It seems that real-time payment is all the rage right now. And yet, it wasn’t that long ago that all payments were instant. Cash, by its very nature is instant – real-time, even.
As innovation, technology and infrastructure began to expand in the finance industry, speed became less and less important. Rather, security and data came to the forefront as businesses looked to reduce potential risks and optimize their payment processes.
But what if companies could have their cake and eat it too? It seems that a real-time payment network will allow to do just that.
What is real-time payment?
Real-time payment (RTP) refers to a subset of payment rails that enable instantaneous transactions, offer 24/7 coverage (or close to it), are open loop, and utilize the ISO 20022 messaging standard.
The real-time payment network is still in its early stages. While some implementations of instant or near-instant payments have been around since 1973 (in the case of Japan’s ZENGIN), this latest, standardized approach hasn’t quite matured yet on the global stage.
But that’s not to say it is small. In 2020, over 70.3 billion real-time payment transactions were processed globally, an increase of 41% over 2019. [1] For some perspective, that’s as if every single person on the planet made eight real-time payments – with change left over.
Where are they happening?
Currently, around 54 countries have introduced some sort of real-time payment system. The biggest of which – by far – is India, with a total transaction value of $25.5 billion in 2020, followed by China at $15.7 billion. [2] It is worth noting, however, that this is in many cases a forced transition and not necessarily a natural transition.
Looking at India, several factors have pushed forward this massive uptake: the pandemic, the reduction of the ‘shadow economy’ once reliant on cash, and the skip over ‘payment card’ adoption in favor of mobile payment methods. [3]
In Europe, where the market is much stricter on the regulation front and payment cards are already well-established (and thriving), we can expect adoption to be slower.
What makes a payment ‘real time’?
The modern meaning to the term ‘real-time payment’ is well-defined – unlike more generic terms like faster payment. It is now more standardized and so only refers to these specific types of payment rails with these specific features.
So, let’s look closer at each of those features:
Instant
This one is a no-brainer. The payment should be processed – from initiation to settlement – almost instantaneously.
24/7 coverage
While not set in stone, you can’t exactly be ‘real-time’ if you are not always available. Banks will need effective and reliable digital and back-end infrastructure to enable this.
Open loop
This piece of jargon refers to a system where payments are linked directly to a person’s bank account as opposed to a prepaid balance. This is one of the major aspects that ‘speeds up’ the payment process.
ISO 20022
This is a standardized electronic data interchange/messaging system that is known for being particularly data rich. Think of it as a language that allows systems to communicate more effectively while offering more data. It was created with the intention to be used as the basis for all financial standards initiatives.
What counts as a real-time payment system?
While we do have a decent set of criteria outlining what is and isn’t a real-time payment, there are some types of payment that offer the illusion that they are instant. After all, aren’t there plenty of examples now where payments can be made instantly?
Not really. A same-day ACH, for example does not operate on a real-time payment rail. They work by batching transactions together and settling them together on a daily basis.
Mobile payments aren’t real-time either. While you may appear to receive the payment from a friend instantly, that isn’t really the case. Most mobile payments are closed loop, and so the money doesn’t go directly to your account, rather staying in your mobile wallet.
It’s worth noting that ‘real-time payment’ as outlined here isn’t the only way to achieve instant payments. Instead, it is a more standardized term that financial institutions can use and follow.
With that said, let’s look at how they work in practice.
How it works
True to their name, real-time payments go through all the steps of the payment process instantaneously.
In a typical non-cash payment, the process would usually follow these steps:
This can be changed around, but your typical procedure should look similar to this. A real-time payment process essentially speeds up these processes. Here’s how:
Thanks to the use of digital technologies, these processes can now be performed at a click of a button. Likewise, it can also work any time of day (or night) to ensure the payment goes through just as they come in.
The open loop design means that payments can flow directly between the bank accounts of the involved parties. It’s the kind of thing you see in modern mobility-as-a-service developments, allowing for convenient and widespread payment. It also offers high interoperability, helping to scale the network even further.
At the same time, the ISO 20022 standard reduces any miscommunications while delivering a standardized set of data. This can then be processed and read quickly as, again, the systems can be built around this standard to ensure there are no issues when it comes to bank-to-bank communication.
