Despite strong adoption worldwide, U.S. financial institutions have been slow to embrace real-time payments.
This reluctance is largely due to the complexity of the financial landscape, established consumer payment habits and lack of a federal mandate driving change. But the coronavirus pandemic fueled greater demand for real-time payments, as consumers and businesses increasingly transact digitally. As the share of real-time payment transactions in the U.S. doubled in 2020, financial institutions have an opportunity to launch real-time services that meet demand and enhance the customer experience.
Real-time payments are irrevocable, account-to-account payments that can be initiated through any device — laptop, mobile, or tablet. Because they are cleared and settled nearly instantly, 24 hours a day, seven days a week, 365 days a year, the funds are available to the recipient immediately. This has significant cash flow and liquidity advantages over traditional payment options.
More than 60 countries are live with real-time payment systems today, and real-time payments grew 41% globally from 2019 to 2020. The U.S. ranks ninth worldwide with 1.2 billion transactions; well behind real-time leader India, which had 41 million real-time transactions per day in 2020.
The Clearing House was an initial driver of real-time in the U.S., launching its RTP® network in 2017. Currently reaching more than 60% of U.S demand deposit accounts, RTP is open to any federally insured depository institution. The Federal Reserve’s FedNow, which is now live with a pilot program, will drive further adoption when it launches in 2023.
Real time payments have been primarily driven by person-to-person (P2P) and consumer-to-business (C2B) uses cases. Services like Zelle®, which was introduced in 2017 by Early Warning Services (EWS), have propelled adoption by making it easy for consumers to pay digitally; for example, paying a friend for dinner or making a rent payment on the day it’s due. In late 2020, Zelle® was integrated with RTP, making these transactions truly real time.
EWS reported a 51% year-over-year increase in Zelle® transactions in the third quarter of 2021, noting growing use of its service by businesses. Having the flexibility to pay rent, process payroll or pay for supplies in real time has particularly strong benefits for small businesses with liquidity challenges.
Disbursements also represent a growing use case, with businesses taking advantage of the ability to efficiently send refunds and make other payments in real time. An insurance company paying claims following a car accident or hurricane could avoid the overhead associated with processing paper checks. At the same time, real-time disbursements boost customer satisfaction by making funds available immediately. Payroll is another example, with the gig economy companies particularly benefitting from the ability to pay workers instantly.
Nowhere has the need for real-time payments been more apparent than in issuance of pandemic stimulus checks. As Federal Reserve Board Governor Lael Brainard said, “The rapid expenditure of COVID emergency relief payments highlighted the critical importance of having a resilient instant payments infrastructure with nationwide reach, especially for households and small businesses with cash flow constraints.”
Request for Payment
Popular in countries like India, Request for Payment is emerging as a convenient tool to facilitate real-time payments on a mobile device. A push notification and short series of prompts detail the payment request, and the payee can authorize payment from a banking app within a few clicks.
Businesses using Request for Payment benefit from immediate funds availability and a more efficient, cost-effective billing process; consumers gain convenience and control. Consumers issuing Requests for Payment can use it to avoid awkward reminders to friends or colleagues by simply sending a request digitally when money is owed.
Establishing a Real-Time Strategy
As financial institutions look to broaden their real-time payments offering, it’s important to consider the technological infrastructure needed to support them. As transactions and use cases continue to grow, both consumers and businesses will come to expect real-time options from their financial institution, and availability of well-established services like Zelle® and newer tools like Request for Payment will become table stakes.
A partnership with a digital banking provider that not only prioritizes real-time payment offerings today, but also has plans for future integrations with real-time focused fintechs, will prove critical to long-term success.