Faster payments are the next phase of the digital revolution in banking. The race toward real time is well underway — more than 200 U.S. financial institutions already send and receive real-time payments. Those that cannot do so must start soon or they will be left behind.
The rise of mobile and digital commerce has created a need for speed and certainty of payment. Bank customers want to be able to pay whoever they want, whenever they want, using a device of their own choosing. But in practice, there are many flavors of fast. It’s important to clarify exactly what we mean by real-time payments and faster payments.
Real-time payments are payments that are initiated and settled almost instantly. A real-time payments rail is a digital infrastructure that facilitates real-time payments 24/7. A crucial characteristic of a real-time payments rail is that it is always available, bringing payments into line with a digital world that never sleeps. In the U.S., there are currently two real-time solutions:
- The Clearing House has offered its real-time payments platform (RTP) to all federally insured U.S. depository institutions since 2017.
- The Federal Reserve is currently developing FedNow, a new service that will enable individuals and businesses to send instant payments, due for launch in 2023.
Both real-time solutions are “open loop,” which means that the payment is connected to a bank account rather than a prepaid balance. This is important: It creates the potential for payments to reach every bank account in the U.S. and beyond.
Faster payments, such as Nacha’s Same Day ACH, are payments that post and settle faster than traditional payment rails but not instantly. For example, both Mastercard and Visa offer push payment solutions that message transactions in seconds but do not settle as quickly.
In practice, all real-time payments are faster payments, but faster payments are not always real time.
Although many payments, such as mortgage installments, are non-urgent, the transformational potential of real-time for banks and their business customers is enormous. Real-time technology marks the biggest advance in electronic payments in 40 years and heralds a new era where payments can be an opportunity for banks to add real business value.
Connectivity. Banks can offer business customers access to a growing real-time network that offers uninterrupted transaction processing. But real-time payment also enables two-way messaging, including request for payment, payment confirmation, credit transfer and remittance advice. Each of these features removes friction and can enhance the relationship between companies and their customers.
Cash flow. Businesses can adopt “just in time” cash management and pay creditors exactly on time. In the U.S., 82% of small businesses that fail do so because of cash flow problems; real-time payments signals a new era of easier cash management. A real-time picture of its cash position allows a small business can be sure it can meet its short-term commitments, minimize borrowing and optimize its use of surplus cash.
Certainty. Real time account-to-account settlement allows business customers to have payment certainty and reduces payment failures, streamlining business processes to reduce costs and increase efficiency.
Innovation. With almost 60 million Americans participating in the gig economy and up to 90% of Americans considering freelance or consulting work, innovation allows people to be paid immediately for the work they’ve done. Real-time payment makes “day pay” a practical reality.
Customer expectations. The tech giants have redefined the customer experience. Real-time payments present a unique opportunity for banks to catch up with a fintech approach to business banking by coupling it with simplified account opening, accelerated credit decisioning and synced accounting packages.
Real-time payment processing is a pivotal innovation in banking that should be included in every bank’s digitalization strategy. But there’s a lot to consider. A payment never happens in isolation; it’s always part of a larger business workflow. Many mission-critical bank systems are batch based, so there will always be integration issues and challenges. Moreover, there are peripheral systems, such as fraud detection, that banks must choreograph with payment movements. And as real-time payments build momentum, banks should be prepared to manage burgeoning payment volumes.
Getting started in real-time payments is never easy, but it’s a lot easier with expert help. Banks should work with their payments partners and build a road map to success. Managed services can offer a fast route to industry best practices and empower a bank to start with a specific pain point — receivables, for example — and progress from there. But every bank must start soon, for the race towards real time is accelerating.
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