In my last article I talked about real-time payments and their beneficial features: immediate availability of funds, the certainty of the payment, the sender’s control over timing of transmission of funds, and the opportunity to send large dollar amounts quickly.
Whether you recognize it or not, most of us are exposed to real-time payments on a pretty regular basis. They make our lives easier by giving people and businesses a quick way to exchange money safely and with confidence, and can ease financial stress.
In my article, I’m going to give you more context about real-time payments by talking about:
Trends that are driving the need for real-time payments
How real-time payments benefit the consumer
A few common use cases
Trends driving shift to need for real-time payments
Economic trends
According to a Pew Research Center analysis of government data, the middle class has steadily contracted in the past five decades. The share of adults who live in middle-class households fell from 61% in 1971 to 50% in 2021. This has resulted in a lot of belt tightening. According to a November 2022 LendingClub report, 63% of Americans are living paycheck to paycheck. According to a Bloomberg report, two out of five American adults do not have sufficient savings to cover even a $400 emergency, and one in five are not able to pay their current month's bills in full. Consistent or ready access to cash can help make managing finances easier.
Gig economy
According to a recent Pew Research study, 36% of adults in the US now participate in the gig economy in some way. This is up from just over 30% in 2015. "Gig jobs" allow people to mold their work around family and personal needs. People enjoy the freedom of working when they want, how they want, and where they want. This number will likely continue to grow as more adults take on "side gigs" to help make ends meet. Gig workers want to be paid for work as they do it. They don’t want to wait weeks or months to harvest the fruit of their labor.
Shift to digital
With every generation, digital interactions become more pervasive. Expectations continue to rise for quick, safe, and efficient access to every aspect of our digital lives whether web surfing, shopping, banking. According to a May 2022 Federal Reserve study 70% of consumers use their mobile device to send or receive payments, 60% want to see their electronic transactions reflected in their online banking experiences in real-time, 83% of consumers are using a fintech payment app or digital wallet at least occasionally. We shouldn’t find it surprising that digital access and immediate view of funds can give people a sense of control over their lives and funds.
How real-time payments benefit consumers
These trends build a case for the need for real-time payments and funds transfers. The person living paycheck to paycheck and struggling to make rent, pay for gasoline for their daily commute, or buy groceries to feed their families, will often turn to the gig economy to augment their income. Getting paid for these jobs in real-time can help ease financial stress by access to the money they need, when they need it.
According to an Ernst & Young poll conducted in August 2021, 83% of American workers believe they should have access to their earned wages at the end of each shift. For workers struggling to pay bills on time, same-day pay can be a lifeline.
Common consumer use cases
P2P payments
Technically, providers like Venmo, PayPal, and Zelle fall into the "faster payment" category rather than "real-time" payments. However,these apps help with the growth and adoption of real-time payments, as it helps consumers get comfortable with the idea of sending and receiving money quickly and easily in near-real-time. You've probably used these popular apps to pay a friend back, pay for a sitter, split a bill, give a gift, etc.
Wallet disbursement
The problem with some of these payment services (ex. Venmo, PayPal) is that often the funds received through these channels stay in a holding account. The money has to be moved to your bank account before you can use it. This can be annoying if you are on the receiving end of these funds and want to use the money to pay your bills. To access these funds, you either have to wait a few days for the transfer to happen, or pay a fee for "real-time" movement of the money into a bank account. (This service typically uses the real-time payment rails.)
Small business merchant account transfers
If you have your own business, you might be using Square or some other POS or online sales system to help you collect funds. You are likely to run into the same challenge as the consumers who use P2P apps; your revenue is sitting in an account that is hard to access. These funds have to be transferred to a bank account before they can be used to pay your bills. For a small fee, real-time payments can get your money into an account at the time you designate.
Payroll and earned wage access
If you are a freelancer, a gig worker, or someone who needs to get paid quickly, real-time payments can be a lifesaver. Payroll is one of the more popular use cases for real-time payments. Many gig jobs (like Uber, Door Dash, and GrubHub) already pay the worker at the end of the shift. Recently there is also a trend for more traditional companies like McDonalds and Dunkin' to offer employees the ability to get up to 50% of their daily wages through Apps like DailyPay and Instant Financial. These services, which come at a small fee, offer employees access to their pay within minutes of clocking out of their shift.
Real-time payments can provide relief from financial pressure and can be a lifesaver for those that are living on the edge (maybe eliminate the need to access a payday loan) or living on the go and wanting to be spontaneous with their lifestyle. I expect that over the next several years, we will see real-time payments introduced into more and more of our daily experiences.
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