Real-Time Payments: Getting Your Business Ready for RTP
The traditional question of "Cash or credit?" is evolving. Now, it's important to prepare your business to offer Real-Time Payments (RTP) as payment options expand.
Staying up-to-date with payment methods is becoming increasingly complex. Beyond cash and credit, both consumers and businesses now have more ways than ever to transfer money, including the option of Real-Time Payments, which allows for instant fund settlement.
To remain competitive, businesses must clearly understand what RTP is, the benefits it offers, how it affects banking, and the steps to implement it. As the shift toward Real-Time Payments is just beginning, this is the perfect time to learn how it can be integrated into your business operations.
What Are Real-Time Payments (RTP) in Banking?
Real-Time Payments (RTP) is a payment system created by The Clearing House (TCH) that allows electronic payments to be processed instantly, 24/7, between financial institutions. This system ensures that funds are transferred and settled almost immediately, offering a quick, secure, and convenient way for both consumers and businesses to send and receive money.
RTP transactions are usually completed within seconds, making them an excellent choice for transactions that need to be processed quickly, such as loan disbursements or payments to gig workers through platforms like Lyft and Upwork. Additionally, RTP is cost-effective, with banks charging fees that typically range from $0.01 to $2 per transfer, depending on the transaction type. However, the fees charged to users may be higher due to bank markups.
RTP is gaining popularity among consumers and businesses. For instance, in 2022, 20% of all insurance payouts were made through instant payment platforms like RTP. In the third quarter of 2023, RTP handled 64 million transactions, totaling $34 billion in payments.
Despite its growing use, RTP faces competition from other payment methods, such as traditional ACH payments, same-day ACH payments, and the newly launched FedNow program.
It's important to note that while the term "real-time payments" is sometimes used broadly, RTP specifically refers to the Real-Time Payments system by The Clearing House. Other systems, like FedNow, also offer real-time payment capabilities but operate on different rails.
RTP Credit vs. Debit—What's the Difference?
There are two main types of payments: credit (also known as push payments) and debit (also known as pull payments).
Imagine you're buying a bike and need to pay the bike shop. When you instruct your bank to send the payment, such as by swiping your credit card, your bank "pushes" the money to the store's account. This is called a push or credit payment. On the other hand, debit payments occur when someone withdraws money from your account. For example, if you set your electric bill on autopay, you've authorized the utility company to "pull" the money from your account each month.
RTP, by design, supports only credit (push) payments. If a business needs to initiate a debit (pull) payment via RTP, they can use a feature called Request for Payment (RfP). This feature essentially asks the payer to send a credit payment instead of directly pulling funds from their account.
Handling the risk associated with instant debit payments can be difficult—you wouldn’t want unauthorized parties accessing your account and withdrawing money. RTP’s RfP feature functions similarly to an invoice, allowing you to decide whether to make the payment. However, RfP has certain limitations due to the higher risk involved and typically requires more information to process.
How Do RTP Payments Compare to Other Payment Methods?
In the world of payments, both financial institutions and consumers are always looking for faster and more efficient ways to transfer money. So, how does Real-Time Payments (RTP) stack up against other methods?
ACH (Automated Clearing House) vs. RTP:
ACH is a long-standing payment method in the U.S. that allows banks to transfer funds between accounts. While both ACH and RTP support electronic transfers, they have key differences. ACH supports both push (credit) and pull (debit) payments, allowing for transactions like automatic bill payments where funds are pulled from your account. RTP, on the other hand, only supports credit payments, meaning money is pushed from one account to another. If a business wants to "pull" money using RTP, they can use the Request for Payment (RfP) feature, which acts more like sending an invoice rather than an automatic debit.
Other distinctions include:
- Operating Hours: ACH transactions settle only during banking hours, while RTP operates 24/7.
- Cost: ACH is generally cheaper than RTP.
- Availability: ACH is more widely available, used by all U.S. depository institutions, while RTP is accessible by 65% of U.S. demand deposit accounts (DDAs).
- Reversibility: ACH payments can sometimes be reversed automatically, whereas RTP payments are final once made. If an RTP payment needs to be returned, it must be done manually, and there's no guarantee it will be honored.
- Failure Timing: RTP payment failures are immediate, whereas ACH returns can take several days.
RTP vs. FedNow:
FedNow, launched in summer 2023, is a new payment method similar to RTP but operated by the U.S. Federal Reserve. Like RTP, FedNow processes payments in real-time, 24/7, and supports request-for-payment features. However, unlike ACH and RTP, FedNow is not managed by The Clearing House.
Currently, FedNow has lower coverage compared to RTP and ACH, with just over 400 financial institutions participating. However, as a new platform, it is expected to grow in the coming years.
In summary, RTP offers real-time, 24/7 credit payments with some unique features like Request for Payment, but it has limitations compared to traditional ACH payments, such as reversibility and wider availability. Meanwhile, FedNow is an emerging competitor in the real-time payments space, offering similar benefits with a different governing body.
|
Feature |
ACH |
RTP® |
FedNow |
|
Who operates it? |
Fed + The Clearing House |
The Clearing House |
Fed |
|
Hours available |
Banking hours |
24/7 |
24/7 |
|
Credit and debit? |
✔️ Credit and Debit |
❌ Credit and RfP only |
❌ Credit and RfP only |
|
Are payments revocable? |
✔️ Yes |
❌ No |
❌ No |
|
Coverage by US financial institutions? |
100% |
460+ financial institutions |
400+ financial institutions |
Which Banks Offer RTP in the United States?
