What are Real Time Payments? How RTPs Work

Imagine this scenario: Your son calls you from college in a panic on a Sunday night. He’s flat broke, with a zero balance in his checking account. What should he do?

The more realistic question is, what should you do?

When you were his age, your options were limited. Today, though, you can use a real time payment platform such as Venmo to send him $100 instantly. (The lecture about money management will come later).

Simply put, real time payments allow anyone to initiate and send faster payments any time of day or night.  

Convenient and fast? Absolutely. But they’re also safe and offer end-to-end communication within the transaction. That means the financial transaction data is available immediately for the financial institution that transfer the funds, and the one that receives it.

Understanding Real Time Payments

RTPs are not new. Japan developed the first one in the 1970s. By 2010, the United States, China and India had their own RTP “rails” – the digital infrastructure that facilitates the payments. By 2019, the number of countries using RTP had reached 54.

Until recently, those RTP rails were used primarily for consumer peer-to-peer (P2P) transactions like the Venmo payment you made to your son. In 2020, according to the Mercator Advisory Group, 14% of consumers were using Venmo, and 54% were using the most popular P2P payment app, PayPal.

More consumers now use RTPs instead of paper checks for their monthly payments because they eliminate the lag time between an online payment and the clearing of the funds used to make that payment. That lag time can create liquidity problems for consumers living paycheck to paycheck.

With real time payments, the payee’s account is credited immediately, and the payer is instantly notified about the status. With a paper check, however, a payee could delay cashing it, leaving the payer with an unreliable cash balance and the potential for writing bounced checks. RTPs eliminate that.  

Interestingly, even Venmo is not exactly real-time because it fronts the money to the recipient and then draws from the sender’s authorized account. Since the recipient can use the money immediately, though, it’s real-time enough.

From Consumers to Business

Recently, businesses have realized the advantages of RTPs. Here are several:

• Instant access to funds
• Immediate confirmation
• Irrefutable transaction: Once an RTP is made, the sender can’t cancel it.
• Real-time transmission of more data about individual transactions
• Better management of individual capital requirements to help with forecasting
• Eliminates the danger of liquidity problems just as it does for consumers

Are RTPs safe? Yes, due to a process called tokenization.

Tokenization is the process of converting plaintext into a token value that does not reveal the sensitive data being tokenized. It creates unique party identifiers that shield account numbers within the system. The token is of the same length and format as the plaintext. Both plaintext and token are stored in a secure token vault.

Factors Driving RTP Growth

Smart phones have been a catalyst for RTP, enabling anyone to move money without going to a bank or making a phone call. Start-up companies, spin-offs and partnerships have appeared to support this trend.  

Then came Covid, where a world in quarantine created the need for rapid cash transfers and bill payments. Add to that the increase in global commerce, and people expect to have access to their funds anywhere in the world.

According to a report from Deloitte Consulting LLP, technology innovation, globalization and regulatory pressures have been key to driving RTP momentum. In addition, the report cites these additional tipping points:

Common Customer Expectations

• #paynow
• Friends immediately
• Deposits same day
• Bill pay same day
• Pay with anything (miles, points, etc.)
• No late fees if same-day payments
• Low-fee transfers

Common Merchant Expectations

• Get real time payments
• Better use of cash flow
• Reduce fraud
• Provide incremental value to customers 

When to Use Real Time Payments

Consumers, especially younger generations, use RTP for anything from paying monthly bills like mortgages, rent, utilities and phone bills to one-time payments like gifts to friends and relatives or medical bills.

But what are businesses using them for?

Primarily to meet consumer demand. While consumers have been using RTP for P2P transactions, those transactions use The Clearing House’s RTP network when they send money from an app like Venmo to a bank account.

Banks and fintechs* began tipping their toes in the RTP waters through those P2P apps. Now they’re swimming in them, and B2B (business-to-business) users agree that RTPs improve customer service.

