The “Real-Time Payments (RTP)” system from the US Clearing House is expected to disrupt the financial landscape in 2021. While the latest payment system was launched in 2017, it may seem like that it can change the financial industry. As of right now, the network reaches 56% of US direct deposit accounts. So why do financial institutions think that RTP can change payments in 2021?
What Is Real-Time Payment?
There’s a lot to understand about real-time payments. Real-Time Payments or “RTP” refers to payment networks or a network that is used to make the payment. The hint is in the name, the payments happen in real-time, unlike ACH Payment processing time. These payments are initiated, cleared, and settled within seconds, thus causing the payments to be instantaneous. Real-time payment networks operate 24x7x365, this allows users to initiate the payment anytime and the payment will be cleared within seconds. For payments to happen 24×7, banks and credit unions will need to have a 24×7 backend system.
“Open-Loop” is an important part of real-time payments, which allows the payment to go directly into the person’s bank instead of relying on a prepaid balance. Without a clear and nuanced data-rich method, it’ll be tough to reduce payment errors.
Real-time payment is the first new payment system in the U.S in the last 40 years. And it enhances the payment method dramatically, including initiating, settling, and reconciliation. All the process of payment processing happens within seconds.
What makes real-time payment so fast is that it combines immediate fund availability, settlement finality, instant confirmation, and integrated information flows that ensure payments are made within seconds. This is the simple way of how does real-time payment works?
What’s Special about RTP?
The RTP is the only payment system in the US that offers instant and cheap money transfers. In short, currently, businesses operating under the financial industry have to choose between speed and cost in providing payments. Fast payments are possible with credit/debit cards or wire transfers but customers have to pay the huge fee by choosing those options. Cheaper methods like ACH transactions and paper checks are slow and inefficient.
RTP is a payment system that allows businesses to separate themselves from the current catch-22. The fee for RTP is pretty low, at $0.045 per transfer, and transactions are completed in seconds 24/7. This is significantly faster than credit card payments or wire transfers at a fraction of the cost for financial institutions.
What’s even more important is that RTP comes with an increased level of security, thus improving the fraud prevention techniques. Merchants also get the benefit of guaranteed payments without worrying about chargebacks.
The Real-Time payment systems support all types of transactions (P2P, B2B, B2C, C2B), consumers, businesses, governments, and all other entities can use RTP. Finally, RTP offers better communication during transactions, which means real-time messaging between the receiver and sender, which can be helpful in reducing fraud in the internet age.
So, even after these features why is RTP not the standard practice in the industry? While there are complex reasons for this, there are two major factors.
Firstly, it’s the lack of incentives. Up until 2020, there weren’t many incentives to use alternative payment methods to paper checks and cash. However, the pandemic has increased the demand for new contactless payment methods. The most popular methods currently are debit and credit cards, however, after months of continuous use, financial institutions have understood that card fees aren’t worth the convenience. Because of this, financial institutions will focus more on trying out new payment methods like RTP.
Secondly, it is difficult to integrate. While businesses can integrate payments directly into their systems, they need to integrate with each bank individually. As the US has more than 4,000 banks, RTP integration is almost impossible for small to medium-sized banks. For RTP to become standard in the industry, there needs to be a simpler and more unified solution. Thoroughly understanding real-time payments is the way to make the payment system standard.