Instant payments, also known as real-time payments, are a type of electronic payment that allow for near-instant transfer of funds between financial institutions.
Instant payments has been gaining traction around the globe as consumers and businesses demand faster and more convenient ways to move money. More than 72% of countries around the world have an infrastructure supporting real-time payments.
Faster payments is not the same as instant payments, although instant or real-time payments are considered faster payments. There are a number of payment services that have been introduced over the last few years like Zelle, PayPal, Venmo, Visa Direct, Same-Day ACH that have the appearance of being real-time or instant payments, but while the customer experience feels like real-time, in the back-end it still takes hours, if not days for the transaction to settle. Real-time payments literally settle in real-time.
The key features of instant payments (real-time payments) are:
Immediate Availability and Notification - Sender and Receiver will get a notice within seconds confirming the transfer of funds. The speed of the transaction makes this a highly attractive service helping businesses and consumers with their cash flow needs.
Payment Certainty - unlike traditional payments that can be cancelled or reversed, when a person or business is paid with funds through a real-time rail, they can have confidence in their funds.
Controlled by the Sender - The networks only support payments initiated by the sender, so you have full control on when funds are leaving your account
Large limits - The real-time payment network can support up to $1 million, which should support most transactions that a consumer or business might want to do (please note, your bank may impose lower limits, and you can't send more funds than you have in your account!)
In the US, there are two main instant payment rails
The Clearing House Real Time Payments (RTP®) recently celebrated its 5th anniversary. This is an established and robust real-time payment rail that was established in 2017, and in Q3 of 2022 saw more than $22.7 billion in transactions
The long anticipated Federal Reserve FedNow Service has been in development for some time and is slated to formally launch this summer, in the May-July time frame.
An important thing to note, is that in order for a payment to take place, both the sending and receiving bank must be participating in the same instant payment network. As of this article writing, the two networks do not have plans for interoperability - meaning that if you are working with a financial institution that only participates in one network, you are going to be limited to being able to send or receive transactions from other banks that are participating in that network. For the broadest reach, it is recommended that banks join both networks so that they can support all real-time payment transactions.
It is recommended that if your financial institution wants to join these networks, that they work with a Third Party Service Provider (TPSP) that can help you make the connection quickly, and cost effectively. TPSPs do the heavy lifting of putting the system and network connections in place, parsing through messages to make sure they are correctly formatted, certifying with TCH and the Fed ensuring that all responses are properly handled, maintaining service level uptimes, and handling the technical upgrades as required. This reduces your technical and operational overhead and allows the financial institution to focus on meeting the needs of their customers.
Both of these payment rails leverage the ISO20022 payment messaging standard, laying the foundation for even more innovation with the advances in Open Banking and Embedded Finance. As technology continues to advance and more and more businesses and consumers demand faster and more convenient ways to move money, instant payments will become even more popular.
In conclusion, faster payments are continuing to grow in usage, but the future of banking in in the instant / real-time payments, that will help drive confidence in the payment system. Because of the immediacy, transparency, and control over these transactions, we will continue to see growth and widespread adoption of instant payments over the coming years.
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