In our fast-paced world, people expect things to happen quickly. Fortunately, with the power of modern technology, tasks that once took hours or even days to complete are now carried out in seconds, or even instantaneously. This goes for payments, too.
Real-time payments are a form of payments or money transfers that happen immediately, so money can move from one place to another in the blink of an eye.
In this guide, we’ll cover all you need to know, explaining how these payments operate, how they compare to other payment types, and what the benefits they bring are.
What Is a Real-Time Payment: Definition
Let’s begin with a quick definition of what real-time payments actually are. As the name suggests, a real-time payment, or RTP, is a type of payment that happens almost instantaneously. This means that the payment is initiated, processed, cleared, and settled in seconds – allowing money to be moved in almost no time.
How Do Real-Time Payments Work?
So, we’ve seen the basics of what a real-time payment is. But how do these kinds of payments actually function? Well, RTPs require something called a real-time payment “rail.” The “rail” is the digital infrastructure that essentially allows for payments to occur and be processed quickly.
These payment rails or platforms are usually online and operational 24/7. This means that transfers of money can happen all the time – without any delays or periods of downtime. This also means that, if a bank wants to offer RTPs, its systems also need to be operational on a 24/7 basis.
Another key aspect of RTPs is the fact that they’re “open loop.” This means that your money is taken straight from your account, instead of some kind of separate balance. In addition, a unique messaging format such as ISO 20022 is used for these kinds of payments to reduce the risk of mistakes or delays in the process.
Real-Time Payments vs Other Payment Methods
You can sometimes see terms like faster payments being used instead of real-time payments, which could imply that the two terms mean the same thing. However, to fully understand the question “What is a real-time transfer?,” it’s important to understand that RTP payments are unique and are not exactly the same as other payment methods in use today. Here are some comparisons to illustrate this point:
- Real-Time Payments vs Mobile P2P Payments – Mobile payment apps like CashApp offer very fast cash transfers, but they’re not RTPs. Such apps have closed-loop systems where money only moves within the system, rather than outside of the app itself.
- Real-Time Payments vs Wire Transfers – Wire transfers have long been a popular and reliable method for moving money around and paying for purchases. But they’re not the same as RTPs, due to the way in which they’re used. While they do settle instantly, wire transfers can be used for high-value payments, while RTPs are more for sending money to people you know or paying for everyday goods and services.
- Real-Time Payments vs Same-Day ACH (Automated Clearing House) – Same-day ACH transactions are fast payments in the US, but they’re not as fast as RTPs. Thus, the two terms shouldn’t be used interchangeably.
- Real-Time Payments vs Faster Payments – Many banks and financial institutions can offer the so-called faster payments or push payments that claim to be much faster than normal. However, they’re usually not as lightning-fast as real-time payments, so they aren’t quite the same thing.
The Benefits of Real-Time Payments
We’ve conclusively looked at what real-time payments are. But perhaps you are still wondering about the advantages and uses of RTPs. Well, here are some of the key benefits:
- Speed – Obviously, the main advantage of real-time payments is their speed. These payments are super-fast and can be vital for businesses or people that need access to funds right away.
- Communication – Communication is also a lot clearer when it comes to processing payments via a real-time rail. They connect the payer to the payee in a way that no other system can do.
- Clarity – Processing payments via other systems can involve vagueness and confusion. In comparison, RTP systems are much clearer and more efficient, providing better financial control and a clearer picture of every transaction.
- Versatile – There are countless potential uses for real-time payments. The B2B industry, for example, is taking a huge interest in these payments in order to improve efficiency for businesses that sell to one another.
What Banks Support Real-Time Payments?
As we can see, real-time payments have a lot to offer. In fact, they are the most modern method of moving money from one place to another (e.g., paying people or businesses for goods and services). But not all banks currently support these kinds of payments. So which banks are RTP-enabled at the moment? Some popular banks are:
- Bank of America
- Bank of the West
- JPMorgan Chase
- US Bank
- Wells Fargo
- Corporate One
- First Bank
- Fifth Third Bank
What Do Real-Time Payments Mean for the Future of Finance?
It’s clear that real-time payments offer many advantages. Their speed and efficiency are unparalleled, and these payments are becoming more and more popular – just like BNPL systems and their high adoption rates. No wonder reports show that lots of financial institutions are currently in the process of implementing RTPs for their customers.
So, how can we expect things to change in the future? Well, more financial institutions and banks will likely continue to implement RTPs, so these payments could become the de facto method in many situations.
While we don’t know what the future holds, we assure you that novel payment methods and fintech giants like Tarya are on the rise – aiming to revolutionize the financial sector we know.