During this time of disruptive evolution, banks & merchants must consider how to achieve more than just a fast payment transaction through participation in the real-time movement. They must take a position that allows them to efficiently scale alongside the changing ecosystem and grow their business through customer-centric innovation and reach into new markets. Real-time readiness should be viewed as a strategic leap towards modernization, both from a business model and technology perspective. Enter, Real-Time Payments.
Before this, there had not been a significant overhaul of clearing and settlement systems in the US since the introduction of the Automated Clearing House (ACH) four decades ago; businesses and consumers had been somewhat limited in terms of experience. With the global payments landscape evolving faster than ever before, with threats of competition from non-banks, and with real consumer need, The Clearing House (TCH) and its member banks recognized that a radical change was required to continue to offer real value in the transaction space.
What Is Real-time Payments?
Most consumers and small businesses likely believe that they already make real-time payments. After all, they regularly purchase goods and services with their credit and debit cards in-store or online. And they are shifting to digital wallets and mobile P2P payment services, which may seem like real-time transfers.
However, these aren’t real-time payments. Credit card transactions are structured loan products, settled by payers at the end of the month. Debit payments are linked directly to the payer’s bank account but aren’t settled in real-time. In fact, even services like PayPal, Venmo and SquareCash are not real-time payments because the only immediate transfer is between funds held in those wallets. Try to move the cash to your bank or to a different P2P wallet and you’re back to multi-day ACH.
A true real-time payment is one in which money moves almost instantaneously from one bank account to another,24/7. Once financial institutions, consumers and corporations understand what RTP really is, raising awareness on the benefits will follow naturally.
What countries have adopted Real-Time Payments?
What is the architecture behind Real-Time Payments?
ISO 20022, developed by the International Organization for Standardization (ISO), is the global messaging standard for financial business transactions, including payments. ISO 20022 is actually a recipe for making financial messaging standards (i.e., messages between financial institutions and between their customers to help interpret information). With ISO 20022, businesses and financial institutions (FIs) have a global standard that provides the flexibility for multiple payment types within a single format. A company can send domestic currency wire transfers, multi-currency payments including foreign exchange (FX), currency-to-currency payments, drafts, and more in a single file format to the FI that would disburse the payments as applicable. The standard offers a single format that spans payment types and scenarios, that will scale to future interoperability, and that will deliver on comprehensive approaches to payables and cash management. This is why it’s such an attractive standard, not to mention the large number of characters it can carry, enabling data-rich messaging.
What are the benefits of Real-time Payments?
For consumers, the benefits are obvious: speed, availability, and certainty. While the benefits for businesses may be less clear, commercial payments have the greatest potential to drive RTP adoption. TCH projects that over half of RTP volume will be driven by business-to-business (B2B) payments. This is based on several benefits that only RTP can deliver:
- Monetization opportunities for banks: B2B services are the only way to directly monetize RTP. Data from other jurisdictions where RTP schemes have been put into place – the UK, Singapore, Sweden among others – clearly show that consumers expect RTP to be free, while businesses will pay.
- Differentiation opportunities for corporates: Although corporations generally like to hold on to their money and pay as late as possible, there are cases where offering immediate payment can serve as a competitive differentiator. An insurance company, for example, can empower its adjusters to offer on-the-spot claims reimbursements using RTP, so that customers can get repairs done over the weekend rather than wait for a check or ACH credit.
- Better control over liquidity and working capital: Treasurers today manage cash and liquidity primarily on an end-of-day working-day basis, using bank statements and funds transfer services to ensure that account balances at the end of the day will support the next day’s transaction needs. But the businesses treasurers support no longer work on this antiquated basis—goods are bought, sold and shipped in real-time, 24×7, globally. RTP will allow treasurers to operate on an intraday basis unshackled by the business day, keeping up with the speed of commerce.
- Taking the friction out of receivables: U.S. RTP’s request for payment mechanism, combined with its ability to transmit extended supply chain data with the payment, offers a unique opportunity to take the friction out of receivables processing, particularly for small businesses. Consider a restaurant that needs an emergency delivery of supplies for a special event. Their supplier’s delivery person is on the road already and needs payment on delivery. The supplier doesn’t like cards because of the fees, and they’ve stopped taking cash because of fraud/loss issues. With RTP, the delivery person can send a request for payment—in essence, a digital invoice—with the actual details of the goods to be delivered to the restaurant. The restaurant can approve the request for payment and send a matching real-time payment which is immediately received by the supplier, who can reroute their delivery immediately. Both money and goods move in real time, with no reconciliation needed.