Instant payments are revolutionizing the payments world. Gone are the days of waiting hours or weeks for a check to clear or funds to move from one account to another. 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 accessing funds and making payments faster. Instant payments are also emerging as a game-changer for companies by providing an additional revenue stream and helping them balance their books faster. Despite the excitement for instant payments and new technologies like FedNow, there are also challenges to consider, including fraud risk and regulations.
Below, you’ll learn more about what instant payments are and how they work, explore the challenges to adoption, and gain insights into what the future holds.
What are instant payments?
Instant payments are payment methods that allow people, businesses, and financial institutions to transfer money in near real-time. This represents a fundamental shift in digital money movement, as funds are transferred in seconds, rather than days or hours. While wiring money is usually instant, it's also costly. Instant payments are both fast and affordable.
Many people use the terms instant payments and Real-Time Payments (RTP) interchangeably, but there are differences between the two. RTP is one of two payment rails that process instant payments and is run by The Clearing House. The other instant payment rail is called FedNow, run by the Federal Reserve.
Instant payments are also not the same as same-day ACH. While same-day ACH is faster than traditional ACH, it is not instantaneous. The speed of same-day ACH can still depend on submission times, the receiving bank's policies, and any intermediary banks involved in the transaction.
There are two primary categories of instant payments: credit (also called push payments) and request for payment (RfP). In the payments space, credits are often referred to as ‘instant payouts’ and RfPs as ‘instant payins’.
Credit payments involve the sender initiating the transaction and "pushing" money to another account. RfP allows the recipient to request funds from the sender, which accomplishes the same end result as pulling money into their account (although the recipient must authorize the payment before funds are moved).
Due to the differences in security and risk management processes, the different types of transactions are not equally available. This discrepancy is covered in more detail in a further section.
How do instant payments work?
Timing, cost, and risk assessment processes can vary by processor, but here's a simplified explanation of how most instant payments work. Note that the following steps are automated and completed in seconds with limited human involvement.
Payment initiation: The sender (often a merchant, but may also be a person) initiates the payment through a mobile app, online banking platform, or even in person. For payouts, they would be sending money, while payins would be requesting funds.
Payment information is sent: The sender provides information about the payment, including the amount, recipient's details (such as account number or user name), and any other required information.
Authorization: For payouts, the sender's financial institution validates the payment request by verifying the account balance and checking for fraud risks. For payins, the financial institution receiving the request must validate the request as well as obtain the payor’s approval to send the payment.
Routing: After authorization, the payment is routed through the payment network, either FedNow or RTP.
Notification: The recipient's financial institution is notified of the payment request and validates it on their end, then notifies the receiver of the pending transfer.
Funds Transfer: After all checks are complete, the funds are transferred from the sender and delivered to the receiver's account.
The speed at which these steps are completed makes instant payments a convenient option for a number of financial transactions, including account-to-account payments, bill payments, and even ecommerce transactions.
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Why use instant payments?
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 pay 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-instantaneous 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 a newer instant payment rail launched by The Federal Reserve that allows financial institutions of every size to offer instant payments. Features are being rolled out in stages, but it currently offers both credit transactions and requests for payment, though RfP transactions have limited availability due to the lack of infrastructure for required risk assessments. Similar to RTP, it is available 24/7. More than 100 financial institutions currently participate in FedNow, and coverage is growing.
Same-Day ACH
Same-day ACH is not technically an instant payment rail but does allow for faster payment processing. It allows users to collect payments and send money. Transactions are processed on the same business day. However, it is only available during business hours. Transactions posted late on a Friday, for example, will not be made until Monday. Same-day ACH has nearly universal coverage, with most financial institutions accepting payments.
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.
Use cases for instant payments
Instant payments could revolutionize the way money moves by providing 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: Individuals and businesses can use instant payments to 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: Using real-time payments, businesses can 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: This is currently one of the most common use cases for instant payments. Popular apps like Venmo and CashApp allow individuals to easily split the bill at dinner, send cash for a night out, or accept payment for a shared utility bill.
Consumer-to-business (C2B) payments: Using instant payments, customers can quickly make payments for goods and services, both online and in person. This use case is especially interesting for ecommerce shopping, where customers expect a fast, hassle-free experience. C2B payments also allow customers to make time-sensitive payments quickly.
Same-day payroll: Gig workers and freelancers already rely on real-time payments for quick access to their 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 get refunds to customers faster, 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 both FedNow and RTP. The platform reduces risk by verifying accounts and transferring money quickly.
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 be daunting and may 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 of the biggest hurdles to the widespread usage of instant payments is the slow adoption of RfP (i.e. instant payins). Currently, the majority of use cases for instant payments are for payouts, such as instant payroll and instant loan disbursements. This is due to a lack of infrastructure for risk assessments required for instant payins. Overcoming this barrier will take time as the infrastructure for instant payins gets built.
Currently, Plaid offers a bridge solution for this problem through ‘synthetic real-time payments’ using Plaid’s ACH risk reduction product, Signal, which analyzes more than 1,000+ risk factors. As much as 90% of transactions—especially from trusted regular customers—will end up in the ‘low-risk’ bucket. For account funding use cases, funding can be accelerated (i.e., provide instant funds availability) as if it were an instant payment. This can help 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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