The realm of ecommerce and digital transactions demands instantaneous processes. According to CNBC, consumers worldwide spent $900 billion more online in 2020 than the two years before.
Rising online spending is obviously not news to anyone anymore. But its ongoing and rapid growth has put the spotlight on a relatively new type of payments technology: real-time payments (RTP).
So, what are real-time payments? And why should businesses care?
Below, we explore the ins and outs of RTP technology—including its benefits and how small businesses can take advantage.
What are real-time payments?
Initiated and settled instantly, real-time payments are payments made in real-time—exactly as the name suggests.
In the United States, the most distinguished RTP network belongs to The Clearing House (TCH). Launched in 2017, The Clearing House’s RTP network opened the door for B2B, P2P, payroll, and request-for-payment (RfP) real-time payments in the U.S.
The Federal Reserve’s FedNow service launched in July 2023 and now operates as the second major real-time payments system in the U.S., running parallel to The Clearing House’s RTP network.
How RTP works
RTP operates as a credit push system. The payment is initiated by the sender’s bank and pushed to the recipient’s account. This differs from traditional credit card or ACH transactions, which are often authorized as debit pull systems.
All RTP systems are built on a digital infrastructure called the real-time payments rail. If you’re not familiar with the term, a “payments rail” is a payment network that moves funds from the payer to the payee.
The Clearing House’s rail requires participating financial institutions to initiate, clear, and settle payments instantly using real-time gross settlement (RTGS)—meaning each payment is finalized individually, 24/7/365, without waiting for batch cycles.
Instant transactions to these accounts require seamless movement of nuanced information with no errors. To accomplish this, financial institutions implementing RTP must speak the same language. In the RTP realm, this can be done by requiring parties to utilize ISO 20022—a standard that dictates how information is transferred between financial institutions. (Think of it as a manual that standardizes the terms and processes used when banks “talk” to each other.)
Payment information is also exchanged in an open-loop system, which enables inter-bank transfers.This allows RTP payments to transmit faster, and it also offers greater security to all parties on the network. Rather than relying on a prepaid balance, RTPs are directly connected to personal accounts.
Benefits of real-time payments
Real-time payments are the latest big leap ahead in digital payments technology. Fast settlements have huge impacts on funds availability. For individuals or businesses that need those immediate turnarounds, RTPs have a significant impact. We’ve all faced emergencies that require immediate access to funds. And better cash management can transform businesses.
Faster communication between parties also promotes a smoother customer experience. In the business-to-business (B2B) sector, increased transparency around the arrival of funds makes parties move faster and with more confidence.
When payments are settled instantly, businesses can provide products and services quicker and have simpler financial conversations with customers. Better cash management and simplified reconciliation are key. RTPs use ISO 20022 data standards to carry detailed remittance information (invoice numbers, references) along with the payment, automating accounts receivable (AR) reconciliation for businesses.
Perhaps the best news for businesses is that real-time payments are irrevocable—the sender cannot unilaterally initiate a stop payment. However, like any bank transfer, RTPs can be reversed via a formal reclamation request initiated by the bank in cases of verified error or fraud.
What payment types are “real-time payments”?
Payment services everywhere talk about fast payments, immediate payments, and instant payments. Some are used interchangeably for real-time payments, but most “fast” payments are not RTPs.
What an RTP is
Genuine real-time payments networks run on the RTP rail. Anything else is not a real-time payment. In other words, faster does not equal real-time.
The payments technology used also makes RTP unique. Visa and Mastercard both offer push payment solutions that send transactions in just a few seconds or minutes. But these transactions are not settled. The receiver may have their money immediately, but the transaction is not completed in real-time.
Again, real-time payments run on the RTP rail, and they are instant. Initiation and settlement are completed in seconds.
What an RTP is not
Same-day ACH is heavily promoted as a faster payments solution. Rather than the three-day wait of a traditional ACH transaction, same-day ACH has taken it down to just one day. But it’s not an RTP. It’s faster but not instantaneous.From a technology perspective, same-day ACH is also different from RTP. Same-day ACH transactions are batched and settled together daily. RTPs are individually processed in real-time.
Mobile payments like Venmo and CashApp are not true RTPs because they initially operate on a “closed-loop” ledger (funds stay within the app’s ecosystem). While they do offer “instant transfer” out of the app, that service utilizes push-to-card technology and not the RTP rail, meaning the funds movement is initiated via card networks and not the bank-to-bank RTP network.
