Last editedMar 20233 min read
Although electronic bank transfers have been the go-to payment method of choice for businesses for decades, the speed of electronic bank transfers has always been dependent on the relevant country’s banking infrastructure. This can create uncertainty and distress, especially for smaller businesses that rely on prompt payments to ensure a positive cash flow. However, in recent years countries have invested more and more money into their banking infrastructure, enabling money to move significantly faster than it ever has before. These new types of transfers are known as real-time payments (RTP).
What are real-time payments?
The term “real-time payments” (RTP) refers to any type of account-to-account transfer that allows funds to be available immediately to the beneficiary. While settlement times can differ depending on which real-time payment processing scheme is being used, transfers are generally completed within seconds. Consequently, real-time payments are also referred to as instant or immediate payments. While there are a broad range of bank transfer systems that claim to support fast payments – like instant ACH transfers – RTP processing is actually instantaneous. For a little more information on some of these other speedy payment systems, check out our guide to faster payments vs same day payments.
How real-time payments work
Different real-time payments schemes are used throughout the world. In the United States, for example, RTP networks include Zelle, Real-Time Payments Network, and FedNow. But how does it all work? Essentially, there are five parties involved in real-time payment processing: the payer, the payee, the payer’s financial institution, the payee’s financial institution, and the RTP network. The process is relatively simple – real-time payments make use of payment rails operating on digital infrastructure to move money from one account to another in real-time:
First, the payer initiates payment.
Then, the transaction is authorized by the payer’s financial institution.
A message is sent via the RTP network.
The RTP network validates the message, confirms liquidity, and payment is either accepted or rejected.
Then, the payment is authorized by the payee’s bank, and a payment notification is sent to the payer.
Benefits of real-time payment processing
Although there are plenty of challenges associated with real-time payments – from expensive payment charges to difficulties aligning with legacy systems – there is also an enormous range of benefits to consider.
Firstly, speed. Consumers are demanding when it comes to the convenience of electronic payment options and instantaneous access to funds, and the faster you can make their funds available to them, the better. But the increased speed of real-time payments isn’t just beneficial for consumers, it can also have significant practical benefits. For example, during an economic crisis or a disaster situation, it’s vital for people to have access to funds immediately. Furthermore, real-time payments reduce the risk of money getting tied up in payment processing, ensuring businesses have positive cash flow and liquidity when they need it.
It’s also important to note that real-time payments are transmitted along with data that is formatted to a global messaging standard. This lets businesses reconcile payments automatically, which improves efficiency and makes it significantly easier to resolve errors and minimize processing delay. Finally, RTP processing costs roughly the same as non-instant electronic bank transfers ($1.95 for 10 transactions per capita, according to a 2019 report from Deloitte), making them even more attractive to businesses and consumers.
Plus, a broad range of use cases can be supported by real-time payment processing, including Government to Consumer (G2C – tax refunds, social benefits, etc.), Consumer to Government (C2G – taxes, donations, etc.), Business to Business (B2B – bills, refunds, etc.), Business to Consumer (B2C – refunds, legal settlements, etc.), Business to Government (B2G – taxes, campaign donations, etc.), Government to Business (G2B – government contracts, tax rebates, etc.), and so on. As such, we can expect to see increased consumer, merchant and corporate adoption of real-time payments (RTP) over the coming years.
GoCardless and real-time payments
GoCardless offers Instant Bank Pay, which allows merchants to send links and request one-off payments from customers in the UK and DE. These bank-to-bank payments, powered by Open Banking, allow for instant payment confirmation. Using this form of real-time payments, it’s extremely easy to get paid, as all the customer needs to do is click on the link and provide the necessary details.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.
