant payouts eliminate the wait, so your customers can access these funds almost immediately. For example, e-commerce platforms leveraging instant payouts can offer instant refunds to build trust across their customer base and encourage repeat business.

Send and Receive Instant Payouts With Trustly

If you want to realize the full benefits of instant payouts, you need the right tools. 

With Trustly, you can reduce the cost of payment acceptance by leveraging the power of modernized ACH payments. Plus, Trustly handles the entire payment experience end-to-end so your customers can make payments via their bank account without leaving your website or app.

Ready to give your customers the payment experience they deserve? Schedule a demo with our team to get started.

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