By Mike Faden
Several factors are driving the global proliferation of real-time commercial payments, also known as immediate payments. Due to rapid technological change and the adoption of smartphones, consumers expect almost everything to be available instantly – including payments.2 According to a 2015 report by Deloitte, real-time payments offerings from fintech startups are increasing pressure on established financial institutions to offer faster payment services. Meanwhile, regulators are supporting real-time payments to benefit consumers and improve competitiveness of national economies.
The U.S. doesn’t yet have a ubiquitous real-time payments system designed for business-to-business (B2B) as well as consumer transactions, though the U.S. Federal Reserve (Fed) is leading a broad initiative to spur development of one.3 Some real-time systems already exist or are in development, including several focused on person-to-person payments. Of course, national real-time commercial payment systems will have to become interoperable across borders before they can be routinely used for paying foreign contractors.
The term “real-time” can cause confusion, so it’s worth briefly describing how real-time payments differ from other payment types. Two key steps in payments that transfer money between bank accounts are clearing, which is when the funds become available in the recipient’s account and are debited from the payers’ account; and settlement, which is when the two banks involved actually transfer the funds between them.4 The key characteristic of real-time payments is that the recipient immediately (usually within seconds) receives and can use the funds. Settlement may also occur in real time or it may occur later, depending on the system.
For comparison, credit-card authorizations provide an immediate guarantee of payment, but the recipient may not actually receive the funds until later. With other B2B payment methods commonly used in the U.S., such as Automated Clearing House (ACH) and Real-time Gross Settlement (RTGS), funds are usually available to the recipient within one business day.
Definitions of real-time commercial payments systems typically include some or all of the following characteristics:
Of note, that last bullet reflects strong sentiment among U.S. businesses. According to a report from the Fed: “When making a payment, not having to give their bank account information to the payee was important to 85 percent of consumers and 81 percent of businesses. By a significant margin, consumers and businesses indicated that they would rather share an e-mail address or a phone number to make/receive payments instead of sharing their bank account numbers.”6
The U.S. lags other countries (including the U.K., China, India, Japan and Singapore) in implementing a national real-time payment system. Reasons include the sheer scale of the U.S. banking system and the fact that regulators haven’t imposed pressure on banks in the way that they have in other some countries.7 However, progress is underway. The Fed is leading an effort to improve the speed, safety and efficiency of payments, involving the financial-services industry and other stakeholders. Members of a Faster Payments Task Force established by the Fed submitted 22 proposals for fast-payment systems, which are being assessed against criteria including speed, ubiquity, security and efficiency.8,9 Results of the assessment are due in early 2017.10
Companies that submitted proposals include The Clearing House (TCH), the bank-owned operator of ACH and wire payments infrastructure, in conjunction with FIS. TCH is developing a real-time payments system due for pilot deployment in early 2017.11 The Fed itself is unlikely to develop a real-time commercial payments system unless it absolutely has to – i.e., unless “actions of the private sector alone will likely not achieve the desired outcomes for speed, efficiency and safety in a timely manner.”12 However these developments play out, it may take time for real-time payments in the U.S. to become ubiquitous, due to the size and number of players in the U.S. financial-services industry.13
Real-time commercial payments may provide a number of benefits for B2B invoice payments and other transactions, including:
Real-time international commercial payments systems that can be routinely used for paying foreign contractors aren’t yet universally available – but they are coming fast. Stay tuned for further developments.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. “Smarter bank payments—part 3: Real-Time Payments and APIs,” Accenture Banking Blog; http://fsblog.accenture.com/banking/smarter-bank-payments-part-3-real-time-payments-and-apis/
2. Real-time payments are changing the reality of payments, Deloitte; http://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-cons-real-time-payments.pdf
3. Strategies for Improving the U.S. Payment System, U.S. Federal Reserve System; https://fedpaymentsimprovement.org/wp-content/uploads/strategies-improving-us-payment-system.pdf
4. “A Guide to Real-Time Payments Terminology,” Accenture Banking Blog; http://fsblog.accenture.com/banking/a-guide-to-real-time-payments-terminology/
5. Flavors of Fast (Edition 2), FIS; https://www.fisglobal.com/-/media/FISGlobal/Files/Report/Flavours_Of_Fast.pdf
6. Strategies for Improving the U.S. Payment System, U.S. Federal Reserve System; https://fedpaymentsimprovement.org/wp-content/uploads/strategies-improving-us-payment-system.pdf
7. “Real-time payments in the US: right said Fed,” Banking Technology; http://www.bankingtech.com/500772/real-time-payments-in-the-us-right-said-fed/
9. Strategies for Improving the U.S. Payment System, U.S. Federal Reserve System; https://fedpaymentsimprovement.org/wp-content/uploads/strategies-improving-us-payment-system.pdf
10. “Federal Reserve Selects Firm to Assess Faster Payments Solutions,” U.S. Federal Reserve; https://fedpaymentsimprovement.org/federal-reserve-engages-in-effort-to-assess-faster-payments-solutions/
11. “The Clearing House and FIS Submit Joint Proposal to Fed’s Faster Payments Task Force,” The Clearing House press release; http://www.businesswire.com/news/home/20160425006026/en/Clearing-House-FIS-Submit-Joint-Proposal-Fed’s
12. Strategies for Improving the U.S. Payment System, U.S. Federal Reserve System; https://fedpaymentsimprovement.org/wp-content/uploads/strategies-improving-us-payment-system.pdf
13. “Real-time payments in the US: right said Fed,” Banking Technology; http://www.bankingtech.com/500772/real-time-payments-in-the-us-right-said-fed/
15. The Global Adoption of Real-Time Retail Payments Systems (RT-RPS), SWIFT; https://marketinfrastructures.swift.com/sites/marketinfrastructures/files/white_paper_real_time_payments_0.pdf
16. 2016 World Payments Report, Capgemini; https://www.worldpaymentsreport.com/download
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