The popularity of faster payments in the U.S. is growing at an accelerated pace. Not only are customers expecting their goods and services on-demand, but they’re also relying on digital, social distancing-friendly solutions to do so. With the use of cash being discouraged, people are looking for alternatives that offer the same speed and finality of payment. Faster payment offerings fill that need. They are designed to significantly expedite the actual movement of funds, with settlement completed anywhere from the same day to a few seconds after the payment is initiated.
“Faster payments” is an umbrella term for different payment systems that various entities have launched in support of quicker on-demand payments. In this blog post, we’ll outline four of the major systems that have evolved in support of faster payments.
Real-Time Payments: RTP® from The Clearing House & FedNow
First, we’ll tackle the newest payment rail: real-time payments. Real-time payments (RTP—not to be confused with The Clearing House’s brand name RTP®) is a generic industry term for a payment network or “rail” that allows businesses and consumers to send, clear, and settle payments instantly. Globally there are more than 50 real-time payments networks. All differ slightly but have a few common characteristics.
With real-time payments, funds move from the initiating account to the receiving account in a matter of seconds, requiring 24x7x365 capabilities for both operators and participants. Real-time payments systems also use the data-rich ISO 20022 messaging standard for payments. This allows for much more detailed information on a payment’s source and purpose or why a payment was denied. Real-time payment networks tend to have irrevocable payments and most are based on a “credit push” model. Rather than withdrawing directly from your bank or credit union account, which is known as a “debit pull,” a creditor would send a request for payment or a request to pay, which can then be accepted or denied by the payer.
In 2017, The Clearing House (TCH) launched its real-time payments system, RTP, the first new central payments infrastructure launched in the U.S. in over 40 years. The infrastructure of RTP is designed with both speed and security in mind, conforming to consumer protection criteria that help prevent fraud and misuse.
FedNowSM is a competing real-time payment service in development by the Federal Reserve, set to go live in 2023. The Federal Reserve expects the addition of a second network to increase efficiency and reduce costs overall for real-time payments. Two operating networks will also allow for redundancy—users will be able to switch networks if one goes offline. Without a clear outline for interoperability, however, efficiency gains and cost savings will remain to be seen once FedNow goes live.
The expansion of real-time payment allows the U.S. to catch up to other countries, including the U.K., South Africa, and Brazil, that already have 24/7 RTP systems in place. TCH’s system supports funds transfers, payment requests, and two-way communication between parties. The infrastructure is built to help facilitate financial transactions between businesses and consumers, including bill payments, insurance claim payouts, and invoicing. RTP is open to all U.S. financial institutions, and as of 2020 is on its way to becoming an industry mainstay.
Some financial institutions are taking a wait-and-see approach to RTP integration, citing a lack of client demand and difficulty upgrading to a 24×7 operating model. Alacriti recently partnered with The Clearing House in an American Banker webinar where TCH presented the data behind the rapid growth of RTP. It’s not hard to see why. A rideshare driver could be compensated by the end of every ride instead of having to wait for a specified payday during the week and business owners could receive payment the moment an order is made and immediately direct that money towards additional working capital needs, for example.
Other “Faster Payments” Networks
Zelle®
Zelle® is a faster payments network from Early Warning Services that allows users to send money to one another by simply using an email address or a phone number linked to an account. Zelle is accessible from participating banks’ websites, the Zelle app, and other mobile apps.
Zelle was built to facilitate person-to-person payments without the need to physically exchange cash or write a check. Today, over 1,000 financial institutions are connected through Zelle. The availability of funds through Zelle is near-immediate, though the system actually clears and settles the funds leveraging older central rails that are not technically real-time. Zelle has seen solid growth prioritizing low-value transfers—value limits are set by each participating financial institution, generally between $5,000 and $20,000 a month with smaller daily limits.
The Card Networks: Mastercard Send® and Visa Direct
Two well-known payment card brands—Mastercard and Visa—are staking their claim in faster payments as well. These established brands operate tried and true payment rails that have moved money via credit and debit card transactions for over 60 years. They are now leveraging their existing networks to join in the faster payments revolution.
Traditionally, debit cards have facilitated “pull” transactions, meaning that the merchant accepting the card for payment was “pulling” funds from the underlying customer. Visa Direct and Mastercard Send® are now flipping the sequence and using debit card accounts to push funds from businesses or merchants directly to consumers’ accounts. This can facilitate everything from government benefit payouts and insurance claim payments to wages earned by contract workers in the gig economy. Given the ubiquity of Mastercard and Visa cards around the world, it also opens the possibility for fast, frictionless cross-border payments.
Nacha: Same Day ACH
The Automated Clearing House (ACH) Network is one of the largest payment systems in the world and has a 40+ year history of moving money between financial institutions. ACH is the backbone of many financial transactions that people have come to depend upon, from electronic mortgage payments to direct deposit of payroll and payment of government benefits.
Historically, payments made via the ACH network took one to three business days to settle. In 2015, an amendment to the National Automated Clearing House Association’s (Nacha) Operating Rules was announced to speed up the settlement of payments made via the ACH Network. This amendment, known as Same Day ACH, was designed to enable the same-day movement of money for almost any ACH transaction.
The Bottom Line: The payments market is entering a tipping point as the desire for faster payments continues to drive significant innovation in payment networks. This has resulted in the evolution of established networks (ACH, Mastercard, Visa) as well as the development of new ones (RTP and FedNow). As faster payments continue to generate new consumer interest and demand, financial institutions and businesses can capitalize on this by partnering with the right fintech to help execute their digital transformation strategy.
To help prepare your financial institution for real-time payments, please download Guide: Preparing for Real-Time Payments.
Updated from a blog originally published January 4, 2021.
Alacriti’s centralized payment platform, Orbipay Payments Hub, provides innovation opportunities and the ability to make smart routing decisions at the financial institution to meet their individual needs. Financial institutions can take full ownership of their payments and control their evolution with ACH, Wire, TCH’s RTP® network, Visa Direct, and the FedNowSM Service, all on one cloud-based platform. To speak with an Alacriti payments expert, please contact us at (908) 791-2916 or info@alacriti.com.
