Real-Time Payments

The real-time payment system is a payment network that allows users to send money instantly and quickly in real-time. It allows individuals to transfer funds from one bank to another immediately. There is no delay in the settlement time of transactions as well. Anyone can transfer money and reduce transaction risk for a longer time. In short, the transactions get settled on all days (weekends, public holidays, or even after business hours). 

The real-time payments network is an alternative to the ACH. While the ACH takes one or more business days to settle transactions, it creates risk and uncertainty regarding funds among the parties. Also, banks tend to hold more funds to offset this risk. Hence, it turned out to be expensive for them. However, RTP has solved this problem for banks. The RTP network supports credit and push amounts. This means that one cannot debit anyone's account using this system. Since this system is purely for fund transfer basis, payments are final and cannot be reversed. 

Additionally, there is no chance of payment failures, which is otherwise standard in the ACH system. In case of insufficient funds and initiating the payment, the bank will automatically deny the payment to avoid any failure. In case of fund availability, the bank sends a message with the payment details to the network. Here, RTP uses the ISO-20022  standard to process the message. With this protocol, the clearing house will process the message and direct it back to the company's or utility's bank to complete the payment.

Let us look at some examples to comprehend the concept better:

Example #1

Suppose Kevin is a customer who wants to buy a lot of toys from John, who is a businessman. After billing, the total value came to be $3000, which was due on Kevin's side. Also, John wanted this amount urgently to make another payment. As a result, he suggested Kevin make an RTP for the instant transfer. So, Kevin entered the recipient's name (John), entered the amount, and initiated the transaction. Here, the clearing house acts as a secret agent in this process. It communicated the message from Kevin's bank to John's bank for transferring $3000 to the latter's bank. Kevin was amazed to see the transfer occurring within seconds.

Example #2

According to a statistical report, as of May 2024, the global real-time payments market had surged 42% in 2023, reaching a total of 266.2 billion. Likewise, the future assumption growth of the RTP market is projected at a 17% compounded annual growth rate. Not only that, but the RTP transactions in 2023 alone covered one-fifth of the electronic transactions worldwide. Even real-time payments in the US accounted for 3.5 billion transactions in the same year.

This payment system has several benefits to offer the economy. They have eased the functioning of clearing houses and banks as well. Let us understand the advantages of RTP in practice:

• Speed

With traditional payment methods, transactions take longer dues and delays in fund transfers. At times, it can even take two or more business days or weeks. However, in real-time payments, transactions can happen in seconds. It also improves quick fund transfers and saves time as well.

• Improved cash flow management

RTP is significant in cash flow management. Due to the transaction speed, the chances of failure are reduced. As a result, the receiver is sure of receiving funds from the payer. This amount can later be utilized for personal or professional purposes. Hence, there is a smooth flow of cash throughout the course.

• Cost-effective

This system also contributes to low operational costs, thus benefiting from real-time payments. As there is no middleman (like Visa or MasterCard) involved, there are no interchange fees charged while making payments to the merchant.

• Enhanced security and fraud prevention

Another major benefit of RTP is the security system. Due to the enhanced security features, it is not possible to interfere in the payment process and steal money. Multiple-factor authentication protocols have also been established to reduce the frequency of fraudulent activities.

• Increased customer base

With the multiple benefits associated with RTP, the acceptance and application is also worldwide. Many banks and financial institutions have collaborated to increase awareness regarding RTPs. Countries like India, Brazil, China, Korea, the US, Egypt, and others.

Here are some of the top challenges faced in the economy opting for RTP:

• Increased risk of fraudsters

Every technology has disadvantages compared to its benefits. Despite the modern security features offered, hackers still find a way to disrupt technology. In 2023, there were more than 36,000 cases between 2021 and 2022, resulting in a loss of $10 billion, a 14% increase from 2022.

• Compliance responsibilities

The evolving landscape of RTP brings many regulatory complaints for financial institutions, and they may increase in the future. As a result, it is necessary to monitor whether a business is following or not, thus ensuring the smooth functioning of the market.

• No scope for corrections

Unlike RCH, making corrections or altering the payment details is not possible. Once payment is made, there is no chance to change the amount or payee details. So, if there is wrong input, the payment may not be made to the concerned party. Likewise, recovering the amount may be challenging.

The following are the points that explain the difference between RTP, FedNow, and ACH. Let us look at them: