Demystifying Real-time and Faster Payments

Eighty-five percent of business leaders say the most important factor when choosing a banking partner is whether the financial institution (FI) offers real-time payments (RTP) capabilities, according to Citizens’ annual payments and treasury survey. RTP is also growing in importance with mid-size FIs. According to Cornerstone’s What’s Going On in Banking 2022 study, three in 10 banks and a quarter of credit unions plan to implement RTP in 2022. 

FIs that want to stay in business must deploy connectivity to faster payment networks or suffer the consequences of losing out on valuable account holders – along with their deposits and fee revenue. 

What is the difference between RTP and faster payments?

Awareness of faster payment rails isn’t something that matters to most consumers or businesses. Most people don’t necessarily care how funds get from one account to the next, but they do care about moving their money in the fastest and most secure fashion. From a consumer’s perspective, RTP and instant payments may look very similar; however, from an FI perspective, the settlement and funding time differs. Below are some examples of different RTP and faster payment types:

• ACH payments typically require one to two business days to settle; however, there is a same day settlement option. 
• Wire payments typically settle on the same-day but can require one day to settle if the originator requests the wire after the cut-off time which can be as early as 3 p.m. CT. 
• Push-to-card payments, using the Visa and Mastercard network, allow consumers to ‘push’ money to a debit card or credit card. While funds will be available immediately, it typically settles at the end of the day through card processing. 
• FedNow, the Federal Reserve’s RTP solution, is anticipated to be available in 2023. Payments will settle and fund immediately.
• RTP is on The Clearing House’s network and payments are funded and settled immediately.  

Which use cases should FIs be considering for RTP and faster payments?

As businesses, consumers, and FIs recognize the value of real-time and faster payments, adoption will continue to increase and use cases will continue to emerge. Here are a few use cases FIs should be evaluating:  

• Account-to-Account (A2A) payments enable internal and external money movement transfers between accounts without relying on third-party intermediaries or payment cards. 
• Business-to-Business (B2B) payments enable invoice payments, requests for Pay AR (account receivables) and other money movement transfers between two businesses in exchange for goods or services. 
• Business-to-Consumer (B2C) payments enable payroll, refunds, insurance claims and other money movements to consumers.
• Person-to-Person (P2P) payments enable consumers to move money from their account to another individual’s account for anything from paying or splitting a bill between friends and family to paying rent. 
• Consumer-to-Business (C2B) payments enable consumers to move money to a business for example when paying bills, rent, or mortgage payments or when purchasing goods or services online or in a store.

Alkami recently commissioned Cornerstone’s 2022 digital banking benchmarks and found that roughly half of the participating FIs reported P2P payment metrics. 

• The bad news: a measly 5% of checking account holders are using their bank or credit union’s P2P payment capabilities. 
• The good news: the percentage of checking account holders that are using those P2P payment tools grew by 20% between 2020 and 2021.

We also discovered that 54% of banks ranked B2B payments as a top three use case for their RTP strategy while only 9% cited B2C. Both FIs and their business clients must play their part in growing awareness of the technology and experimenting with emerging use cases of RTP.

What are the risks FIs should be considering when implementing RTP origination?

As more FIs and businesses embrace RTP to increase efficiency and meet consumer demands, FIs need to be aware of the risks associated with originating these types of payments. 

RTP transactions are irrevocable. When a fraudster uses social engineering tactics to request money and the victim authorizes the payment, the funds are available in the fraudster’s account within seconds. The same goes for account takeover scams where fraudsters will use phishing or other scams to gain access to the account holder’s password or Personal Identifiable Information (PII) to transfer funds. Fraudsters will then quickly move those funds or withdraw the money, and victims (or their FIs) are unable to reverse payment of the funds. FIs need to educate their users and be prepared with similar guidelines and approvals for RTP as they have for wires to reduce the level of risk associated with these instant payments that allow for little to no time for due diligence.

RTP transactions operate 24/7/365. Traditional FIs operate typical business hours Monday through Friday with closures for national holidays. Payments like ACH and wires align with the bank operating hours with cut-off times at the end of the business day; however, RTP, push-to-card payments and FedNow will operate 24/7/365. FIs need to consider the impact this will have on staffing schedules to ensure they have sufficient support available at all times to coordinate between the core, provider, and consumer. 

RTP risk management processing systems are not commercially available. Mature payment channels, like ACH and wires, have been around for quite some time and have very sophisticated risk management processing systems that have evolved as payments and risks have changed. FIs use this commercial software to limit their exposure by evaluating risk before an ACH or wire is processed. Right now, RTP does not have a risk management processing system in place to control transaction limits, velocity, or payment delays to allow for the appropriate time for payments to be analyzed for risk and verified before processing payment to the receiver. This puts a tremendous risk on the FI to put their guidelines and processes in place and educate their employees and user base to reduce risk. FIs can also reduce risk by implementing transaction limits for RTP and restricting the types of faster payments your organization engages in. 

RTP is a very complex payment channel and the industry as a whole is struggling with understanding the intricacies, risks and best practices around originating and receiving these types of payments. Nevertheless, FIs do understand that this new payment channel is a must-have feature to retain account holders. If you aren’t ready to dive in fully to RTP at your organization, you might consider getting your feet wet by allowing your account holders to receive payments which is less risky than originating payments. Starting with this functionality will give your organization and account holders a chance to better understand the process, make sure you have the required staff in place, and make significant strides to feel confident to add origination of RTP to your FI offerings.