Keeping up with the payments landscape is becoming a bigger challenge. Instead of just cash or credit, consumers and businesses today have more options than ever to send or receive funds, including instantly settling Real-Time Payments (RTP).
To stay competitive, businesses need a deep understanding of what RTP is, its benefits, and how to implement it. The road to Real-Time Payments is just beginning, making now the time to gain a deeper understanding of how it fits into your organization.
What are Real-Time Payments (RTP)?
RTP, which stands for "Real-Time Payments" is a payment rail developed by The Clearing House (TCH) that allows for real-time, 24/7 processing of electronic payments between financial institutions. RTP provides near-instantaneous settlement of funds, enabling consumers and businesses to send and receive payments quickly, securely, and conveniently.
RTP transactions are generally completed within seconds, making them ideal for time-sensitive transactions, including loan disbursements or gig worker payments from apps like Lyft and Upwork. Another core benefit of RTP is its affordability. RTP fees are charged to banks by transaction and range between $.01 and $2 per transfer, depending on the type of transaction. Note that this is the fee charged to banks and that the fees charged to RTP users are likely marked up.
RTP is becoming an increasingly popular payment option for consumers and businesses alike. For example, insurance companies sent 20% of all payouts in 2022 via instant payment platforms like RTP. Instant payroll, like those for gig workers, accounted for 15% of the total RTP payment volume in Q2 of 2022.
However, RTP faces stiff competition from traditional ACH payments, the newer same-day ACH payments, and the soon-to-launch FedNow program.
Note: While often used interchangeably, RTP is not an acronym for all real-time payments. Rather, RTP is a specific payment rail, Real-Time Payments (RTP) from The Clearing House. FedNow will also power real-time payments but is a different payment rail.
How does RTP compare to ACH?
ACH is a traditional payment rail that allows US financial institutions to transfer funds between them. Like RTP, ACH allows for the electronic transmission of funds—however, the similarities stop there.
ACH is bi-directional, meaning you can use both push (credit) and pull (debit) payments. RTP only offers credit payments, meaning that funds are pushed from one account to another. Debits (pulls of funds) that are common for ACH bill payments are not possible with RTP.
Other differences include operating hours, cost, and availability. ACH transactions only settle during banking hours, while RTP transactions settle 24/7. Standard ACH fees are much cheaper than RTP and ACH also has wider availability than RTP, as all US depository institutions can use ACH, compared to 65% of US demand deposit accounts (DDAs) with RTP.
Another key difference between RTP and ACH is the ability to revoke payments. ACH payments can be reversed automatically in some cases, while RTP payments cannot. Once an RTP transfer occurs, consumers or businesses have no recourse to have those funds returned (outside of a manual request to return the money, which may or may not be honored). ACH and RTP payments can both fail. However, RTP payment failures are typically immediate, while ACH returns can take several days.
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What are the differences between RTP and FedNow?
FedNow, set to launch in the summer of 2023, is an entirely new payment rail. While it has many similarities to RTP, it is run entirely by the US Federal Reserve. It will serve as a platform for financial institutions to build their own real-time payment solutions. Unlike ACH and RTP, it is not run by The Clearing House. Similar to RTP, FedNow will process payments in real-time, 24/7.
Implementing Real-Time Payments (RTP) can help modernize your payment infrastructure and improve the customer experience. From understanding the use cases to managing returns, preparing your business for RTP will ensure a seamless transition. Keep in mind that you are adding RTP as a payment option, but not replacing other payment methods like ACH and cards. In fact, you may only want to offer RTP for the most popular use cases below.
1. Understand RTP use cases
RTP can currently be used in a variety of use cases, including instant payroll processing, loan disbursements, and merchant payouts. This means employees or customers can receive payments or paychecks immediately instead of waiting for several days for the funds to clear. Gig economy payments can also benefit from RTP.
Looking to the future, RTP is likely to expand into new areas, including home equity line of credit (HELOC) disbursements and merchant customer service payments. In 2021, RTP released the ability to ‘request for payments’, also called RfP. This expanded RTP’s ability to handle consumer bill pay and business-to-business (B2B) use cases but is still in its early stages. These developments will likely drive the adoption of RTP and improve the overall payment experience for consumers and businesses alike.
Watch the video below to learn how Plaid can set your business up with 24/7 instant payouts.
2. Decide if it makes sense for your business
When deciding whether RTP makes sense for your business, it's important to consider the value it can deliver—outside of pure dollars and cents. One potential benefit is improved customer satisfaction, as the ability to make and receive payments instantly enhances the customer experience. Another potential benefit is higher activation rates, as customers may be more likely to use your services if they know they can receive payments quickly. RTP may even lower customer churn rates by reducing payment friction.
Start by evaluating your current payment processes and identifying pain points. You can also look at the payment preferences of your customers and assess whether offering real-time payments would provide a competitive advantage. Consider the cost and complexity of implementing RTP as well as any potential security risks. By weighing the potential benefits and drawbacks of RTP, you can make an informed decision about whether it's the right payment solution for your customers—and your business.
3. Ensure you have fallback options
One potential challenge of RTP is that it’s covered by only about 65% of financial institutions. While this number should increase in the future, it’s important to have other payment rails to fall back on. Ideally, you can work in an automated switch to ACH for customers who’se financial institutions don’t support RTP. Transfer, Plaid’s payment processing product, has this fallback structure in place as part of its multi-rail orchestration flow.
4. Make adjustments for security
Security is crucial for Real-Time Payments (RTP) because of the immediate nature of these transactions, plus the fact that they cannot be returned. This speed also means that there is less time to identify and stop fraudulent activity, making it critical to have robust security measures in place.
Real-time payments and multi-rail strategies are the future
The increase in RTP usage and the launch of Fednow is leading to a shift in the payment landscape. As the adoption of newer payment rails increases, there are likely to be even more use cases and platforms than we can currently imagine.
There is one certainty about the future of payments—customers want more payment options. This means the future of payments is going to be faster and multi-rail.
→ Learn how Plaid Transfer can prepare you for the future of bank payments via a multi-rail (ACH + RTP) strategy