RTP perks for B2B and B2C (business-to-consumer) use include:

• Insights into client needs
• Better control over payment timing
• Liquidity management
• Instant bill payment
• Stronger cash flows
• Better budgeting
• Seamless integration with systems like invoicing and bill payment
• Reduced costs through increased efficiency (e.g., automation)
• Opportunity to grow revenue (e.g., transaction fees, fees for new service or product offerings)
• Reduced interbank settlement risk

*The term “fintech” combines its key components: finance and technology. It refers to any business that uses technology to enhance or automate financial services, transactions and processes.

How to Use Real Time Payments

A good example of RTP benefits for business is updating payroll processes. You gain valuable time in your internal processes so you can make changes right up to the day of payroll. This eliminates lag time for bonuses, commissions, new employee paychecks and even termination pay.

In other cases, both you and your payee can benefit. Direct debits from customer accounts, for example, can frustrate customers who might forget due dates and don’t have enough money in their accounts to cover the payment. RTP solves that problem:

• The customer initiates the payment when the money is in their account
• You receive payment immediately
• Customer avoids an overdraft
• Customer is happy and so are you

Besides bill pay, top use cases for instant payments are account-to-account (A2A) transfers and P2P payments. Consumers would be able to transfer funds between accounts at different banks, for example.

For B2B transactions, a top use case involves e-invoicing.

Here, billers could send a request for payment (RfP) to their customers through an RTP network. Customers respond by initiating a credit transfer through an end-user interface offered by the financial institution. The payment would include all the details needed to post the transaction.

These “push payment prompts” with RTP are game changers. They will streamline transactions and allow for more efficient payment tracking as part of a comprehensive procure-to-pay process.

The Clearing House’s RTP Network

In the U.S. the most prominent example of a real-time payment rail is The Clearing House’s (TCH) RTP network   It allows third-party service providers to connect to its RTP network and offer real-time payments to their customers.

Launched in 2017, it now delivers real time payments for:

• Business-to-business (B2B) real-time transactions
• Peer-to-peer (P2P) real-time transactions
• Payroll
• Request for pay (RfP)

All federally insured U.S. depository institutions are eligible to use TCH RTP. The RTP pricing schedule, operating and participation rules, message specifications, security requirements and related information are publicly available on the TCH website.

Businesses that want to tap into TCH RTP platform typically use third-party service providers. They include Sherpa Technologies, ACI Worldwide and Alacriti, which offer streamlined processes for connecting to the platform.

Sherpa Technologies, a credit union service organization for Corporate One Federal Credit Union, was the first fintech to receive certification with TCH RTP. That partnership model brings the benefits of real time payments to 800 credit unions, which also participate in the RTP network.

TCH RTP network is the only fully implemented RTP system in the United States. Another one, called FedNow, is in its pilot stage.

What is FedNow?

The Federal Reserve Board announced development of an RTP rail named FedNow in 2019 and launched a pilot program in 2021. The program consists of more than 200 financial institutions and processors that are helping to support its development, testing and adoption.

Like The Clearing House’s RTP platform, FedNow will support services like instant bill pay at any time on any day of the week. It’s being developed by the Federal Reserve Bank so that financial institutions of every size and in every community can provide safe and efficient instant payment services in real time. With FedNow, both businesses and individuals will be able to send and receive instant payments conveniently using mobile devices.

FedNow will be released in phases. The first release, scheduled for 2023, will provide clearing and settlement capabilities. It will also include value-added features like request for payment and remittance information to support a range of use cases, initially account-to-account transfers and consumer-to-business bill pay.

Benefits of RTPs

Consumers and businesses benefit from the payment flexibility RTP offers in the following ways:

By overcoming the lag-time of legacy payment infrastructures, real time payments unleash new transaction potential for business. Combining real time payments with data sharing, for example, will create real-time commerce. A company would be able to see whether a customer has the ability to pay for a shipment of goods before they are shipped.As RTP continues to evolve, so will the applications that support it. These will enable you to better serve your customer, increase sales, and expedite an expansion into new markets