The RTP Network, available since 2017, had 150,000 businesses using its network as of September 1, according to its operator, The Clearing House. FedNow, the instant payment rail operated by the Federal Reserve, just launched in July.
So real-time payments are still in their early days. They allow consumers and businesses to send and receive funds from their accounts at banks and credit unions in real-time, any time of day, any day of the year, with immediate funds availability for receivers.
“Business owners are accustomed to using apps that mimic real-time payments in their personal lives, such as Zelle and Venmo, which are not real-time, as settlement happens the next day,” said Jim Colassano, senior vice president of product development and strategy at The Clearing House (TCH), in an email.
“Owners expect to be able to do the same with their businesses, so they have been looking for more user-friendly ways to send bills and invoices to customers while customers have been searching for a better payment experience that gives them more control."
“If I’m a finance leader, I don't want to have three days' worth of my payroll sitting in a bank due to processing time for the legacy rails; I want to be able to make those payments right now if needed.”
Head of emerging solutions, U.S. Bank
Why else would a CFO want its organization to have the ability to pay in real-time in their back office when alternatives like ACH settle in 24 to 72 hours and are a generally accepted means of paying suppliers? And why add another rail to the already numerous ways accounts payable or treasury can send money?
1. The need for speed
The ability to buy supplies and inventory instantly and have the supplier receive the payment in real-time is valuable. But real-time payments also lower the risk of having money tied up in transit during market disruption. When Silicon Valley Bank (SVB) failed, some startup businesses had payroll flowing through SVB. Others were trying to remove their deposits quickly and send them to another bank or a digital wallet provider.
"If I'm a finance leader, I don’t want to have three days’ worth of my payroll sitting in a bank due to processing time for the legacy rails; I want to be able to make those payments right now if needed,” said Mike Jorgensen, head of emerging solutions, U.S. Bank global treasury management.
Instant payments are also available seven days a week. For a business, the capability can come in handy, for example, if a contingent worker’s contract ends on a weekend or after hours. “I may want to pay the contractor and get them off the books versus waiting for the traditional pay cycle,” Jorgensen said.
Real-time payments can also enable the employer to offer earned wage access (EWA), which allows employees to receive a part of their check before payday.
2. Data and information
The ACH file contains the amount that needs to be paid, who needs to be paid, and some other limited information. Jorgensen said the data received after the payment is even more limited because it depends on the supplier sending back information through the network, which most suppliers don't do.
That results in difficulty reconciling the payment because the payer lacks info on who was paid, how much they were paid, and when they received the funds. A real-time payment contains things like the supplier name and rich invoice information, said Jorgensen, including a breakdown of line items. With real-time payments, “you're sending out the payment with all this rich data, and you're getting confirmation without [the recipient] having to do anything.”
3. Lower cost
Instant payments are significantly cheaper than a wire transfer with the same — if not better — speed. Normal rack rates for wires trend anywhere between $15 and $30, said Jorgensen, depending on the financial institution. ACH payments run 10 cents to 15 cents. Depending on the bank, an instant or real-time payment can cost from 25 cents to $1.
Like commercial cards or procurement cards, it makes sense to use real-time payments for a certain percentage of back-office spend, Jorgensen, because they are less expensive than wires and have a higher value proposition than ACH.
4. Working capital efficiency
With precise control and visibility over when a payment is sent and received, a business can have better control of cash flow – which is critical for many small and mid-sized operations, said TCH’s Colassano.
“RTP allows paying businesses to manage the timing of their outgoing payments precisely and to get immediate confirmation that each individual payment has been received."
Senior vice president, The Clearing House
The main benefits of businesses receiving payments are the earlier access to good funds 24/7, “which can reduce a company’s need for short-term loans to cover critical expenses,” said Colassano.
“RTP allows paying businesses to manage the timing of their outgoing payments precisely and to get immediate confirmation that each individual payment has been received, which can improve not only cash flow but also their ability to capitalize on early payment discounts,” Colassano said.
5. More capabilities are coming
In August, TCH announced expanded Request for Payment (RfP) availability, which allows businesses to request a payment through the RTP network. For example, RfP also allows payroll providers to send RfPs to its corporate customers so corporates can fund payroll on the same day that employees are paid, said Colassano, rather than three to four days before payday, which can allow employers to retain money in their accounts.
FedNow will also offer request for payments and plans to provide risk management and operational enhancements geared toward providing additional fraud prevention tools and straightforward access to account and transaction information.
If businesses are interested in implementing real-time payments, it will be essential for them to connect with their financial institution to see if they are one of the institutions participating, said Colassano.
About 400 financial institutions are on the RTP network, and 90% of RTP participants are community banks and credit unions. FedNow has 108 financial institutions so far sending and receiving on the network.