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Faster Payments Are Coming to U.S. – Are You Ready?

Recently, I joined Wells Fargo, Lipis Advisors and The Clearing House for a panel discussion, the day after the first test transaction went through. Here are my key takeaways as well as insights on real-time payments, how they’re different from credit cards and ACH, and the many bottom-line benefits they offer.

What are real-time payments?

You can define real-time payments as a new payment method that instantly takes money out of one bank account and deposits the money in another bank account, 24×7. The same transaction carries both the payment and the remittance data describing why the sender made the payment.

“Our new RTP network involves instant clearing and settlement of irrevocable funds,” said Keith Gray, Vice President with The Clearing House (The Clearing House, with guidance from the Federal Reserve, have established rules to govern this new payment network).

Real-time payments offer several advantages over established ways to pay.

  • Run on new rails and do not use credit card, ACH or wire transfer networks
  • Move money faster than same-day ACH or credit cards, which typically take hours (or some cases days) for the money to move
  • Prevent ACH returns because real-time payments are not reversible

You may also hear people refer to these as instant, faster, immediate or warp-speed payments.

How will organizations receive real-time payments?

Imagine receiving funding and posting data from your consumers instantly. Real-time irreversible funding with rich data could be used in a lot of scenarios, from bonding an insurance policy, to mortgage closing and last-minute bill payments. The diagram below shows the six easy steps in this process.

Imagine a consumer goes to the insurance company website, selects a policy and opts to pay in real-time. The insurance company sends a request for payment to the consumer’s bank. The consumer gets an alert on their phone to approve the request for payment. When the consumer approves the payment, the money immediately moves from the consumer’s bank account to the insurance company combined with the transaction data.

If a request for payment goes unanswered then there will be a time-out. The insurance company can then reach out to the consumer to alert them that the payment was not completed.

How will organizations send real-time payments?

The applications for sending real-time funds reach far and wide.

Lenders could fund personal loans, universities could send student refunds and insurance companies could pay claims with the recipient getting the money in their bank account instantly. Imagine an automobile insurance adjuster looking at the damage to the car and immediately depositing the payment to the consumer’s bank account, which could send customer satisfaction soaring.

How much will real-time payments cost?

It is still too early to see exactly how the market will price this service. “Pricing for real-time payments will fall between ACH and wire transfer pricing. Most banks will price the service at a premium alternative to ACH,” said Leo Lipis, Managing Director of Lipis Advisors.

How do real-time payments prevent fraud?

To reduce fraud, only the owner of the account can initiate a real-time payment to take money out and the only option is for a credit push payment. Debit pull payments cannot take pace. To further prevent criminal activity, real-time payments include fraud analytic tools.

There is currently a network limit of $25,000 per transaction and it is expected that this will quickly increase to $100,000. The current limit reduces risk, as we learn how to use this new payment network.

How fast are real-time payments?

The first test real-time transaction took three seconds to complete. Compare this to how credit card payments work today. Currently, you could go online, order new running shoes, receive the shoes in the mail and run a marathon before the shoe company receives the funds from your credit card payment.

Do I need to post payments instantly?

Yes! When consumers click pay they expect the company to credit their payment immediately. It is unacceptable to re-possess a car, deny enrollment for classes or shut off the electricity after a consumer has paid their bill. But only 56% of organizations avoid these embarrassing situations by posting payments to their accounting systems in real-time.

Why should organizations accept real-time payments?

Happy consumers, lower costs and saving staff time top the list of benefits organizations expect from real-time payment processing. No wonder 60% of organizations are interested in accepting real-time payments.

“This is phenomenal interest because we are only just at the education stage in the industry,” said Lipis.

Millennials are accustomed to the experience of “I press and the money goes.” To the delight of consumers of all ages, real-time payments finally makes this dream come true.

“The network is very chatty. There’s lots of communication, in real-time. Every payment has an immediate confirmation. Also, all related information about the payment goes right along with it to eliminate any reconciliation problems,” said Gray. Tying data and dollars together will simplify payments for organizations.

In addition to eliminating exception processing, real-time payments are expected to be priced lower than credit card payments.

Payment executives give real-time payments a medium priority compared to their many other initiatives to catch up with consumer demand. We expect this priority to rise as real-time payments move out of testing and prototypes into the mainstream.

Where are real-time payments already taking place?

“Real-time payment processing goes back to 1970s with Japan. We’ve seen lots of adoption over past 10 years in countries like UK, Sweden, Brazil and Nigeria,” said Lipis.

The world’s two most populous countries (China and India) offer real-time payment systems and the two largest economies (United States and EU) are in the process of going live.

How do I prepare for real-time payment processing?

A change of this magnitude requires a phased-approach, in order to reap the biggest benefits.

Phase 1

  • Post payments in real-time
  • Consolidate payment systems
  • Accept debit and credit card payments in all channels with real-time authorization

Phase 2

  • Provide feedback on real-time payment prototypes
  • Allocate IT resources
  • Sign up for real-time payments with payments partner

Phase 3

  • Begin sending request for real-time payment
  • Begin accepting real-time payments

Phase 4

  • Begin sending real-time payments

Keep learning

With a new payment network launching, this is an exciting time to lead your organization’s payment strategy. Now is the time to learn and prepare.

Vice President of Product Management, Electronic Bill Presentment and Payment

Steve Kramer serves as vice president of product management for electronic bill presentment and payment at ACI Worldwide. Steve leads the company's strategy to provide easy online, mobile and in-person payment services to more than 3,000 clients. Steve has served as a vice president of product management and strategy at major players in the electronic payment processing market for the past 16 years. Steve enjoys being outside, whether playing tennis, softball or scuba diving.