Real-time payments: What is driving their growth?

Gone are the days when your only option to transfer money relied on e-check or withdrawing cash from the bank, both of which took time and effort. Real-time payments, which are nearly instant transfers between institutions, are revolutionizing the way people move money. This efficient payment processing also introduces a new level of disruptive innovation in business.

Popularity in real-time payments has boomed in recent years. The Clearing House reports that transactions on their real-time payments network accounted for $29 billion in Q2 of 2023, up from $18 billion in Q2 of 2022.¹

The growth of real-time payments has been driven by a number of key factors.¹

These include:

• A growing demand for convenient payment and authorization methods.
• Financial inclusivity, allowing new participants with better access to real-time payment capabilities.
• Advances in digital overlay services which have enabled frictionless payments, immediate settlement, and a more seamless user experience.
• Better access and connectivity to new payment rails due to APIs and open banking.
• Government and other initiatives prompting a move away from a reliance on cash.

What are real-time payments (RTP)?

Real-time payments are those made between banks or other financial institutions that are initiated, cleared, and settled almost immediately at any time of the day or night, seven days a week, 365 days a year. This contrasts with checks, which often take several days to clear through the banking process, or cash which, although immediate, is not always a convenient way to pay, especially for larger sums.

What is a real-time payment system?

Real-time payments systems have been set up by financial providers to offer an almost instantaneous form of money transfer, largely driven by the demands of business to improve cash flow and simplify business operations. In recent years, improved technology has made the functionality of real-time payments both possible and effective and has resulted in increased adoption rates and accelerated usage across the business world.

Real time payments vs ACH

Real-time payments refer to payments processed instantly, while an ACH payment can take hours or days. ACH payments are processed in batches, meaning there is some lag time between payment intervals. The real-time payments occur upon initiation, so your recipient will receive the payment in seconds.

How do real-time payments work?

All real-time payments involve five parties:

• The payer
• The payer’s financial institution
• The payee
• The payee’s financial institution
• The underlying real-time payment network

The process by which real-time payments work is very simple. First, the payment is initiated by the payer and then authorized by the payer’s bank or financial institution. Next, a message is sent via an underlying real-time payment network, during which time it validates the message and confirms the liquidity. The payment is then either accepted or rejected if insufficient funds are present in the payer’s account. The funds are then transferred to the payee’s bank account and a payment notification is sent to the payee as confirmation.

Enterprises are adopting new technology, ensuring real-time payment infrastructure can support both payers and payees in making and accepting a variety of payments. It is generally very easy to set up online payment processing for real-time payment transactions – and well worth developing a better understanding of exactly what online payment processing entails, and the many benefits it provides businesses.

The potential benefits and risks of adopting real-time payments

Real-time payments systems and electronic payment options have a range of advantages for both customers and enterprises.

Benefits of real-time payments

Real-time payments may help a business:

• Improve real-time cash flow management and liquidity management for businesses while giving consumers a much clearer picture of their finances.
• Automatically reconcile payments, optimizing back-end processing, and make it easier to resolve errors and reduce processing delays.
• Boost efficiency through eliminating paper-based payments operations.
• Playing a key role in facilitating seamless overseas transactions.
• Satisfy growing consumer demand for instant access to funds.
• Offer more convenient electronic payment systems.
• Empower organizations to optimize existing service offerings and service new markets, creating new revenue streams.
• Enhance business performance, improving operational efficiency, and reducing the risk of fraud.

Drawbacks of real-time payments

Of course, there are also possible risks and drawbacks:

• With real-time payments, there is no margin for error, so there’s no time for corrections once payments are made. Because it’s processed so quickly, there is no margin for error to make a correction or change once the real-time payment is initiated.
• Businesses might face cost barriers when adopting new technologies and updating their systems to accommodate real-time payments.
• The legal implications such as finality of payment and post-transaction resolution. The finality of a real-time payment might bring with it legal implications when seeking post-transaction resolutions.

The types of payments that could benefit from real-time technology

There are several payment scenarios which could benefit from real-time payment processing, including:

• Business-to-business payments such as supplier payments and refunds.
• Peer-to-peer payments: It is possible to offer digital wallet solutions and other payment technology trends that enable people to pay one another directly from their bank accounts via an app. These have been integrated with real-time payments, raising consumer expectations.
• Customer payments, such as shoppers purchasing online and householders making bill payments.
• Consumer to government payments, such as taxes, donations, and loan repayments.
• Business to consumer payments, including rebates and refunds, legal settlements, insurance claims, and employee wages.
• Government to consumer payments, such as subsidies, tax rebates, pensions, and other social benefit payments.

What is driving the growth of real-time payments?

Real-time payments present opportunities for businesses to win, serve, and retain customers through more efficient, secure, and engaging commerce experiences. This can be due to the following factors:

• Technological innovation: The adoption of smartphones has led to the rise of new domestic person-to-person (P2P) payment providers.
• New players and business models: Many FinTech startups are focusing on fraud management for mobile payments, offering services such as fraud detection, improved customer experience, and quick fund availability.
• Merchant expectations: Businesses are looking at real-time payments to enhance their cash flow management, to reduce fraud activity, and provide value to customers.
• Consumer expectations: These are growing in an age of speedier processing and more instant gratification. According to a PYMNTS study, instant payments accounted for 36% of all disbursements in the past two years, with instant usage growing 16% for freelance or consulting project payouts.²
• Regulatory pressure: Regulations in some developed countries are supporting real-time payments, which can benefit both consumers and the government.
• Globalization: Consumers and corporations expect the same simple payment and transfer experience regardless of where they are in the world.