May 16, 2023

The road to real-time payments - where are we now?

John Anderson, Head of Payments at Plaid, sat down with Lily Varon, Senior Analyst at Forrester and Akash Desai, Group Product Manager at Novo to discuss the future of real-time payments. 

Driving the conversation:  

  • How will RTP® and FedNow impact the growth of real-time payments? 

  • What are the opportunities for existing and emerging payment rails? 

  • Why is fraud prevention so important for real-time payments?

Watch now!

The growth of ACH is being driven by consumers and small to medium-sized businesses (SMBs). [2:00] There were 7.7 billion Same-Day ACH transactions in the first quarter of 2023, representing an increase of 6.4% over the first quarter of 2022. This growth is driven by: 

  1. Consumers using ACH for faster bill pay, account funding, and high-value purchases 

  2. Retailers looking to reduce costs 

  3. SMBs using ACH payments to improve cash flow management

“This is about helping businesses and customers feel more in control of their money and have more visibility and awareness about where their money is. That’s great for everyone,” said Varon.

Plaid creates synthetic real-time ACH payments with Plaid Signal. [12:25] Signal uses a machine learning engine to help customers determine when there is low risk of ACH return. As a result, customers no longer need to place holds on those funds in order to ensure they settle or to wait for settlement. That allows them to speed up funds availability. 

“We’ve been able to help our customer create a synthetic real time rail on top of ACH,” explained Anderson. 

“Real” real-time payment options are emerging, but coverage is limited [19:00] Real-time payments are currently supported by the RTP payment platform from The Clearing House. RTP usage is still limited—accounting for less than 1% of the volume of ACH transactions and covers only about 65% of financial institutions. In contrast, ACH coverage is 100%.

Real-time payments are processed immediately and delivered directly to a recipient’s bank account. In contrast, ACH payments are processed in batches at certain times and are only available on business days, not weekends or holidays. 

→ To learn more about how Plaid is making account-to-account money movement safer, smarter, and faster–check out our article, The next phase of bank payments

The adoption of bank payments will create a flywheel effect. [18:30] As the number of instant bank payments increases, consumers and businesses will start to expect faster payment options. Companies will then invest in optimizing the user experience, increasing momentum. Meanwhile, instant payments will displace other payment methods. 

“With a Plaid integration, we can help companies know their balance with certainty. That helps the company create a joyful experience and save costs on customer services,” said Anderson.  

SMBs can use real-time payments to improve cash management [20:00] When an SMB gets paid quickly, they can use that extra cash to pay employees instantly or reinvest in their company. When a business is confident that their incoming funds will immediately settle, they can use those funds immediately or same day. 

“Without the world of RTP you could never get paid and pay employees, without enough balance, on the same day. [SMBs] are looking for that type of cash flow so that they can reinvest in their business” said Desai.

The industry is excited about the launch of FedNow [27:30] A new real-time payment option, FedNow, will launch in July. FedNow, developed by the Federal Reserve, will compete with real-time payments platform RTP. This will improve coverage and offer more payment choices to both businesses and consumers. 

“RTP and FedNow have identical settlement times of 24/7, 365. That is fundamentally what we mean by real time,” explained Anderson. 

Fraud is happening in real time [42:00] The risk of fraud accelerates in the real-time payments space. It’s important to manage the risk of fraud before money is moved, in part, because real-time payments are irrevocable and cannot be reversed. 

What’s next for bank payments? 

The team made these predictions for what to expect in the next 4-6 years:

  • ACH and real-time payments will be optimized for speed and functionality. 

  • With more payment choices, consumers will use data science tools to determine the best payment method.

  • Interoperable technology will make it easier to integrate different payment rails. 

  • Employees will get paid more quickly, improving their experience, and supporting the gig economy.

  • New bank payment use cases will emerge. For example, Amazon now offers a pay-by-bank option via Venmo. 

  • Real-time payment rails will support requests for payments. These are messages sent to account holders which allow them to approve sending funds to pay a bill or other payment that is due. 

“Now that people can get real-time access to their payroll, or to what they earned, that’s going to generate entirely new means of employment and entirely new incentive structures for people to contribute more value to society and more value in what they do,” remarked Anderson. 

Go deeper: Learn how Plaid supports the future of payments