Ask anyone in the industry about the future of payments, and they’ll likely have a very quick answer: instant payments. As businesses increasingly move operational systems online, instant payments are critical to making payables more efficient, secure, and scalable for businesses, government, and consumer segments.
At UMB Bank, we are on a cloud journey focused on real-time payments. It’s an exciting time, as we haven’t had a new payment rail introduced in our network for many years. This new payment rail will allow us to operate twenty-four hours, seven days a week, and 365 days per year. We have been very thoughtful in our approach to rolling out the new development and believe it’s essential to have a plan in place rather than race to the finish line.
The Clearing House (TCH) has already introduced a real-time payments (RTP) rail, and the Fed expects to roll out its faster payments system, called FedNow, in 2023. As the adoption of RTP and FedNow increases, it’s crucial to understand these options and how they could benefit your organization.
What Does RTP Mean for Me?
RTP and FedNow are payment rails that allow one user to transfer money from their bank account to another user’s bank account instantaneously. While there are currently ways to send money in near real-time, such as wire transfers and Automated Clearing House (ACH) payments, the RTP and FedNow systems are available constantly and provide real-time settlement of funds. The systems reduce the number of payment exceptions and provide favorable trading terms.
Sending money via RTP or FedNow accelerates and streamlines the payment process, making it easier for business managers to have the most current information about their financial records. This option enables businesses to reconcile books in real-time, allowing swift and confident financial decisions, as you can be sure the records are accurate and up-to-date.
RTP and FedNow are two separate payment rails, so your bank must implement one of these new payment options. Developing these products takes time because they require some of the most advanced technology and challenge established traditional banking processes.
Are there Risks with Real-Time Payments?
The most significant risk is human error. Once you send an RTP or FedNow payment, you cannot recall it unless the receiver agrees to send it back. Other payment systems allow an exception process to reverse funds, but that’s not the case with the instant payment rails.
To solve this, some companies opt for a “double-check” system within their product before any payments originate. This strategy can reduce the risk of human error while still benefitting from sending a payment as quickly as possible.
As with any payment system, fraud is a concern. To date, it has not been a significant issue. Still, as instant payments grow in popularity and use, the industry will pay very close attention to fraud attempts and how to mitigate and combat them proactively. For example, TCH, the organization that hosts the RTP rail, set up a secure token exchange, which issues tokens to stand in for real account numbers when sending or receiving payments. This method is another measure to combat fraud preemptively, and banks are working together to create and execute additional solutions to prevent fraud collectively.
The Future of Instant Payments
In addition to the benefits to businesses, Congress has recently pushed for banks to adopt this technology. Banks and companies in Europe and Asia have been utilizing instant payments for several years. U.S. banks must implement instant payment products and technology to stay competitive in the international banking landscape.
With that in mind, RTP offerings are on the rise! According to a Q1 2022 Volante survey of mid-tier banks and credit unions, 27% of respondents already offer ACH’s RTP products, and 37% say they’re committed to joining the TCH RTP network by 2023. As a result, we anticipate that TCH’s RTP and the Fed’s FedNow payment rails will become ubiquitous in the U.S. and evolve into the standard form of payment.
As companies mature and require more sophisticated payment needs, they must understand this option and how it could benefit their companies!