U.S. Real-Time Payments Are Poised to Take Off

Rise of real-time payments

The rise of real-time payments is upending the payment process as we know it. It’s certainly not going to happen overnight, but this major innovation will eventually transform much, if not all, of how you get paid and how you pay–impacting just about every enterprise and consumer. It’s a major breakthrough in speed, accuracy, transparency and assurance in payments, helping businesses, consumers and banks manage money more efficiently.

While much remains to unfold, the Federal Reserve has begun accelerating the crossover to RTP in the United States with the introduction of its FedNow network in July. Here are some key facts you need to know:

What are real-time payments?

These payments made between bank accounts are initiated, cleared and settled within seconds, 24 hours a day, 365 days a year.

How do RTP compare to ACH/bank transfers?

Electronic bank transfers are dependent on a country’s banking infrastructure. In the U.S., ACH payments are often processed in large batches once a day or several times a day, and these electronic payments are not processed at night or on weekends.

What is FedNow?

Launched on July 20, 2023, FedNow is an instant payment network, also known in the industry as a rail. The first government-sponsored RTP infrastructure in the U.S., FedNow was developed by the Federal Reserve to allow banks, credit unions and other financial institutions to send and receive transactions within seconds on behalf of their customers round the clock, every day of the year.

Why is FedNow a gamechanger?

The United States is years, if not decades, behind other countries in adopting real-time payments en masse. Japan launched the first such system in the 1970s.

The first U.S. instant payment rail called RTP Network was launched in 2017. It’s run by The Clearing House Payments Company, which is owned by some of the largest U.S. commercial banks. It only enables real-time payment deposits (receiving) and does not allow pulling money out of accounts for payments (sending).

Even among its bank owners, the RTP Network has been slow to catch on. Instant payments made up less than 1% of U.S. payments volume in 2021, according to an April 2022 study by ACI Worldwide and the Centre for Economics and Business Research.

FedNow, which enables both receiving and sending instant payments, changes the game because the federal government is putting its authority and backing behind it and is actively promoting it. It is already attracting small and mid-sized banks and credit unions as well as some of the largest financial institutions. “In 2023, in the U.S., real-time payments will start becoming real,” Nordis client Sanjay Gupta, who heads the biller segment at payments company ACI Worldwide, told Payments Dive.

How is FedNow different than Venmo and Zelle?

Peer-to-peer payments have surged, with 62 million Zelle users and 90 million Venmo accounts in 2022. Venmo and Zelle are consumer apps that individuals and businesses use to make faster payments.  Those payments can still take up to 3 days to clear.

FedNow is part of the banking infrastructure, government-run, and not a consumer-facing capability. So, it’s not designed to replace Zelle, PayPal, Venmo and other consumer payment options.

Who needs or wants instant payments?

In an increasingly digital world, individuals and businesses do. Here are some key advantages:

  • Expand consumer choice and convenience.
  • Enhance customer experience with instant confirmation. RTP offers peace of mind to consumers that their payment has been made or deposit is available.
  • Save payment processing costs. RTP costs a bit more than ACH payments (4½ cents vs 2½ cents per transaction) but far less than cash and credit cards.
  • Improve cashflow and overall consumer payments. It more closely ties billing and other financial communications to payments, in turn speeding payments.

There’s no overstating this benefit: Payments with instantaneous clearing and settlement reduce the amount of money locked into processing. The time from dropping a check in the mail to settling the payment can take up to 10 days, during which no one can “use” that money.

RTP improves cash and funds management for businesses and gives consumers a more accurate picture of their finances at any given moment.

How does this work in the real world?

Here are some RTP examples, according to the Federal Reserve:

  • Workers completing their shifts can get access to their wages immediately upon being deposited into their account
  • Insurers and emergency relief organizations can instantly disburse funds to people impacted by a natural disaster
  • Small businesses can use instant proceeds from sales or services to ensure steady cash flow and avoid the need for short-term credit
  • Account holders can move funds from a brokerage account to a checking account with no delay in accessing transferred funds
  • Digital wallet holders can fund or defund their wallets with immediate funds availability

How does FedNow improve customer insights?

FedNow delivers files of information about the consumer or business that is making or receiving the real-time payment, giving companies new and timely insights into their customers. The information and explanations, including request for payment, remittance advice and request for return of fund, are presented in conversational language versus codes. Since the information is so much more usable, companies can streamline matching payments to accounts and collect time and location of each transaction, helping identify patterns in trends in payer behavior.

Who can use FedNow?

There are an initial set of 50+ participants of all sizes, including giants JP Morgan Chase, Wells Fargo and BNY Mellon as well as smaller players such as MSU Federal Credit Union and First Internet Bank of Indiana. Early adopters also include payment processors and service providers such as ACI and Jack Henry, which in turn enable their banking clients to offer instant payments to their customers.

All participants completed formal testing and certification on the FedNow service. To start, financial institutions must enable receive-payment capabilities. FedNow also gives the option for financial institutions to offer send-payment capabilities.

What’s next for FedNow?

According to Fiserv, one of the biggest participating payment processors, FedNow over time will expand to cover a full range of payment scenarios, including:

  • Person-to-Person (P2P) payments
  • Consumer-to-Business (C2B) payments, like bill payment
  • Consumer-to-Government (C2G) payments
  • Government-to-Consumer (G2C) payments, like tax refunds
  • Business-to-Consumer (B2C) payments, such as employee paychecks
  • Business-to-Business (B2B) transactions, like supplier payments
  • Business-to-Government (B2G) payments, including tax payments

When will my bank start using FedNow?

FedNow is voluntary in the U.S., unlike in other countries that mandate RTP. So, FedNow is only available to the customers of banks and payment processors that opt to implement the service.

How does FedNow impact Nordis Technologies?

We are collaborating with our third-party payment processing partners, so our clients have the option through ExpressoPay to accept real-time payments.

Nordis Technologies plans on expanding ExpressoPay to offer a single payments platform to manage all of your business’s incoming and outgoing payments. Adding RTP will be a seamless method of expediting payments, thus enhancing your company’s cash flow while providing a new level of bidirectional communication.

The value of this capability includes instant payment confirmation, with payers notified by the RTP system that funds have reached the payee’s bank account. This is useful for urgent payment situations, for example, as it closes the information gap for payees awaiting funds and may help to minimize payment status calls to call centers.

What do I need to do to get started with RTP?

To start, companies should research and compare existing real-time payment providers to find the one that satisfies your needs.

Another thing to consider is the impact on your existing approval systems and processes. Real-time payments can bring significant benefits, but as with any new technology, they require changes to your current AR/AP infrastructure and may require  new processes and employee training.

There are planning considerations, with CFOs needing to address how it might affect liquidity and relationships with vendors. Finance departments are going to be getting information in their bank statements quicker. Payments are going to clear pretty much immediately, so finance departments will need to be aware of that in managing their cash. FedNow also makes payments possible on evenings and weekends, which could change the way businesses are run.

Some providers are making the RTP transition easier. Look for real-time payment providers with intuitive interfaces, so clients and vendors can quickly onboard with minimal interruptions. If you have complicated business requirements, working with a provider that has a robust support system also can ease the transition process.

If you would like to learn more, please contact us.