If you have needed money urgently, you know the importance of having it transferred quickly to your account. Electronic transactions conducted via bank take anywhere between 2-5 business days to reflect on your bank account. It takes one day to initiate the transaction, one day to process it, and then one day to post it to your account. Traditional payment methods, like sending checks through the mail, can take longer than any electronic payment method. That’s where real-time payment comes into the picture.
The method allows people to transfer money instantly and have it credited to their bank accounts as soon as the transfer is initiated. The platforms that facilitate real-time payments are available 24 hours and 365 days a year, covering national holidays and weekends. With bank transfers, you need to wait for the holidays or weekends to be over so that the bank can process the transaction. Read on to learn more about real-time payments, their importance, the reasons they are getting popular, and more.
Overview of Real-time Payment
The history of real-time payment (RTP) dates back to 2017 when the Clearing House Payments in America launched the instant payment system that would allow people to send money instantaneously to the recipient. Whether people had to deposit a check or pay bills, the digital infrastructure supporting faster payments became an ideal way to process transactions quickly and safely.
The payment structure became a new standard within a short period. Today, nearly everyone is familiar with the concept and a majority of the people conducting electronic transactions use real-time payment systems to eliminate the waiting period. Before we discuss its value and function, let’s take a look at the difference between faster and real-time payments.
Faster and RTP are used interchangeably. Faster payments are, however, not instant. They are considerably faster than other traditional payment methods, but they still take a day or a few hours to be processed and posted on the bank accounts. Some faster payment methods might confirm the transaction immediately, but take time to settle it. They are not counted as RTPs, as the funds take time to be shown on the receiver’s account. Likewise, ACH networks do not process transactions at specific hours and on weekends and holidays.
How Does It Work?
When a payment is processed through RTP, the funds will be reflected in your bank account immediately—whether it’s a customer buying from your store or you issuing them a refund. Before it was introduced, even the fastest method to transfer funds used to take 24-48 hours. The process changes the way banks communicate. It boosts the efficiency and speed of the transaction, enabling people to process funds fairly quickly and without any hassle. Let’s see how the process works.
- The customer can choose to pay via RTP at a retail store. They might select their desired method of real-time payments and initiate the transaction.
- The issuing bank will review their request and approve it if they have sufficient funds in their bank account to pay the requested amount.
- The bank then sends this approval to the RTP network.
- The RTP network verifies the details and confirms the transaction.
- The recipient will get the money instantly and the same will be reflected on their bank accounts. You can check your account to see the deducted amount.
It might sound like a lengthy process, but it takes a few seconds to be completed and the money to be transferred from one bank account to another, no matter how far the sender and receiver are located.
Real-Time Payments: Are They Really Worth It?
With RTP, you don’t have to wait for days to get your transactions cleared. There’s no need to visit the bank or go through the hectic transfer process. Besides that, you will find many P2P platforms that facilitate instant payments with simple clicks.
Once you have created a profile on these apps, you just need to fill in the amount you’d like to transfer and select the recipient. That’s it. But all these features do not come for free. Depending on the P2P platform you choose, you may have to pay a specific percentage of commission on each transaction. PayPal, for instance, charges a fixed fee on each transaction from the seller and the recipient. Although there are free P2P apps, some recognized and trusted platforms charge you for each transaction.
The traditional transactions, on the other hand, are free of cost. For instance, bank transfers are mostly free. They might take longer to process, but they don’t charge anything extra. This comes in handy when you are transferring a really big amount, and the transaction fee on P2P is ridiculously high.
This leads us to a question, are real-time payments worth it?
According to PYMNTS, 70% of people that have tried real-time payments are highly likely to make it their standard form of payment, while 33% of them do not mind paying a fee if they are guaranteed instant transfer. The faster money movement gives them peace of mind. The research further shows that access to real-time payments is one of the key considerations in selecting a financial institution. They are willing to switch the bank or FI if it doesn’t offer RTP.
FedNow: A New Project for Instant Payments
The Federal Reserve is all set to launch its new instant transfer app “FedNow”. It’s different from CashApp, PayPal, and other instant transfer apps in that it promotes fund transfers through your banks. It’s a government-based payment structure that facilitates faster payments across the United States, but not outside the banks.
The Federal Reserve’s FedNow project has built excitement in customers and financial institutions as the project will enable all FIs to facilitate the instant transfer, allowing faster and safer payments. Instead of having to wait for a week to get your check processed, you can now enjoy instant transfers without using any P2P apps.
Whether you are processing invoice payments or clearing your bills, FedNow will enable faster and smoother transactions that are processed through your banks. The Federal Reserve has clarified that its recent projects are not developed to eliminate private RTP services, like CashApp or Venmo. It’s an addition to the P2P systems that facilitate real-time payments.
How to Use RTP Wisely?
While RTP is secure and speedy, it does come with a few drawbacks you need to be aware of before using this payment system. For instance, transferring a huge amount through RTP apps that charge transaction fees might not be a good idea. You don’t want to spend hundreds of dollars in fees, just because you want the transaction to be processed immediately.
Another thing to note here is that payment transfer through RTP carries some risk. The immediate payment cannot be retrieved once it’s sent. So before you hit the “Pay” button, double-check the recipient’s information. Other than that, fraud P2P apps that scam people and get their money anonymously are on the rise. You need to be careful about the apps that make false claims, like getting a free cashback of up to 100% on using the P2P app for transactions.
Benefits of Real-time Payments
Who doesn’t want their transactions to be settled within seconds? Waiting for days to get the amount on your bank accounts and tracking your account daily to see if the amount has been credited can be a real hassle for merchants and customers. The real-time payment apps have simplified the process, by speeding up the transfers. Here’s how real-time payments benefit businesses and individuals.
Improves Cash Flow
Real-time payments allow you to have funds immediately, making it a great option for merchants that often struggle with poor cash flow. If you require cash from customers immediately to fund your working capital or invest it in other projects, the real-time payment structure is the most reliable choice for you.
It’s much more efficient than traditional paper-based payment systems, such as checks. Even banks take a few business days to process your transactions. While they are free, they don’t offer the convenience you get from real-time payments. With RTP, you can immediately close the transaction after clearing the payment. There’s no need to ask the recipient whether they have received the funds every day. Once it’s sent, you will be notified about the transfer and the settled transaction.
Businesses that have growth plans often implement innovative technology as it gives their business a boost. And not just the domestic transactions, but with a high demand for real-time payments, people are expecting this technology to be available worldwide and facilitate overseas transactions. We already have a few P2P apps, such as PayPal, that accept monetary transactions from different corners of the world at a reasonable fee.
RTP has become a reality for most businesses and individuals. It offers convenience, efficiency, growth, and transparency—all of which are critical for a business’s growth. With a large number of people embracing real-time payments, RTP is now an ideal payment method for all.