Instant payments are changing the payment world in a big way. Gone are the days of weeks for a check to clear or days for ACH payments to process. In the era of instant payments, money can be transferred in seconds
95% of Americans report some level of economic stress. Instant payments can help them weather the storm by delivering funds faster. Instant payments are also emerging as a game-changer for companies by providing an additional revenue stream. While instant payments and new technologies like FedNow are exciting, they also come with challenges, such as fraud risks and regulatory concerns.
Below, you’ll learn what instant payments are, the challenges of adopting them, and explore insights into their future.
What is an instant payment?
Instant payments let people, businesses, and financial institutions transfer money almost instantly, marking a major shift in how money moves digitally. Unlike traditional transfers that take days, instant payments happen in seconds.
While wiring money is quick, it's expensive. Other payment methods can be costly or take days to settle. Instant payments, on the other hand, are both fast and affordable.
There are two main types of instant payments: credit payments, where money is pushed to another account, and request for payment (RfP), where money is pulled from an account after a request is made. These are also called 'payouts' and 'payins'; see below.
It's important to know that "instant payments" and "Real-Time Payments (RTP)" aren't the same thing. RTP is a specific payment rail run by The Clearing House that handles instant payments. Another instant payment processor is FedNow, which is run by the Federal Reserve.
Instant payments are also different from same-day ACH. The speed of same-day ACH can vary based on when it's submitted, the receiving bank's rules, and any other banks involved. However, businesses can access instant ACH transfers with Plaid Transfer, which delivers low-risk payments faster. We'll cover this in more detail later.
How do instant payments work?
Timing, cost, and risk assessment processes can vary by processor, but here's a basic overview of how most instant payments work. These steps are automated and happen within seconds with little human involvement.
Payment initiation: The sender, usually a merchant but sometimes a person, starts the payment through a mobile app, online banking platform, or even in person. For payouts, money is sent; for payins, funds are requested.
Payment information is sent: The sender provides details like the amount and the recipient’s account information.
Authorization: The sender's bank checks the account balance and potential fraud for payouts. For payins, the bank receiving the request must validate it and get the sender’s approval.
Routing: Once authorized, the payment is sent through a payment network like FedNow or RTP.
Notification: The recipient's bank is informed of the payment and validates it, then lets the receiver know the money is on its way.
Funds Transfer: After all checks are done, the money is transferred to the receiver’s account.
The speed of these steps makes instant payments a convenient choice for various transactions like account-to-account transfers, bill payments, and online shopping.
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Why use instant payment methods?
Instant payments offer a number of benefits. The main benefit, of course, is speed. Other benefits include:
24/7 Accessibility: Unlike ACH, which has set processing times, or wire transfers, which are often only available during banking hours, instant payments can be processed at any time. For example, a gig worker who finishes a late night shift can access their payment immediately to fill up their gas tank or purchase groceries.
Improved cash flow: Instant payments improve financial health by allowing funds to be accessed instantly, rather than waiting days for payments to process. This liquidity increases financial security and reduces the impact of financial emergencies, such as an unexpected bill.
Monetization opportunities: For companies, offering instant payment can serve as a source of revenue. While instant payment processors charge a small fee, most businesses that offer instant payments tack on an additional fee. As usage grows, this could become a significant source of income.
Competitive Advantage: As consumer demand for instant payments increases, companies that accept this payment method will have a leg up on competitors that still rely on slower payment methods.
What are the different instant payment options?
There are several options for speedy bank payments, some of which are instant. Here are the three main payment methods to be aware of.
Real-Time Payments (RTP)
Founded in 2017, RTP from The Clearing House enables 24/7 near-instant transfer of funds between bank accounts. It supports both sending money (credits) and requests for payments (RfP). Accessibility for RfP is limited, however, due to the required risk assessments and use case limitations.
FedNow
FedNow is an instant payment system by the Federal Reserve, allowing financial institutions of all sizes to offer instant payments. While features are being introduced gradually, it currently supports both credit transactions and payment requests, though requests for payment (RfP) are less common due to limited infrastructure. Like RTP, FedNow operates 24/7, with over 100 financial institutions already participating, and its coverage continues to expand.
Same-Day ACH
Same-day ACH isn't truly instant, but it does speed up payment processing. It allows payments to be made within the same business day using the ACH network. However, it's only available during business hours, so transactions made late on a Friday won't go through until Monday. Most financial institutions support same-day ACH, making it widely accessible.
