Will the Real-Time Payment Use Cases Please Stand Up?
I was out with an old friend of mine for dinner, and when the time came to pay, we agreed to split the bill: he paid the total and I sent him my portion through Paypal. My friend received the notification instantly, which got him wondering: why is it that it takes days for a bank to credit his account when he receives a payment? It’s primarily because banks in the United States continue to settle transactions using the same system—that is, ACH—that they were using 40 years ago. But that might change very soon.
Despite a slow start, US banks are embracing the rapid technological changes around them and are beginning to work with one another to revise the banking ecosystem. Implemented by NACHA in 2016, same-day ACH was the first step in that journey. By 2020, banks—through The Clearing House, a long-standing banking association—hope to introduce Real-Time Payments (RTP), a new payments system which will further improve the speed of banking transactions. But speed can bring unpredictability, and the reality is that not all use cases are suited to RTP.
What Is RTP?
Before we dive into examples, it’s pertinent to rightly define what the revised RTP ecosystem will look like. While RTP is the system being devised by banks in the US, similar solutions are already in place elsewhere: Faster Payments in the UK, IMPS in India, SPEI in Mexico, and so on. Through these systems, a transaction can often be completed in seconds rather than hours or days. But how?
The obvious answer is newer technology, but there is also a big change in the flow of funds. Traditionally, settlement between two banks takes place before funds are cleared into the recipient’s account. With RTP and its international counterparts, funds are cleared first so that the recipient has immediate access to funds while the settlement between banks takes place at a later stage. Essentially, all these systems are doing is changing the back-end of the payment flow—the user interface should remain the same.
Increasing the speed of transactions, however, brings its own sets of risks. These payments will be irrevocable—an RTP payment cannot be recalled—and as a result, banks are being conservative in how they utilize these new rails. Expect to see tighter KYC norms and payment limits. From initial conversations I’ve had with banks, we can expect a limit of USD $25,000 for the first phase of the implementation.
Assessing the Benefits of RTP
My fear is that, as with every new fintech innovation, people see RTP as a panacea for all pain points. Given that we have a better understanding of how RTP works, we can look more closely at which business payment use cases are likely (and which are not likely) to be addressed by RTP in the near future.
Good Use Cases for RTP
- Business Payments via Cheques: Many SMBs still use paper cheques for payments, often for bookkeeping purposes. However, RTP will offer the ability to link invoices with the relevant transaction and—coupled with quick funds delivery and lower overall cost—is likely to incentivize businesses to move away from cheques.
- Processing Regular Payroll: A business can now wait until the last hour to process payroll and gain additional working capital if required. Since the fund settlement will be immediate, businesses will have 3-5 additional days of working capital.
- Domestic Transfers via Wires: Many business payments take place via domestic wires, which have—in the past—offered faster access to funds. Because RTP supports transfer of the same information as wires (at much lower cost), some businesses may opt for the new system instead. The primary challenge will be payment limits: wire amounts can range into the millions of dollars, and RTP will likely not support such high amounts—or, at least not from the beginning.
Bad Use Cases for RTP
- Cross-Border Payments: As of today, RTP’s international counterparts don’t talk to each other, meaning that they won’t support immediate access to funds in a cross-border payment scenario.
- Alternative Solution: Businesses looking for a quick, cross-border payment solution should consider a company like Hyperwallet, which sends payments through local rails (instead of cross-border wire rails) and is able to deliver payments faster than other solutions. Delivery of funds will be real-time in countries where some form of real-time payment becomes ubiquitous. Another option is prepaid cards or digital wallets, which can be loaded with funds instantly.
- Low-value Freelancer Payments: One of the advantages of RTP for freelancer payouts will be that platforms can wait until the last minute to assess the amount owed to a freelancer before sending the payment. A potential downside, though, is that freelancer payouts are generally low-value and RTP’s cost will lead to deduction of a significant portion of that amount.
- Alternative Solution: Virtual wallet solutions (like those available through Hyperwallet) are ideal in this context, enabling freelancers to accumulate funds and deciding how and when to cash out. Alternatively, prepaid cards enable freelancers to receive funds instantly without major cost being incurred, and card solutions can be augmented with rewards programs that provide additional incentives.
Ultimately, RTP seems best-suited for medium-value domestic payments, and it will take time for it to evolve to address other use cases. The holy grail of RTP use cases is to use your bank account to pay online: ecommerce retailers will get access to the funds instantaneously, and they won’t need to pay the three percent interchange fee that comes with accepting cards—savings they might be able to pass on to the customers. But as with any new solution, that comes with another hurdle: getting everyone comfortable with sharing their banking details online.
These are exciting times for the entire payments ecosystem—but remember to map your use case to the right solution.