The way money moves within our economy continues to evolve—for both personal and business expenses. Payments that we used to make via checks that took time to mail and clear can now be made with an instant transfer from our bank account, so instead of reimbursing a friend with cash for your part of a group expense, you can send money from your checking account to theirs in real time. These new payment systems can certainly be convenient but can also be confusing. Here, we break down some of the most commonly asked questions about instant payments.

What’s the difference between faster payments and instant payments?

Faster payments is a broad term that describes increased speed and convenience. As the name implies, these systems offer faster settlement of funds and information. Faster payments encompass those referred to as same-day, immediate and real-time, and they improve upon legacy payments using innovation and new technologies.

Instant payments are a subset of faster payments. The primary difference is that the transmission of the payment and the availability of final funds to the payee occur in real time or near-real time—and on or very close to a 24/7/365 basis. Instant payment‡ examples include PayPal, Zelle, Real-Time Payments (RTP) and FedNow.

What are the benefits of instant payments?

There are numerous upsides to utilizing instant payments, including:

  • Funds are delivered immediately
  • Confirmation of sending/receipt of the funds is instantaneous
  • Improved control over timing
  • 24/7/365 availability

What is open loop vs. closed-loop in instant payments?

A closed-loop system moves money within a third-party platform, utilizing the sender’s bank account for funding. Funds are posted within the third-party platform into the receiver’s account on that platform. It is up to the receiver to move the funds into their ultimate bank account. Examples of these platforms are Venmo, PayPal, CashApp and eWallets.

In an open-loop system, payment is tied to a bank account, so the sender’s funds go directly into the recipient’s bank account, with no middle step needed. Providers include RTP, FedNow‡, Visa Direct and Zelle.

How are instant payments used?

Instant payments are utilized in a variety of ways and can meet an array of needs. Below are some of the most common usages:

  • Account-to-account: If you have multiple bank accounts, you can utilize instant payments to quickly send money from one account to another. This can be useful from a cash management perspective.
  • Business-to-business: Instant payments also help streamline just-in-time vendor payments, on-demand payments (such as if a merchant needs to be paid for goods upon delivery) and new relationship payments in which you may not have 30/60/90-day terms established yet.
  • Business-to-consumer: Instant payments can help smooth out covering emergency payroll situations, insurance disbursements and quickly verifying account information.
  • Person-to-person: These are more straightforward and can help facilitate transactions such as payments for caregiving, school expenses and reimbursements for meals or other social activities.
  • Consumer-to-business: Utilizing instant payments for recurring bills such as utilities, mortgage and auto loans—or even services such as lawn care—can be efficient and advantageous. Instant payments can also streamline one-off significant costs such as title processing fees.

As the ways we pay each other continue to evolve, it’s important to understand each platforms’ functionalities to best take advantage of the convenience and efficiencies they offer. Your bank can be a valuable resource in helping you navigate these nuances.

If you are interested in learning more about how UMB can help your business as a financial partner, visit our website.

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