What are real-time payments?

Real-time payments are payments between bank accounts that take seconds to initiate, clear, and settle. Real-time payments go through any time of the week, on holidays, and weekends. This payment system allows banks, businesses, and consumers to manage their money.

What are the benefits of real-time payments?

Aside from speed, real-time payments provide businesses with other benefits. These include:

• Reducing the amount of money locked in processing, which improves liquidity and cash management
• Increasing efficiency by eliminating the need for manual involvement
• Allowing businesses to automatically reconcile payments, reducing errors and processing delays
• Increasing data-rich insights such as purchase order numbers, invoice details, and more
• Providing immediate payment confirmation, which assures businesses that transactions were completed

To reap the benefits, businesses must have the right solutions in place to carry out RTP transactions.

Risks and challenges of real-time payments

Along with its benefits, RTPs also come with risks and challenges that businesses must address and navigate.

Fraud and security risks: An instant processing time means banks and payment service providers (PSPs) can’t reverse transactions even if they’re fraudulent. In addition, branks and PSPs have less time to detect and prevent fraud. To address security risks, businesses can invest in solutions that flag fraud in real time, such as a payroll solution with built-in fraud detection capabilities.

Technology investments: Businesses and financial institutions need technology and infrastructure to handle RTPs. This may require updating payment solutions, investing in strict security measures, and implementing new APIs.

Regulatory compliance: Different regions may have different regulations for RTPs. Businesses and financial institutions must ensure compliance with all necessary laws and regulations. This could be challenging for businesses operating or paying employees in different countries.

Full integration: For RTPs to work, they need to integrate and work with the business’s existing tech stack, as well as interact with other payment systems, both domestically and internationally.

Risk management: RTPs come with separate risks from traditional payment systems. Businesses must ensure their risk management strategy covers each of these risks.

How do real-time payments work?

1. The buyer or sender initiates a payment with their bank, usually via an online banking platform or app
2. The sender’s bank reviews the transaction to make sure it’s legitimate, authenticates the sender’s identity, and verifies that there are enough funds in the sender’s account
3. The transaction is forwarded to a real-time payments network, typically managed by a financial agency or banking networks
4. The real-time payments network checks the authenticity of the request and the available funds, either authorizing or denying the transaction before notifying all involved parties
5. Approved transactions are immediately settled, with the paying bank transferring the funds to the receiver’s bank account

RTP systems allow parties to transfer funds instantly. Here’s a more detailed look into how it works:

1. Initiation

The payer decides to send money to the payee and initiates payment on an online banking platform, mobile banking app, or in person at a bank branch.

2. Authentication and authorization

The payer’s bank authenticates the payer’s identity through some sort of security process such as passwords, biometric data, or two-factor authentication. The bank verifies whether the payer has enough funds for the transaction and if everything is approved, the bank authorizes the transaction.

3. Transaction processing

When the bank authorizes the transaction, the bank sends the payment instructions through the RTP system—a central network overseen by a financial authority or a group of banks. The RTPs process all transactions individually and continuously, enabling real-time payments.

4. Notification and confirmation

After the payment is processed, the payer and the payee are notified about the transaction via an SMS, email, or push notification from a banking app.

5. Settlement

Unlike traditional payment systems where settlements occur at the end of the day or later, RTP settlement is instantaneous. The payer’s bank transfers the funds to the payee’s bank where the money can be used immediately.

How is RTP different from ACH?

Real-Time Payments (RTP) is an electronic payment rail run by The Clearing House, which enables instant fund transfers between bank accounts.
ACH payments are electronic transfers through the Automated Clearing House (ACH) network. ACH payments usually take hours to days to settle.

What are some common uses for ACH payments and RTPs?