Let’s start at the beginning
Real-time payments (RTP) are settled almost immediately via digital infrastructure that facilitates the payments. The networks, known as real-time payment rails, provide 24x7x365 access, making them always available to process payments. An example of this that is currently available is The Clearing House RTP network. The Federal Reserve will launch a similar service, FedNow, in 2023.
Don’t faster payments already offer this service?
While faster payment solutions are similar to real-time payment rails, they are not the same. Faster payments settle quicker than traditional payments, but they are not instantaneous. Payment solutions like those offered by MasterCard and Visa’s push payments are incredibly fast. They message transactions within seconds or minutes but still do not settle the payment there and then. So real-time payments definitely fall into the category of faster payments, but the same cannot be said in reverse.
The benefit of real-time payments
We have seen such massive improvements in the speed at which we can pay and get paid; it is not unreasonable to ask why do we need to go even faster. Payments that settle instantaneously can be a game changer for some individuals or businesses.
Trust in the gig economy
One example of this is freelance and gig-economy workers. It is not unreasonable for them to require payment as soon as the work is completed. RTP allows for the exchange of money and information in one transaction. Sometimes, waiting to be paid can lead to delays in processing the next item of gig work and leads to delays in the system. RTP ensures any trust issues between the payee and payer cannot develop.
Deposits and payouts online
The same is true for gamblers who like to wager at online casinos. If people have registered a win on the slots or games tables, they want instant access to their winnings. In return, the betting platform must receive their deposit before a wager can take place. Sometimes a bet is time critical if an event is happening. Instant settlements mean that funds are available for both the payer and payee. As a result, RTP will be an increasingly attractive feature for the fastest payout online casinos that players will be trying to find when deciding where to place their bets.
Payments are irrefutable
RTP deposits cannot be taken back or reclaimed by the person or company that sent them. This means that the receiver is safe in the knowledge that the funds are in their account. This is not the case with current payment methods, where a payment can be reversed in the gap between send and receive.
Peer-to-peer apps rely on RTP
Peer-to-peer apps like Venmo and PayPal have really boosted the uptake of RTP. When groups of friends want to split the cost of a meal or a ride, they want to do so instantly. Younger generations just expect to be able to send money to each other, without having to wait.
These apps are fully integrated with the Clearing House’s RTP network, allowing multiple transfers to be made instantaneously from the app to a bank account.
What are the downsides to RTP?
The most significant disadvantage to RTP is that they require the banks to adopt new digital infrastructure. The last time they had to do this on this scale was in the 1970s when digital clearing houses were introduced. The banks are concerned that if payments can be settled instantaneously at any time of the day, including weekends and holidays, they will be required to match this with staffing. While a global economy means it is always ‘the working day’ somewhere in the world, this will not be a cheap solution to bring to the mainstream. It is understandable why there is resistance from large institutions.
This is not just resistance for the sake of resistance. Major structural changes mean the banks have to learn about new security threats and keep their customers safe in real-time. The platform that now seamlessly handles direct deposits and direct payments took ten years to perfect and to build up volume to make it economically viable. Not so long ago, we waited three to five days for a check to clear to and from our accounts, and even digital transfers took hours or days to appear and disappear in our bank accounts. Much of the worry concerning staffing and other concerns will be overcome with clever fintech solutions that are already in existence.
The US is playing catch up
The first RTP services were launched in 2017 by The Clearing House, and the system is still very much in its infancy. The Clearing House is owned by a collection of big banking names, including Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, and Wells Fargo & Co. In the third quarter of 2022, $19.7 billion of payments were RTP, but this is still a tiny slice of the US’s trillion-dollar market. The FedNow Service is expected to be a significant breakthrough in bringing more users on board.
The US is lagging behind other countries. The first RTP system was developed for use in Japan in the 1970s. The UK, China, and India have had RTP rails since 2010, and by 2019 54 countries worldwide had adopted the technology.