Ask anyone in the payments industry what the future of payments is, and they’ll likely have a very quick answer: instant payments. As businesses increasingly move operational systems online, instant payments are key to making payables more efficient, secure and scalable for businesses, government and consumer segments.
The Clearing House (TCH) has already introduced a real-time payments (RTP) rail, and the Fed rolled out its faster payments system, called FedNow, on July 20, 2023. As adoption of RTP and FedNow increase, it’s important for customers to understand these options and how they could benefit their organizations.
What are RTP and FedNow?
RTP and FedNow are payment rails that allow one user to transfer money from their bank account to another user’s bank account instantaneously. While there are currently ways to send money in near real-time, such as wire transfers and Automated Clearing House (ACH) payments, the RTP and FedNow systems are available 24/7, 365 days a year and provide real-time settlement of funds.
The systems also reduce the number of exceptions to payments and can reduce the amount of the payments because they can be sent through favorable trading terms.
Advantages of RTP and FedNow
Sending money via RTP or FedNow accelerates and streamlines the payment process, making it easier for business managers to have the most current information about their financial records. This option enables businesses to reconcile books in real time, which in turn allows for financial decisions to be made more swiftly and with more confidence, knowing their records are accurate and up to date.
Accessing and using RTP and FedNow
RTP and FedNow are two separate payment rails, so the user’s bank must have implemented one of these new payment options. Developing these products takes time because they require some of the most advanced technology and challenge several established and traditional banking processes.
It’s clear, though, that RTP offerings are on the rise. According to a Q1 2022 Volante survey‡ of mid-tier banks and credit unions, 27% of respondents are already offering the ACH’s RTP products, and 37% say they’re committed to joining the TCH RTP network by 2023.
Why there has been an increased focus on instant payments?
Aside from the benefits to businesses, there has been a recent push from Congress for banks to adopt this technology. Banks and companies in Europe and Asia have been utilizing instant payments for several years. To stay competitive in the international banking landscape, it’s become critical that U.S. banks implement instant payment products and technology.
Are there any risks with RTP and FedNow?
The most significant risk is human error. Once an RTP or FedNow payment is sent, it cannot be recalled unless the receiver agrees to send it back. Other payment systems allow for an exception process to reverse or recall funds, but that’s not the case with the instant payments rails.
To solve for this, some companies opt to have a “double-check” system in place within their product before any of the payments are originated, which can reduce the risk of human error while still benefitting from a payment being requested or sent as quickly as possible.
Also, as with any payments system, fraud is a concern. To-date, it has not been a significant issue, but as instant payments grow in popularity and use, the industry will be paying very close attention to fraud attempts and how to proactively mitigate and combat them.
For example, TCH, which is the organization that hosts the RTP rail, has set up a secure token exchange, which issues tokens to stand in for real account numbers when sending or receiving payments. This is one measure already being taken to pre-emptively combat fraud, and banks are working together to collectively create and execute additional solutions to prevent fraud.
The future of instant payments
It’s anticipated that TCH’s RTP and the Fed’s FedNow payment rails will become ubiquitous in the U.S. and evolve to one of the standard forms of payment.
As companies mature and require more sophisticated payment needs, it’s important they understand this option and how it could benefit their company
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