Real-time payments have been part of the lexicon for years, now that The Clearing House's RTP network is six years old and the Federal Reserve is nearing the launch of its FedNow system. But what makes these systems work, and how much of an improvement are they over the payment options that are widely used today?
From a consumer's perspective, most transactions already feel instant — for example, a credit-card charge shows up right away on a consumer's statement even if no money has actually moved. And many businesses still rely on the "float" of older payment methods such as paper checks.
The pandemic-era shift to digital commerce, as well as its disruption of supply chains, have shone a spotlight on the importance of making funds move as fast as possible. As banks consider The Clearing House's RTP network or the Federal Reserve's FedNow service (which is scheduled to launch between May and July), it's crucial to examine the fundamental differences in how each system moves money – and the challenges in making them interoperable.
Both the Fed and TCH provided roadmaps on how their respective real-time payment systems move funds between point A and point B. And under the hood, the differences between real-time and other transactions are huge.
"Payments can be processed within seconds or minutes, 24/7, eliminating the reliance on waiting on business days or bank hours," said Nick Chandi, CEO and co-founder of software firm ForwardAI. "The process is safer, faster, and cheaper than every other existing money delivery method."
Riding the rails
For real-time transactions via the RTP network, the payer sends the funds via their financial institution or a third-party provider to The Clearing House. From there, the payment goes through the recipient's financial institution or third party, where it's available to the recipient instantly based on a "good funds" model from The New York Fed. "Good funds" means ensuring that there are enough funds to cover the payment, a necessary measure given the transactions are processing in real-time.
Within TCH's payment services, there are several differences between real-time and other digital options such as ACH, wire and card transactions.
Transactions over TCH's RTP network clear immediately at all times, while ACH payments clear several times per day and wire payments clear instantly during operating hours, which can differ based on the bank. Card payments clear immediately when using a PIN, or once daily when using a signature.
Beyond settlement speed, RTP payments advance the ball by using newer security protocols and technology to protect customers' data from being exposed, Chandi said.
"Instant payments also mean businesses can automatically reconcile payment transactions in their accounting software, providing them real-time visibility on their business's liquidity," Chandi said. "They don't have to worry about the delays and settlements that happen with other payment methods, which adds to the toll of managing a small business's finances."
The Fed's real-time payments system, FedNow, follows eight steps, according to
Third, the FedNow service verifies the message meets message format specifications. Fourth, the FedNow service sends the contents of the payment message to the recipient's financial institution to confirm that the financial institution intends to accept the payment message. Fifth, the recipient's financial institution sends a positive response to the FedNow service, confirming that it intends to accept the payment message.
The fourth and fifth steps are designed to mitigate misdirected payments.
In the sixth step, the FedNow service debits and credits the designated master accounts of the sender's and recipient's financial institutions, or their correspondent financial institutions. Seventh, the FedNow service sends a payment message to the recipient's financial institution with an advice of credit and sends an acknowledgement to the sender's financial institution, notifying it that settlement is complete.
In the eighth and final step, the recipient's financial institution credits the recipient's account. As a term of the FedNow service, the Federal Reserve Banks anticipate requiring the recipient's financial institution to make funds available to the receiver almost immediately after the seventh step. This credit to the recipient's account, and the debiting of the sender's account, happens outside the FedNow service.
Regardless of the method, adopting real-time payments is beneficial for merchants and consumers by helping everyone significantly cut down on the time and cost it takes to process payments, according to Chandi.
"Funds are immediately available to merchants to spend on marketing, payroll, or other business needs," Chandi said. "Poor cash flow is one of the biggest problems small businesses face, but excuses for delayed transfers, checks lost in the mail, or similar are common. These excuses are extinct with real-time payment methods."
Working together?
The FedNow network is designed to lower the cost for real-time payments, and thus far the fees are similar between FedNow and RTP. Both RTP and FedNow charge $0.045 per payment, and FedNow has a lower transaction limit of $500,000, compared to RTP's limit of $1 million.
There are differences between RTP and FedNow in how real-time payments settle. While RTP member banks settle payments via a master account at the Federal Reserve Bank of New York, FedNow settles through the participating banks' accounts at the Federal Reserve. These differences need to be reconciled before the two networks can easily work together.
There are also differences between some of the messaging protocols that FedNow and the RTP network use, which could cause some transactions between the FedNow and RTP networks to fail.
These differences can be overcome, according to Jessica Cheney, vice president and head of product management for digital banking at Bottomline Technologies. The payment providers that power the banks' payment systems can access the RTP network and FedNow participant directories and can provide that information to other parties that are tied to either or both real-time networks.
"Participants of both networks are validated when the request for payment is originated," Cheney said. "That can be done without the originator having to know which rail is required to reach each recipient. Fortunately, the message sets and operating guidelines of each rail are similar in nature so this behind-the-scenes routing can be accomplished."
In
There are also use case differences between the two systems, though that could be partly due to the RTP network's longer existence. FedNow materials say that rail plans to serve a number of business and consumer use cases.
The Federal Reserve operates FedNow, while a network of ACH network banks oversee RTP. FedNow enables banks to move funds between FedNow accounts and Federal Reserve accounts, in theory easing management of real-time payments for banks.
RTP enables settlements for the bank-led peer-to-peer network Zelle. The RTP rail is also used to power "instant billing," or the combination of bill presentment and payment with instant settlements to help consumers avoid overdrafts and businesses to better match supply-chain management to financial positions.
RTP additionally has worked with
"Payment methods similar to RTP and FedNow have exploded in the U.K., India and Brazil. When businesses in the U.S. start seeing the convenience and benefits to their clients and vendors, we should see rapid adoption," Chandi said.