This chart illustrates the core differences between RTP, FedNow, and same-day ACH. Note that standard ACH is widely accessible, but generally takes several days to settle.
What are instant ACH transfers?
Currently, instant ACH is not available from The Automated Clearing House. However, Plaid has worked to create a solution that allows the vast majority of ACH payments to be made available in near real-time.
Instant ACH payments can be created synthetically using Plaid's fraud engine, Signal. Rather than just processing ACH transactions faster, our ACH risk reduction product provides a payment score based on more than 1,000 risk factors. This allows companies to make funds available instantly and deliver goods faster when they are confident the ACH process will settle.
After analysis, upwards of 90% of transactions—especially those from trusted repeat customers—land in the ‘low-risk’ bucket. You can choose to pre-fund the transaction (i.e., provide funds) as if it were an instant payment and be confident it will settle.
Use cases for instant payments
Instant payments provide speed, convenience, and efficiency across a range of use cases. While the use cases are likely to change as accessibility increases, the most common scenarios for instant payments are currently:
Account-to-account (A2A) transactions: Users can seamlessly transfer money between their own accounts, whether it's moving money from checking to savings accounts or from their account to a friend or family member.
Business-to-business (B2B) payments: Accelerate the payment process for vendors, employees, and contractors. Suppliers can receive funds faster, which improves cash flow and reduces the need for credit and financing.
Peer-to-peer (P2P) transfers: Allow individuals to easily share money with friends or family, for example to split the bill at dinner, send cash for a night out, or accept payment for a shared utility bill.
Same-day payroll: Gig workers and freelancers can rely on real-time payments for quick access to funds. Businesses like Uber allow workers to cash their earnings out in seconds. This increases cash flow for workers and serves as a source of revenue for the companies.
Insurance payments: Claims processing can be expedited through instant payments, allowing customers to access funds needed to repair their car, book a hotel, or get necessary items after a home or automobile claim.
Refunds and warranties: Merchants offering warranties and refunds to unsatisfied customers can use instant payments to deliver instant refunds to customers, solving their problems and possibly salvaging a poor customer experience.
The challenges of implementing instant payments (and how to overcome them)
While instant payments offer advantages in terms of speed and convenience, widespread usage is not without challenges. Businesses and financial institutions face several hurdles when considering adding instant payments, including:
Fraud risk management
The heightened risk of fraud is a major challenge for instant payments. Unlike credit card or PayPal payments, which can be canceled or reversed, instant payments cannot be reversed. To mitigate these risks, companies should leverage advanced authentication methods, real-time monitoring, and risk assessment.
Plaid Transfer helps limit instant payment risk by offering an all-in-one payment solution for ACH, FedNow, and RTP. The platform reduces risk by verifying accounts and providing deeper insights that reduce NSF returns.
Technical and compliance barriers
The adoption of instant payment systems requires significant technical upgrades and investments in infrastructure to perform the actual transfers and manage compliance.
Navigating complex payment rules can require substantial resources. This challenge is most noticeable in the slow adoption of RfP, which is hindering growth for instant payins. For instant payouts, most institutions can use the current infrastructure through RTP or FedNow.
The slow adoption of request for payment (RfP)
One major challenge to the widespread use of instant payments is the slow adoption of instant payins (RfP). Most instant payments today are used for payouts, like instant payroll and loan disbursements because there's not enough infrastructure for the necessary risk assessments for payins. Building this infrastructure will take time.
Currently, Plaid offers a solution for this using Plaid’s ACH risk reduction product, Signal, which analyzes more than 1,000+ risk factors to determine which payments are low risk and processes those payments instantly. As much as 90% of transactions—especially from trusted regular customers—will end up in the ‘low-risk’ bucket. This can improve new user adoption and customer satisfaction.
The role of Plaid in the instant payments ecosystem
Plaid supports both RTP and FedNow, with intelligent routing between the two rails to help businesses offer broader coverage for instant payments.
It's worth noting that when true instant payins become widely available, Plaid will seamlessly integrate them into its ecosystem. Until the infrastructure to fully support instant RfP is in place, our synthetic instant ACH bridge solution is the next best option.
The commitment to staying at the forefront of payment innovation ensures Plaid’s customers will continue to have access to the latest advancements in instant payments.
The future of instant payments
The path forward is clear: instant payments are not just a trend; they represent a permanent shift. The expansion of RfP (request for payments) is on the horizon and is likely to result in instant payments becoming the de facto choice for recurring payment use cases such as bill pay.
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