If cash is still king, the novelty of real-time payments might be what ends its reign. This new seamless way of instantly moving money in real-time plays an integral role in developing the future of the payments landscape. In today’s digital climate, constant changes and new payment trends continue to speed things along – and there’s no sign of slowing down.
So, what exactly are real-time payments? In this post, we’ll cover what they are, how they work, and why they’re so fundamental to modern finance.
What Are Real-Time Payments?
Real-time payments (RTPs) are payments that are initiated and settled almost instantly. In other words, RTPs let consumers and businesses conveniently send payments directly from their accounts 24/7. When payments happen instantly and in real-time, the receiving party has immediate access to the funds sent to their account.
So, why is this revolutionary? For starters, the typical ACH method does not clear instantly. Plus, most of the transactional process is done and approved in designated “batches” throughout the day. This makes the process of retrieving and receiving money much slower, less secure, and less efficient.
Real-time payments are conducted over the RTP network, a system derived from the Automated Clearing House (ACH) that is pioneering the first core payments infrastructure in the U.S. This system makes the RTP’s “open loop” solutions possible, where payments are connected directly to bank accounts instead of a prepaid balance. This distinction is what gives consumers, merchants, customers, friends, and family the ability to make payments that can reach anyone around the world with a bank account.
Are Real-Time Payments Considered Faster Payments?
Even though they sound similar, “real-time payments” and “faster payments” don’t mean the same thing and shouldn’t be used interchangeably. RTPs are a form of faster payments but faster payments aren’t always completed in real-time. Faster payments are completed more quickly than traditional payment methods, but they aren’t instantaneous. Take a Visa charge for example; transaction messages can be sent in just a couple of seconds, but those transactions aren’t actually settled that quickly––which means those payments aren’t entirely processed in real-time.
What Is RfP in RTP?
RfP stands for Request for Payment and is a messaging system for sending payment requests and receiving funds throughout the RTP network. The RfP goes from biller to receiver while the RTP goes from receiver to biller.
Transactions that are strictly a credit-only push are more secure and efficient, but they’re unable to support debit; this is where RfP transactions come in. The RfP service sends an online or mobile message to the account holder to request a payment, and once the recipient of the request approves the funds themselves, the funds are pushed to the requester’s account using a real-time payment. RfP still allows for stronger security when it comes to billing and invoicing, can be automated, and lets people send their bills immediately.
RTP vs. ACH: What’s the Difference?
The Automatic Clearing House (ACH) is the fundamental building block of electronic money movement. It’s used to process electronic deposits and automate online digital payments. Whenever you get a check to your account via direct deposit or clear the funds for the paper check someone sent you in the mail, you’re using ACH.
ACH payments are electronic money transfers that move money from one bank to another using the ACH network, which helped carve the path for real-time payments. RTP is a new infrastructure with the rudimentary functions of ACH, but built for the digital age.
The main difference between the two is that RTP network payments settle in real-time with immediate clearance while ACH payments normally take hours or days. While ACH payments laid the groundwork, RTPs are setting the stage for the future of all types of electronic payments and money movement.
Why Are Real-Time Payments Valuable?
There are many advantages of RTP services that continue to benefit businesses and consumers alike. Here are some of the more notable benefits of real-time payments.
- Security & efficiency. RTPs are far more effective and safeguarded than credit cards and/or ACH payments. It is faster and more convenient for consumers and it doesn’t require them to provide any confidential payment or account information to a third party. Real-time payment credit transfers are just as fast as cash, but easier to manage without sacrificing security.
- Range of applicability. Because RTPs happen instantly, people are able to do more things with their money more frequently. For example, trading stocks immediately or monitoring sports betting is much more competitive and streamlined since it’s simple to quickly move and/or place cash in multiple places in a matter of seconds.
- Better communication and collaboration. RTP removes a lot of friction within the traditional payment space; it allows consumers to close gaps between all involved parties, such as customers and merchants or banks and other financial institutions.
- Innovative features. The leading technology, while still developing, creates space for fintechs to develop and launch more innovative products for their consumers. They can leverage unique new features such as quick speed, messaging capabilities, and the added security to offer to their customer base—further enhancing the overall payment experience.
Real-Time Payments and P2P Payment Apps
P2P, or peer-to-peer, is a form of payment that apps such as Zelle, Venmo, and PayPal use to transfer money, effectively replacing cash and checks with just a quick tap on your phone. Business owners and individuals alike use these apps, either to collect payment from customers or split the cost of an Uber.
P2P apps are increasingly used in B2B scenarios, making immediate payments more appealing and necessary. However, instant transfers are not available in some of these apps—it all depends on the system those P2P apps are running on. For example, in 2021, Zelle transactions were officially able to both clear and settle using the RTP network. Apps that use RTP to process payments instantly are leading the newest phase of digital money management.
What Does the Future of Real-Time Payments Look Like?
In a post-pandemic world, real-time payments are only growing in relevance and popularity. In fact, The Federal Reserve recently announced its new real-time payment program set to launch in 2023 called FedNow. FedNow is an additional real-time payment network, separate from the RTP network that is derived from The Clearing House.
FedNow exists primarily as an alternative to the RTP network with the intention to introduce some healthy competition in the real-time payment space. Even now, this new RTP network has been set in motion, with pilot programs already in place that have been launched with selected organizations.
Some of the key differences between FedNow and RTP networks include cost and range.
- FedNow will have a much lower transaction limit capped at $500,000, whereas RTPs are at $1 million.
- In terms of cross-border capabilities, the current RTP system can process foreign transactions while FedNow is starting out as a purely domestic network.
With 80 percent of merchants, retail banks, and billing organizations backing real-time payments and Open Banking, the advancement of FedNow is just the beginning of new competitors in the RTP network space
RTP Banking with Trustly
Real-time payments are reshaping how people conduct business and participate in eCommerce. Modern banking systems such as Trustly can help consumers take full advantage of instant transactions.
Trustly’s Open Banking solutions are changing the way businesses and individuals manage their money by leveraging the real-time infrastructure for quick and seamless payments. This kind of banking creates better customer experiences, helps lower payment processing costs, and increases your bottom line.
Learn more about all these benefits and other real-time payment perks at Trustly here.