Over 460 banks in the United States are currently part of the RTP (Real-Time Payments) system. This number is continually growing as more financial institutions join. As of now, RTP is available at around 70% of U.S. financial institutions, including well-known banks such as:
- American National Bank
- JD Bank
- Bank of America
- Century Bank
- Navy Federal Credit Union
- CitiBank
- Citizens National Bank
- PNC Bank
- Signature Bank
- Fifth Third Bank
In addition to these major banks, many local credit unions and smaller banks also support RTP transfers. Some examples include State Bank of NW Missouri, Jacksonville Fireman Credit Union, and Indiana University Credit Union.
For the full list of participating banks, you can visit The Clearing House website.
4 Steps to Prepare Your Business for Real-Time Payments
Implementing Real-Time Payments (RTP) can help modernize your payment system and enhance the customer experience. By following these steps, you can ensure a smooth transition to offering RTP alongside your existing payment methods like ACH and cards. Keep in mind that RTP can be introduced gradually, starting with the most relevant use cases.
1. Understand RTP Use Cases
RTP can be applied to various scenarios, such as instant payroll processing, loan disbursements, and merchant payouts. With RTP, employees or customers receive payments immediately, eliminating the usual waiting period for funds to clear. This is particularly beneficial for gig economy workers who can get paid right away
Looking ahead, RTP is expected to grow into new areas, such as home equity line of credit (HELOC) disbursements and merchant customer service payments. In 2021, RTP introduced the "Request for Payment" (RfP) feature, which enhanced its capabilities for handling consumer bill payments and business-to-business (B2B) transactions. Although RfP is still in its early stages, these advancements are likely to increase RTP adoption and enhance the payment experience for both consumers and businesses.
2. Decide if RTP Makes Sense for Your Business
When evaluating whether RTP is right for your business, consider the benefits beyond just cost savings. RTP can enhance customer satisfaction by enabling instant payments, which improves the overall customer experience. Additionally, offering RTP may boost activation rates, as customers are more likely to engage with your services if they can receive payments quickly. RTP can also help reduce customer churn by minimizing payment-related issues and friction.
Start by reviewing your current payment processes and identifying any issues or areas for improvement. Consider your customers' payment preferences to determine if offering Real-Time Payments (RTP) could give you a competitive edge. Evaluate the costs and complexity involved in implementing RTP, as well as any potential security risks. By carefully weighing the benefits and challenges, you can make an informed decision on whether RTP is the right payment solution for your business and your customers.
3. Ensure You Have Fallback Options
One challenge with RTP is that it’s currently available through only about 65% of financial institutions. Although this coverage is expected to grow, it's essential to have alternative payment options in place. Consider implementing an automated switch to ACH for customers whose banks do not support RTP. For example, Transfer, Plaid’s payment processing product, includes a fallback mechanism as part of its multi-rail orchestration process.
4. Make Adjustments for Security
Security is vital for Real-Time Payments (RTP) due to the immediate nature of these transactions and the fact that they cannot be reversed. The speed of RTP leaves less time to detect and prevent fraudulent activities, so it is crucial to have strong security measures in place to protect transactions and sensitive data.
RTP Payment Use Cases
Real-Time Payments (RTP) offer the advantage of immediate fund transfers, making them ideal for various financial transactions in today’s fast-paced environment. Here are some practical use cases for RTP:
Instant Payroll
Employers can use RTP to provide instant payroll payments to employees, offering greater financial flexibility. For example, a retail worker who completes a long week of work can have their paycheck deposited instantly into their account, rather than waiting a few days for processing.
Instant Payouts for Gig Economy Workers
Gig economy workers, such as ride-share drivers, can benefit from RTP. After completing a shift and earning their pay, they can choose to receive their earnings immediately through the app. The funds are deposited into their bank account right away, allowing them to cover unexpected expenses or make purchases quickly.
Instant Loan Disbursements
RTP can be used for quick loan disbursements, especially in urgent situations. For instance, if a parent needs a $500 loan to repair their car and ensure reliable transportation, they can apply through a fintech lender. Once approved, the funds are deposited instantly into their account, enabling them to address the repair bill without delay.
Refunds and Warranties
Manufacturers can use RTP for processing refunds and warranty claims, particularly for high-value items. If a stove stops working shortly after purchase, the customer can receive a refund immediately through RTP after providing evidence of the issue. This quick refund helps them buy a replacement without waiting for a check or ACH processing.
B2B Payments
In business-to-business transactions, RTP can streamline payments. For example, a toy manufacturer who orders parts from a supplier can use RTP to pay immediately upon receipt. This speeds up the payment process, reduces accounting costs, and strengthens the business relationship by demonstrating reliability and promptness.
Real-Time Payments and Multi-Rail Strategies: The Future of Payments
The rise in Real-Time Payments (RTP) and the introduction of FedNow are transforming the payment landscape in the U.S. As more payment rails become available, we can expect to see a broader range of use cases and platforms emerging. RTP is likely to expand into new areas, such as home equity line of credit (HELOC) disbursements and merchant customer service payments.
One thing is clear about the future of payments: customers are demanding more options. This trend indicates that the future will be characterized by faster transactions and a multi-rail approach, where various payment systems coexist and complement each other.
Talk to Our Expert
Our Services
ISO 20022 (MT to MX) Adoption & Migration
FTM For Corporate Payment Services
IBM Cloud Park For Integration (CP4i)