Wire transfers are RTGS transactions (like RTPs), meaning settlement is instantaneous. However, wire transfers utilize older technology (like Fedwire), lack the data-rich messaging (ISO 20022) of modern RTPs, and are typically reserved for low-volume, high-value corporate transfers.
Push-to-card is also close but not quite a real-time payment. Using existing card networks, push-to-card reverses information flow to send funds to a debit or credit card. But it can not process new payments from them. What’s more, push-to-card payment processing does not settle instantly. It takes a few minutes.
One service provider close to RTP status
Zelle is the closest to RTPs of all the “not-quite-RTP” solutions. Operated by Early Warning Services LLC, Zelle was developed in collaboration with a number of the most prominent U.S. banks. It’s an independent transfer service making it easier to transfer between different banks and credit unions. And in 2021, Zelle was integrated with The Clearing House’s RTP network.
Zelle’s speed is achieved primarily through its own network and internal ledger. While it can leverage the TCH’s RTP rail when both participating banks are connected, Zelle is better classified as an instant messaging service that utilizes various underlying rails (including ACH and RTP) to guarantee payment delivery, often in minutes.
How businesses can implement real-time payments
Businesses must work with their acquiring bank or a payment partner (like Stax) that has integrated its platform with the TCH or FedNow networks. Your processor acts as your gateway to the real-time rail, handling the technical requirements.
Many financial institutions are already integrating with The Clearing House’s RTP network, and FedNow will present even more options in the coming years. So far, JPMorgan Chase, Wells Fargo, Bank of America, Citibank, and PNC (among others) have real-time payment methods available. These institutions can both send and receive RTPs, and they are Member FDIC.
All businesses will have to accept that there is going to be a process of adoption before all transactions can be RTP transactions. If your payee does not have an RTP-powered solution, you cannot have the end-to-end RTP experience. But enabling your business today for the evolution of this technology in the future is a smart option to pay and get paid with greater convenience.
Even with RTPs, businesses still need payment processing integration. Stax is an award-winning small business credit card payment processor offering all-in-one merchant services to streamline your companies ability to take payments.
Contact us today to learn how we can support you now and into an RTP-powered financial future.
Quick FAQs about real-time payments
Q: What are real-time payments (RTP)?
Real-time payments, or RTP, are payments that are initiated and settled instantly. This means that the transactions are completed in real-time, providing immediate access to funds.
Q: Who operates the most distinguished RTP network in the United States?
In the United States, the most distinguished RTP network is operated by The Clearing House (TCH). The network was launched in 2017 and paved the way for real-time payments in various sectors including B2B, P2P, payroll, and request for payment (RfP) in the U.S.
Q: How do real-time payments work?
Real-time payments work on a digital infrastructure called the real-time payments rail, a payment network that facilitates the movement of funds from the payer to the payee. Financial institutions implementing RTP must use the ISO 20022 standard, which standardizes how information is transferred between them.
Q: What are the benefits of real-time payments?
Real-time payments offer several benefits, such as fast settlements, improved cash management, enhanced customer experience, and increased transparency. They also cannot be canceled or reversed once received, ensuring the funds are 100% available.
Q: Are fast payments and instant payments the same as real-time payments?
No, fast payments and instant payments are not the same as real-time payments. While many payment services use these terms interchangeably, genuine real-time payments run on the RTP rail and are completed in real-time, both initiation and settlement.
Q: What types of payment are not considered real-time payments?
Same-day ACH, mobile payments like Venmo and CashApp, wire transfers, and push-to-card are not considered real-time payments. While some of these options do offer faster settlement times, they do not process and complete transactions in real-time.
Q: How can businesses implement real-time payments?
Businesses can implement real-time payments by integrating with the RTP network of The Clearing House. Many financial institutions, including JPMorgan Chase, Wells Fargo, Bank of America, Citibank, and PNC, have real-time payment methods available.
Q: Why should businesses care about real-time payments?
Businesses should care about real-time payments due to their benefits such as immediate funds availability, improved cash management, smoother customer experience, and increased transparency. They also can speed up the provision of products and services and simplify financial conversations with customers.
Q: What does “payments rail” mean in the context of real-time payments?
In the context of real-time payments, a “payments rail” is a payment network that moves funds from the payer to the payee. It forms the basis for all RTP systems.
Q: What is the role of ISO 20022 in real-time payments?
ISO 20022 plays a crucial role in real-time payments, as it is a standard that dictates how information is transferred between financial institutions. It ensures that all parties speak the same language, making the seamless movement of nuanced information possible.
