Editor’s Note: Real-time payments (RTP) might not be a new concept, but the push to make them more common in the financial industry is louder than ever. But why the sudden demand? This is just one example of a larger trend impacting banking right now: customers want more immediate and digitally savvy solutions, and businesses want streamlined processes. Real-time payments can meet that need, and so can a variety of other finserve-ready services like Contact Center as a Service and SD-WAN Concierge.
We live in impatient times. Consumers and businesses have rising expectations and want to align payments with their busy 24/7 world. While real-time processing achieves this, it also transforms how money is managed and provides a strategic platform for disruptive innovation. Let’s consider how digital real-time transfer of value brings good ideas to life.
Real-time paymentsthe new cash?
Real-time value exchange has been around for as long as money itself. As the original medium of exchange notes and coins have facilitated commerce for around 5,000 years. Being generally accepted and trusted, cash offers payment certainty and enables business to take place with relatively low friction.
Paradoxically, as financial markets became interconnected and sophisticated, payment delays became the norm. Innovative financial instrumentssuch as checks and promissory noteshindered settlement as clearing took time. Similarly, while the introduction of mainframe computers created a new world of opportunity for electronic payments, batched-based processing dictated clearing times and payments had to be scheduled.
Real-time payments (RTP) remove these technical bottlenecks and create an environment where consumers, merchants, and financial institutions can pay friends and customers, settle bills, and transfer money immediately, 24/7.
As well as increasing the speed and efficiency of digital payments, real time ushers in a new era of contextualized commerceirrevocable payment can be made exactly where and when it is needed. This is particularly relevant when transacting online or through an app. Nowadays a digital experience without instant payment will tend to be lackluster, fall short of customer expectations and put a merchant at a disadvantage.
We have entered a new era of instancy. Every organization must understand the business case for real-time payment and how it adds value. There are many great examples of high value/high impact use cases that we are seeing applied very broadly, says Ginny Chappell, senior vice president, digital payments at FIS. Real-time payments can be very empowering for consumers and small business by improving choice and increasing visibility of cash.
Why the rush toward real time?
For consumers, RTP improves choice and is a new, convenient way to complete transactions. Payment can be initiated through one of many channels, including smart phone, tablet and the web. Similarly, consumers can receive cleared funds into a bank account immediately which is far more efficient than payment by check or waiting for funds to clear through an automated clearing house.
RTP solutions are open loop meaning that payment is connected to a bank account rather than a prepaid balance. This is an important characteristic because it creates the potential for payments to reach everyone with a bank account in the U.S. and beyond. But for RTP to reach ubiquity, there must be sustainable benefits for all parties. So, what are the likely use cases?
RTP brings new efficiency to many existing payment processes. Although consumers may already believe that their funds are sent and received in real time, some payment methods can take days to reach recipients and settle in their accounts. This can be confusing as bank account balances may not be up to date. RTP offers certainty and brings clarity to cash management, with up-to-the minute transaction histories and real-time account balances.
RTP can improve people’s lives in many ways. For example, proceeds from a house sale or from cashing in investments are available immediately. In an online world people can load money to a broker account, trade in stocks immediately and monitor cash positions precisely in real time.
However, RTP also creates brand new opportunities. Consider the case of peer-to-peer ride sharing. Without real-time payment, customers could pay by card, but that transaction might take days to clear and for funds to reach the beneficiary. RTP removes the friction and closes the gap between a company, its customers and employees. In this case, the company gets paid immediately, the employee gets paid faster and everyone is happy.
Turning transactions into relationships
Another important characteristic of real-time payment is the ability to support messaging between payer and payee, such as:
- Request for payment
- Payment acknowledgement
- Credit transfers (or push payments)
- Remittance advice services
These innovations allow a payer and payee to include additional, flexible information to enrich the payment, increase transparency and build a dialogue. In practice, real-time processing creates a payments ecosystem, where financial institutions, merchants and customers can exchange information to boost efficiency, create value and do things differently.
With RTP, businesses can receive funds more quickly which improves forecasting and cash management. This is particularly crucial for small businesses where cash flow and liquidity management are paramount. The pandemic highlighted the importance of cash, access to funds and cash flow management. With a real-time picture of its cash position, a small business can be sure of meeting its short-term commitments, minimize borrowing and optimize use of surplus cash.
But big business benefits too, particularly where there is a long supply chain or cross-border payments. With real-time payments cash can be managed precisely, working capital management optimized and payments choreographed using e-bills or request for payment capabilities.
Many businesses will seize real-time payments as an opportunity to increase transparency and modernize payment processes, which often revolve around checks and the five-day week of automated clearing houses. For example, employers can pay contractors in full as soon as work is complete. With around 9%1 of U.S adults currently or recently employed as gig workers immediate payment is of growing importance. Real-time payments make payroll on demand a practical reality and everyone benefits from increased flexibility and convenience.
The road to real time
After much discussion, RTP is shifting from theory to practice. The world has entered a new age of instant and payments are center stage. Recent research2 suggests the US market is approaching a tipping point. Over 60%3 of U.S. banks are already connected to the RTP network. With over 5,000 banks in the country this shows great progress but those who ignore RTP will be left behind.
With today’s innovations fast becoming tomorrow’s business baseline, the race toward real time is for real.