Essentially, each piece works hand-in-hand to enable the speed expected for payments called ‘real-time’.
So why is this important for businesses?
Why it’s important
There are a few different ways in which real-time payments are important for businesses.
Speed
The obvious answer. But speed in and of itself isn’t of particular interest to businesses. Instead, it is more to do with the flexibility and control it offers.
Data
Again, ISO 20022 comes into play. Like virtual cards, real-time payments bring with them plenty of remittance data, which is actionable and can be analyzed by businesses for a better perspective and reconciliation of their payments.
Efficiency
Real-time payments are fast, digital and data rich. That translates to efficiency when it comes to resources, with time and costs being cut when compared to traditional means.
Cash flow
With settlement taking a matter of seconds, businesses don’t need to wait around to receive payments from clients. Forecasting and the general management of cash also becomes easier. Likewise, suppliers can also expect faster turnover of cash, enabling them to invest it faster.
Will we see real-time payments being used by businesses any time soon?
Instant payment options have been available for some time in certain markets. For example, the Clearing House Automated Payment System (CHAPS) in the UK has facilitated real-time transactions of payments since the 1980s. However, these systems were often only for large scale/high value payments.
This new wave of real-time payment will now offer an instant payment option for lower-value amounts. So, are businesses on board with this new system?
It seems so. A lot of the draw for businesses on this topic is that last point outlined above – cash flow.
Real-time payments and extended payment terms
The ability to make payments immediately allows for a large amount of flexibility about when payments are made. In turn, this enables businesses to benefit from extended payment terms with their suppliers.
Extended payment terms are a great tool for managing working capital and ensuring money within the company can be allocated as needed. Real-time payments enable this management by giving companies more control of when the payments actual leave their account and thus allow for even further extensions of payment terms.
However, this can also further strain the relationship with the supplier and will cause companies to miss out on early payment discounts. Even for the business, the potential security issues and room for error are a concern, which make real-time payment more of a tool to be used liberally.
With that said, when it comes to the logistics of adopting real-time payments, we have some numbers to share that prove that the demand and supply is starting to appear:
The demand
According to Mastercard, 60% of organizations believe that faster payments would be beneficial for their business. [4] This comes in the context of the supply chain disruptions from the pandemic, where businesses had to adapt their payments based on the quickly changing needs of suppliers.
In another report, almost half (48%) of SMBs are said to be either ‘extremely interested’ or ‘very interested’ in real-time payment settlement. [5] When you combine those who answered ‘somewhat interested’ and ‘slightly interested’ into that number, you get a massive 83% looking favorably at our topic today.
As a last note, consumers are also pretty eager for faster payments. PYMNTS found that 20% of U.S. consumers cite receiving real-time payments most frequently for at least one type of disbursement. [6] One third (33%) would even be willing to pay a fee to receive money instantly.
This makes sense when you consider how consumers are used to convenient, invisible payments. The added speed is a big bonus on top of that.
The supply
And banks are starting to take notice. Over in the U.S., 85% of banks are looking to offer real-time B2B payment facilities. [7]
But no look into real-time payment would be complete without mentioning ‘The Clearing House’, perhaps one of its widely recognized implementations.
With The Clearing House, we can see that the volume and value of its real-time payment activity have grown almost non-stop. In Q1 of 2020, the network saw a volume of almost $5 billion, which grew to more than $18 billion by Q2 of 2022 – an increase of around 260%. [8]
Ultimately, real-time payment is on track to account for just over a quarter of global electronic payments by 2026. [9]
Let’s get real
When it comes to new payment technologies, businesses are often slow to move. That makes sense, as there are plenty of security concerns and internal workflows that would need to be reworked. That is a big upfront investment of time and money.
And let’s not forget the fact that real-time payments are non-revocable, at least in its current implementations.
But real-time payment looks to be different – businesses around the world seem to be very enthusiastic about the new innovation in the payment scene. Consumers are slowly but surely getting access to them too, setting up the infrastructure and understanding that should soon make its way to B2B scenarios. Until that point, real-time payments will remain a niche use case amongst businesses.
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Banner photo by Karolina Grabowska from Pexels
[2] https://www.statista.com/chart/25871/real-time-payment/
[4] https://b2b.mastercard.com/news-and-insights/archive/real-time-payments-soar-2020/
