Real-time payments through the RTP® network have gained significant traction, presenting valuable opportunities for businesses to optimize cash flow and improve their operational efficiency. As the the FedNow® Service expands availability in 2023, the impact of instant payments is set to grow even more. Industries such as payroll and transportation have been early adopters, leveraging real-time payments to accelerate wage access and speed up payments for sales.
In a recent PaymentsJournal podcast, Adam Carter, VP of Faster Payments, Global Treasury Management at U.S. Bank, and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, explore the specific sectors and use cases driving the adoption of real-time payments and the transformative potential they hold for businesses in the coming years. They also address a surprising finding: Contrary to expectations, real-time payments have fueled transaction growth without displacing traditional payment methods like ACH and wire transfers.
The Origins of Real-time payments
When banks were getting ready to launch real-time payments through the RTP network, they believed it would mostly be used for business-to-business transactions. But after the network launched, they realized that assumption was wrong. “Instead, there was a significant amount of -business to consumer and even person to person activity,” Carter said. “They didn’t anticipate how innovative fintech partners would be in using the network to improve their clients’ experience with services like digital wallets.”
In many cases, younger people are driving the adoption of RTP.
“While we do believe that older generations will also catch up and start using these services, initially, it was mainly younger people who embraced them because they are used to this kind of instant interaction,” Carter said. “There definitely seems to be a demographic factor at play here.”
With the rise of the gig economy, getting quick access to wages has become the norm. Even employees working in large retail stores can now access their daily wages through various earned-wage providers.
“It’s not just about Uber; that’s just a good example,” Carter said. “After working a few hours as an Uber driver, you can access a portion of your earned wages with just a few clicks and have it in your account instantly. This allows you to use the money right away for things like buying groceries or filling up your car with gas, helping you on your financial journey.”
Changes in RTP Over the Past 5 Years
In recent years, the real-time payments space has grown enormously. Services like Zelle, Visa Direct, MasterCard Send, and the upcoming Fed Now Service have brought about shifts in customer habits when it comes to financial interactions.
Previously, customers would keep money in separate accounts and wallets without frequent or fast transfers between them, as traditional methods like ACH transfers took several days. However, with the emergence of real-time rails, customers can now move funds much faster and in different ways from before. Digital wallets, once used occasionally for personal transactions, are now being utilized by small businesses that require immediate access to funds for operations and purchases.
“The ability to move funds instantly has made these services more consumer-friendly,” Carter said. “Moreover, the introduction of real-time payment systems has led to overall transaction growth, with many transactions being entirely new and not cannibalizing existing methods like ACH and wire transfers.”
According to Bodine, there was an initial belief that real-time payments would replace ACH and wire transfers. “The prevailing wisdom has now shifted to the coexistence of different payment methods,” Bodine said. “The original expectation of instant payments overtaking ACH and wire transfers has been proven wrong.”
Early RTP Adopters
Early adopters of real-time payments can be seen in three key industries. First, the fintech sector has leveraged real-time payments for various services, including digital wallets and similar platforms. These were among the initial adopters, and they have experienced significant growth.
Second, industries related to payroll have embraced real-time payments for accelerated wage access, employee reimbursements, and travel expenses. The immediate availability of funds has proved a valuable benefit for consumers.
Third, the transportation industry, particularly in freight movement and trucking, has seen a notable adoption of real-time payments. Timely disbursements play a crucial role in this sector, and real-time payments enable efficient and just-in-time delivery of funds upon the arrival of freight at its destination.
Bodine relates a good example of how real-time payments have taken off in his home state of Indiana.
“In my agricultural area in Indiana, where checks were commonly used, I’ve noticed that small businesses, such as agricultural suppliers and tractor maintenance providers, are now accepting real-time payments, via iPhones,” Bodine said. “Another example: Beverage companies delivering to stores, like 7-Eleven, are starting to receive real-time payments instead of issuing checks.
“It’s fascinating to see how real-time payments are infiltrating the traditional check and cash systems in these areas.”
Carter concurred and provided an additional example of how RTP is infiltrating markets with an example from a U.S. Bank client, Driveway.com.
“Previously, when Driveway acquired or sold vehicles, they would give customers a check,” Carter said. “With real-time payments, customers can now process the payment request while the driver is present, and the funds instantly appear in their account.”
The ability to see the money in their account immediately adds to the positive experience of the transaction. Furthermore, Bodine notes that there is also satisfaction in being able to send funds immediately.
“Similar to the mentality behind using cash, people want the reassurance that the services they’ve received are paid for in real time,” Bodine said. “Instant payments provide a social and psychological aspect where individuals feel a sense of security and immediacy in completing transactions.”
The Future of Instant Payments
Different instant payment services, like the RTP network and FedNow Service, are expected to coexist to meet the growing demand for fast and convenient transactions. The Federal Reserve has developed the FedNow Service as its own instant payment solution. The FedNow Service began roll out in July 2023 and will expand availability over the next few years. Instant payment services will likely involve servicing both payment rails.
Cross-border payments are also set to expand, with the key to success lying in collaboration between banks and networks.
“Building a real-time network within a single region, such as North America, is relatively straightforward due to the integrated economy,” Carter said. “But expanding beyond that requires careful consideration and partnerships with networks in different countries.”
The current interest rate environment is also a boon to the adoption of real-time payments. “Real-time transactions enable customers to retain their funds for longer, allowing them to leverage and earn interest on their cash longer before making payments,” Carter said. “This shift has led to businesses considering a transition from traditional ACH payments to real-time payments, as it allows them to maximize the value of their funds by extending their days payable outstanding.”
In the next year or two, instant payments will have a transformative impact on businesses. Businesses need to understand how the movement of money in real time will affect their back-end operations and be prepared to adapt their processes accordingly.
“A significant percentage of businesses (around 56%) are already planning to use instant payments by the end of 2024, and the remaining businesses should begin working on implementing it as well,” Carter said. “However, integrating instant payments into existing business processes and procedures will require careful consideration and potential adjustments.”
From a banking perspective, it is crucial for institutions to be prepared to receive instant payments. Regardless of the size or type of bank, being on the instant payment rails in receive mode is essential.
“Customers will seek out banks that can facilitate instant payments, and banks that fail to provide this service may risk losing customers,” Bodine said. “Therefore, banks should prioritize developing strategies to enable instant payment receipt and subsequently focus on implementing the capability to send instant payments as well.”
As younger generations embrace the convenience and immediacy of real-time payments, businesses and banks must adapt to integrate these systems and meet customer demands. Collaboration between banks and networks, the expansion of cross-border payments, and the potential for longer fund retention for interest rate benefits further highlight the transformative potential of real-time payments. It is crucial for businesses and banks to understand and prepare for the impact on their operations and stay competitive in the evolving financial landscape.
