Picture for a moment your life before the pandemic. Prior to 2019, how often did you purchase groceries online, complete an in-store transaction using your PayPal account, or use curbside pickup services? Chances are that digital payment transactions were not a constant part of your daily routine. Though digital payments had already been increasing for quite some time, these transactions skyrocketed during the pandemic, accelerating digital interactions much faster than anticipated.  

Back in March 2020, when the pandemic was still “young,” a Credit Union Times article titled “Coronavirus Is Already Impacting Consumer Banking: Survey” reported that 63% of consumers were more inclined now to try a new digital app or website than before the pandemic. In addition, an article by the Financial Brand in April of 2020 reported the results of a J.D. Power survey; approximately one-third of retail banking customers planned to increase their use of online and mobile banking services post COVID-19, and only 46% of consumers would go back to “banking as usual.” Overall, the impact of COVID-19 established a new expectation from members of convenient and secure digital interactions from their credit unions.

Fast forward to today

Both of those articles were published more than two years ago. Since then, consumers across all age demographics and businesses of all sizes have rapidly become more and more adept with digital payments. Fintech companies have met consumer demand with a variety of solutions that deliver frictionless, transparent, and fast payment solutions that make paying easy for the consumer. We can basically make almost any digital payment we want now, from ordering fast food to buying a car to sending pizza money to a kid at college. 

All of this has been happening as The Clearing House’s RTP^® network rail came to the market in 2017, and the Federal Reserve is expected to follow suit with their own service in 2023. As our economy becomes increasingly digitized and consumer shopping habits move ever faster toward e-commerce, real-time payments are in a prime position to be utilized as the primary digital payment solution. For many consumers, real-time payments are affecting their choice of financial institution, and credit unions who are not offering real-time payments are going to be at a competitive disadvantage. 

As the rapid evolution of the payments ecosystem continues, we must recognize that real-time payments are the future of our industry. Understanding the essential elements of real-time payments – what they are and what they are not - will establish a solid foundation from which to know how to implement them.

Identifying the transaction rails

In today’s payment world, transactions travel on separate rails. There’s the ACH rail, the debit/credit rail, and, most recently, The Clearing House’s RTP® network rail, which has been live since 2017. The RTP network rail facilitates real-time payments and is not part of the other payment rails. The Federal Reserve is also planning to launch its own payment rail in 2023 called FedNow℠. Like ACH, both rails support separate participant profiles for Receive Only, Send/Receive and Request for Payment (RfP), which enables billers to initiate real-time payments from bill payees with the click of a button.

Understanding faster payments vs. real-time payments

Though sometimes these terms are used interchangeably, they really are two different things. Real-time payments stand apart from other legacy payment systems in five substantial ways:

1. Real-time payments are certified. The payment authenticity is guaranteed.
2. Real-time payments are final. They cannot be revoked or recalled once authorized by a sender and submitted. There is a Request for Return of Funds if real-time payment funds are sent in error, but this process takes place after settlement. In comparison, any returns on legacy payment systems can take place before funds are settled.
3. Real-time payments are immediately available to the receiver. Senders and recipients also receive status notification that funds were sent and that they are now available. Legacy payment systems clear in batches at varying times. Senders may not know for a few days if a transfer was successful and that funds are available to the receiver to use. 
4. Real-time payments are instantly settled. Legacy payments are settled by batch and at varying time intervals; with real-time payments, financial institutions settle funds instantly and individually.  
5. Real-time payments are confirmed. The payee and payor receive notifications of payment status. Legacy systems typically only provide the payer with notification that the payment was sent.

Debunking misconceptions about real-time payments

Payments made through Zelle, PayPal or Venmo are not real-time payments. Zelle, PayPal and Venmo are only front-end applications that allow consumers to initiative a payment via an ACH, a debit, or the RTP network rail.

In addition, signing up for Zelle does not give your credit union access to the RTP network. To transact payments on this rail, your credit union must be a participant and connect to the RTP network to receive or send funds via a front-end application for RTP. Just as you need to be an ODFI or RDFI on ACH to process ACH payments, you need will need to be a participant on the RTP network to receive/send real-time payments.

Managing risk and fraud

Real-time payments relieve a lot of the settlement risk financial institutions face today. Settlement risk is very real in existing payment forms but, by using a credit-push (good funds) model, which verifies money is available before it is sent, the real-time payments model eliminates transaction settlement risk on their network. Though this model doesn’t mitigate fraud, it does eliminate settlement risk.

For those financial institutions who are receive only on the RTP network, there is no risk, because the credit-push model verifies the funds are good when they are sent. Starting your real-time payments journey as a “receive-only” participant will allow your financial institution to enable RTP network access for your members without bearing the transactional risk and apply the risk mitigation tools as you migrate to “send” use cases, such as enabling business-to-consumer (B2C) and business-to-business (B2B) transaction functionality.

For more detailed information about risk and fraud management as it relates to real-time payments, check out this article by our credit union service organization, Sherpa Technologies.

Benefitting from real-time payments

Real-time payments offer numerous benefits to credit unions and the members they serve. Below are some examples of key benefits that often resonate most with financial institutions:

• Grow revenue by supporting a variety of use cases. Recent industry research reports that 40% of RTP users would willingly pay fees to get their payments in real time, and 2 in 3 consumers say they would be more likely to continue doing business with firms that provide a real-time payment option. Further, approximately 50% of insurance, income and earning disbursement recipients would be willing to pay a fee to receive those payments instantly.
• Remain competitive by fulfilling members’ expectations and desire for instant payments. Real-time payments are growing significantly while traditional check and cash continue to decline. In 2021, real-time payments tripled. Research says more than 1/3 of U.S. consumers cite access real-time payments as a factor in choosing their financial institution. The RTP rail currently reaches more than 60% of U.S. demand deposit accounts.
• Address gaps in current payment methods through additional data, requests, security, and immediate availability. Real-time payments can facilitate a new request for payment (RfP), which allows a business or a consumer to send a request in the form of a message and provides the payor with the option to authorize or deny the payment. Push, or credit, transactions enable payers to instruct their financial institution to send money from their accounts to recipients’ accounts, putting the payer in control of the timing of the release of their funds. The contextual data surrounding a payment has been missing from every previous payment system. Using the ISO2022 financial messaging methodology that creates standard, consistent payment messages across all business processes within the financial services industry, real-time payments offer the ability to attach information about the payment that doesn’t detach throughout the process, which is helpful during payment processing and reconciliation. Real-time payments facilitate real-time authorization, real-time posting, and real-time clearing and settlement.

Reimagining your business with real-world use cases

When most people think about real-time payments, the first use case that comes to mind is person-to-person payments. But as you can see with the following graphic from The Clearing House, ways you can use real-time payments are as diverse as the credit unions. 

This chart is not an all-inclusive list of every type of use case, either. The ways to use real-time payments are almost limitless. As each credit union experiments with and experiences immediate payments, they will learn what use cases are most valuable to their specific credit union. And that’s the greatest benefit of this new payment option—the tremendous opportunity to enhance how credit unions serve members, streamline credit union business functions, and generate new products and revenue.