Real-Time Payments (RTP – not to be confused with The Clearing House’s brand name RTP®) refers to payment rails (platforms or networks via which payments pass through) that share a few characteristics.
The first is in the name: they are real-time—or very near real-time—initiating, clearing, and settling in a matter of seconds. Real-time payment networks are ideally 24x7x365, meaning they are always online and available for a transfer. As a result, in order to connect to a RTP rail, the bank or credit union’s backend systems will need to be available 24×7.
“Open-loop” is another important characteristic of RTP—this means the payments are withdrawn directly from an account, rather than relying on a prepaid balance.
Finally, a data-rich messaging format like ISO 20022 is also necessary. Without this clear and nuanced form of information, it is more difficult to resolve errors, which leads to processing delays. Strong formatting standards also provide greater security to all participants in the network.
Current examples of RTP networks include The RTP® Network from The Clearing House (TCH) in the U.S., UPI in India, Faster Payments in the UK, and PIX in Brazil. The terms “instant payments,” “immediate payments,” and “faster payments” are also sometimes used interchangeably to refer specifically to real-time, or near-real-time, payments rails.
Real-Time Payments in the U.S.
The RTP® Network from the Clearing House
Launched in 2017, The RTP® Network was the first of its kind in the United States. It is developed and operated by The Clearing House Payments Company L.L.C. (PayCo), which is privately owned by a group of the world’s largest banks. It currently reaches 75 percent of all U.S. demand deposit accounts held by U.S financial institutions accessible by 61 percent of DDA account holders. Access is available to all federally registered depository institutions, either via a direct connection or a third-party service provider (TPSP). Financial institutions with the resources to make their backend processes compatible with the network can connect directly, but others may need to use a TPSP. Such providers specialize in complex and resource-intensive infrastructural issues like ensuring 24x7x365 processing. As with all specializations, this makes TPSPs more efficient. The current cap for an RTP transaction is $100,000, with lower limits sometimes set by connected institutions.
FedNowSM from the Federal Reserve
The Federal Reserve is on track to launch its own RTP network in 2023. Much of what goes for The Clearing House’s network also applies to FedNow, though FedNow will be operated entirely by Federal Reserve banks.
The Fed expects the launch of a second domestic RTP rail to drive cost reductions, efficiency improvements, and increased adoption through competition. Given that the service is still in heavy development, specifics are still being worked out. What we do know is that FedNow’s rollout will be phased with the first stages involving support for core capabilities. The Fed is aware that the main obstacle for many financial institutions is 24x7x365 processing, so they are hoping to ease that transition. Concerns have been raised involving interoperability and public-private sector competition, but the Federal Reserve seems to be taking these concerns, as well as other lessons from extant systems into consideration. The current expected value cap for a FedWire payment is $25,000, but the Fed is also considering increasing this limit before release.
Common Questions
Even if you’re fully versed in payments lingo, there are some overlapping terms that it helps to clarify. Although the industry communicates the benefits of RTP to end-users and interest is increasing among consumers, consumer education still has a way to go. The meanings of terms can depend on who’s using them as well as the country they are being used in.
Faster Payments is a blanket term that, in the U.S., refers to an accelerated payment rail. Examples include same-day ACH, real-time payments, Zelle, push-to-card, and others. They are advocated for by the US Faster Payments Council. In the U.K., Faster Payments refers to one of their actual payments networks.
Is ____ a real-time payment?
Mobile P2P Payments: Not really. Not yet, at least. Apps like Venmo and CashApp offer instant transfers between users—but only as long as money is moved within that app’s system (closed-loop). As soon as a consumer or business wants to access their cash outside of the app, another payment rail will be deployed, typically ACH. Some vendors, however, are eyeing real-time payments as a method of facilitating transfers between eWallets and consumer bank accounts. This won’t make mobile wallets themselves open-loop but would allow for a more seamless connection to an open-loop system, like RTP.
Zelle: Kind of! Operated by Early Warning Services LLC, a company owned by several prominent U.S. banks, Zelle is an independent transfer service linked to many banks and credit unions. It has recently been integrated with The Clearing House’s RTP network, which allows payments sent using Zelle to be delivered by the RTP network. If the payee or payer financial institution is not connected to the RTP network, then it still settles in minutes via Zelle’s own network but is not technically real-time.
Wire Transfer: Kind of. Typically reserved for low-volume, high-value transactions, wire transfers do settle instantly. For this reason, they are referred to as real-time gross settlement, or RTGS, transactions. Despite the similarities, the difference is a practical one: real-time payments are ideal for high-volume transactions, whereas wires are used for high-value transactions. You might use RTP to send money to a family member or pay rent, while wire transfers make more sense for real estate transactions or settling estates.
Same Day ACH: No. While same-day ACH transactions are an improvement over regular ACH transactions, they only shorten the three-day window to one. More importantly, they are batched, so rather than being individually processed like RTP or wire transfers, they are all compiled and settled together at the end of the working day, meaning payments initiated after an institution’s cutoff window won’t be processed until the next business day.
Push-to-Card: Almost. Push-to-card leverages existing card networks but reverses the flow of information so that funds can be sent TO a debit or credit card, rather than from one. Transactions can settle in minutes—which is fast—just not as fast as via RTP.
Check: What? No!
Why Use Real-Time Payments?
There are myriad benefits to using real-time payments across every level of the financial system. The example most familiar to Americans are disbursements from the U.S. government, such as stimulus payments and benefit payments. The ability to send money directly to consumers electronically saves a huge amount of money on printing and mailing and helps eliminate printing errors like misspelled names. Electronic disbursement also speeds time to payment for many who rely on such payments for critical living expenses.
The good news is that soon we won’t have to think about the “what-ifs”. More institutions are connecting to TCH’s RTP network, and with the arrival of FedNow, real-time payments should very soon be the standard that ushers the U.S. into the next generation of commerce.
Learn more about real-time payments in the webinar, RTP 2.0: Adding Value With Payment Origination & Innovation.
Updated from a blog originally published January 22, 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.
