July 13, 2023
Fast, faster, fastest: the promise of real-time payments and the challenges that still remain
Real-time payments allow money to be moved from one bank account to another in seconds, 24/7/365. Jenny Johnston led a panel at Fintech Nexus USA discussing how faster money movement is reducing friction and creating new opportunities. The panel, “Fast, Faster, Fastest: The Promise of Real-Time Payments—and the Challenges that Still Remain” included Stephany Kirkpatrick, CEO and founder of Orum, Nick Thompson, Bank Partnerships Lead at Modern Treasury and Ajay Andrews, Product Lead, Payments at Plaid.
Driving the conversation:
Key factors impacting the adoption of real-time payments
How to compare real-time payments vs. ACH
How FedNow will change the payments ecosystem
Challenges companies need to be aware of
Real-time payments reduce “time to money” from days to seconds. [1:10] For many consumers, “time to money” – the amount of time between when someone is owed money and when it’s available for them to use – is critical for financial wellness. Real-time payments shorten time to money by enabling a payment between bank accounts to be initiated, cleared, and settled within seconds, any time of day, including weekends and holidays. In contrast, ACH payments can take up to 3-5 days to be settled because they’re processed in batches and are only available on business days at certain times, not weekends or holidays.
With real-time payments, consumers have faster access to funds, enabling them to pay bills quicker, reduce overdraft fees, and invest in the things they need. That can be a game changer for workers living paycheck to paycheck. With real-time payments, gig workers can access earned wages as soon as they clock out and ride-share drivers can get paid in time to buy gas for the next shift.
“In the gig economy, one to two days really does make a very meaningful difference to have access to those funds and not be subject to late fees, overdrafts, and all the different ways that a large part of the population is having to constantly think about where their money is and when it’s coming,” said Thompson.
Real-time payment volume is projected to grow dramatically, but today, most US consumers still move their money with ACH. [6:20] Real-time payment volume in the US is expected to grow to 8.9 billion by 2026; however, US ACH transaction volume will likely exceed this given that 30 billion US ACH transactions took place in 2022.
That’s due in part to the limited usage of the RTP® payment platform from The Clearing House, which supports real-time payments. RTP reports that its network reaches 65% of US demand deposit accounts (DDAs) and is currently accessible to financial institutions that hold close to 90% of US DDAs. In contrast, ACH coverage is 100%.
“Faster payments are going to be a fundamental change in the way that the American business owner and the small business owner are able to operate,” said Kirkpatrick.
A new payment rail called FedNow will help boost transaction volume when it launches in July. FedNow is a round-the-clock payment and settlement service developed by the Federal Reserve. For the first time, US consumers and businesses will have two real-time payment options, RTP and FedNow.
Selecting the best payment rail isn’t always straightforward because each differs in speed, settlement risk, and coverage. [14:20] ACH typically has a lower rate of fraud than real-time payments. RTP has broad coverage, but The Clearing House only handles clearing and not settlement, making it more challenging to manage liquidity. FedNow real-time payments will handle both clearing and settlement, appealing to smaller and long-tail banks that already have a settlement account with the Fed.
“FedNow allows banks who already have a settlement account with the Fed to leverage that. We believe long-tail banks will adopt FedNow,” said Andrews. “What that means for our customers, who might be in the lending or gig worker space, is that the percentage of consumers who you can instantly pay goes up.”
There are limits to real-time payment use cases [23:50] Request for payment (RFP) allows using real-time rails for use cases currently served by ACH debit, but has shortcomings with its user experience and bank adoption. There is also a need to educate consumers about fraud vectors.
Companies are adopting real-time payments to meet consumer expectations and differentiate their services. [27:50] Today’s consumers expect things to happen quickly and payments are no exception. That consumer demand is likely to grow for ACH as well as real-time payments as more money flows between banks, apps, and consumers. Meanwhile, businesses are using instant payouts to gain market share. A payroll provider wants to offer the fastest early-wage access. Lenders want to offer instant loan disbursements. Insurers can quickly deliver disbursements for auto, life and health insurance claims. Ultimately, real-time payments will change the way digital financial services are delivered.
“The promise of real-time payments really is catching up with the rest of the world,” said Andrews. “You can see the change in people’s daily lives when money can move in seconds…Real-time payments is not just a technical rail, it’s an economic and societal imperative.”
Plaid helps companies navigate these payment options with innovative payment solutions such as Plaid Signal, a synthetic real-time ACH solution that allows customers to offer a near-instant payment experience without increasing the likelihood of an ACH return. Instant Payouts supports ACH and RTP and allows customers to use Plaid Transfer to link a bank account, check if it’s eligible for real-time payments, and move funds instantly. Customers in a variety of businesses and verticals like personal lending, marketplaces, insurance, brokerages, and digital investment platforms are using Instant Payouts to enable immediate access to money for their customers.