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What Are Real Time Payments?

 

Real-Time Payments or “RTP” refers to payment rails (platforms or networks via which payments are made) that share a few characteristics. The first is in the name: they are real-time, or at least very close—initiating, clearing, and settling in a matter of seconds. Real-time payment networks are ideally 24x7x365, meaning they are always online and available for a transfer. As a result, in order to connect to a RTP rail, the bank or credit union’s backend systems will need to be 24x7. “Open-loop” is also an important characteristic—this means the payments are connected directly to a personal account, rather than relying on a prepaid balance. A data-rich messaging format like ISO 20022 is also necessary. Without this clear and nuanced form of information, it is more difficult to resolve errors, which leads to processing delays. Strong formatting standards also provide greater security to all participants in the network.

Current examples of RTP networks include The RTPⓇ Network from The Clearing House (TCH) in the U.S., UPI in India, Faster Payments in the UK, and PIX in Brazil. The terms “instant payments”, “immediate payments”, and even “fast/faster payments” are also sometimes used interchangeably to refer specifically to real-time payments rails. 

This can get very complex very fast, so let’s hone in on what’s most relevant in the U.S.

 

Real-Time Payments in the U.S.

 

RTPⓇ Network from the Clearing House

Launched in 2017, RTPⓇ Network was the first of its kind in the United States. It is developed and operated by The Clearing House Payments Company L.L.C. (PayCo), which is privately owned by a group of the world’s largest banks. It currently reaches over half of all U.S. demand deposit accounts but is accessible to 70%. Access is available to all federally registered depository institutions, either via a direct connection or a third party service provider (TPSP). Financial institutions with the resources to make their backend processes compatible with the network can connect directly, but most may need to use a TPSP. Such providers specialize in complex and resource-intensive infrastructural issues like ensuring 24x7x365 processing. As with all specialization, this makes TPSP’s more efficient. The current cap for an RTPⓇ transaction is $100,000, with lower limits sometimes set by connected institutions.

 

This network allows for several types of messages:

  • Credit Transfer: the only way funds can be transferred on TCH RTP, a credit push

  • Request for Payment: prompts a user to send a credit transfer

  • Payment Acknowledgement 

  • Request for Information and Response to RFI 

  • Stand-Alone Remittance Advice 



FedNow from the Federal Reserve

Pending further updates, the Federal Reserve will launch its own RTP network in 2023 or 2024. Much of what goes for The Clearing House’s network also applies to FedNow, the main difference being that FedNow will be operated entirely by the Federal Reserve banks. The goal is that the launch of a second domestic RTP rail will drive competition, in price and ease of use but most importantly adoption. Given that the service is still in heavy development, specifics are still being worked out. What we do know is that FedNow’s rollout will be phased, the first stages involving support for core capabilities. The Fed is aware that the main obstacle for many financial institutions is 24x7x365 processing, so they are hoping to ease that transition. Concerns have been raised involving interoperability and public-private sector competition, but the Federal Reserve seems to be taking these concerns, as well as other lessons from extant systems into consideration. The current expected value cap for a FedWire payment is $25,000, but the Fed is considering an increase before release.

 

Common Questions

Even if you’re fully versed in payments lingo, there are some overlapping terms that it helps to clarify. Although the industry markets the benefits of RTP to end-users, many still don’t have the information they need. The meanings of terms can depend on who’s using them, as well as the country they are being used in.

Faster Payments is a blanket term that, in the U.S., refers to an accelerated payment rail. Examples include same-day ACH, real-time payments, Zelle, push-to-card, and others. They are advocated for by the US Faster Payments Council. In the U.K., Faster Payments refers to the actual payment rail itself. 

 

Is ____ a real-time payment?

Mobile Payments: Not really, not yet at least. Apps like Venmo and CashApp offer instant transfers between users, but in reality, the value is held in a “closed-loop”, in contrast with the aforementioned “open-loop”. Within the loop, i.e. the app, users can exchange funds instantly, but if they want to retrieve money from within that closed-loop, they will have to use another payment rail, typically an ACH payment. However, some are eyeing real-time payments as a method of facilitating transfers between their eWallets and a checking account. This doesn’t make mobile wallets themselves open-loop but would allow for an easier connection to an open-loop system, like RTP.

 

Zelle: Kind of! Operated by Early Warning Services LLC, a company owned by several prominent U.S. banks, Zelle is an independent transfer service linked to many banks and credit unions. It has recently been integrated with The Clearing House’s RTPⓇ network, which allows payments sent with Zelle to be delivered by the RTP network. If the payee or payer’s financial institution is not connected to the RTP network, then it still settles in minutes via Zelle’s network but is not technically real-time.

 

Wire Transfer: Kind of. Typically reserved for low-volume, high-value transactions, wire transfers do settle instantly. For this reason, they are referred to as real-time gross settlement or RTGS transactions. Despite the similarities, the difference is a practical one: real-time payments are ideal for high-volume transactions, whereas wires are used for high-value transactions. You might use RTP to send money to a family member, or pay rent; while wire transfers make more sense for buying expensive real estate or corporate acquisitions.

 

Same-day ACH: No. While same-day ACH transactions are an improvement over plain old ACH transactions, they only shorten the three-day window down to one. More importantly, they are batched, so rather than being individually processed like RTP or wire transfers, they are all compiled and settled together at the end of the working day. 

 

Push-to-Card: Almost. Push-to-card leverages existing card networks but reverses the flow of information so that funds can be sent to a debit or credit card, rather than from. It can settle in minutes, which is fast, just not as fast as an rtp network.

 

Check: What? No!

 

Why Use Real-Time Payments?

There is a myriad of benefits to using real-time payments, across every level of the financial system. The most familiar example to most Americans today is disbursements from the U.S. Government—stimulus checks. The cost of these Economic Impact Payments is high enough without the cost of printing and mailing checks or cards. Add in inevitable errors—misspelled names, payments sent to the deceased—and the price rises even higher. However, what’s even more crucial than money is time. People need aid to keep them out of the red, and to do that the payment has to arrive before their money runs out. The Treasury Department and IRS have the Herculean task of sending out hundreds of millions of payments, and there is just no way to do it without delays. Had the government been able to leverage a faster network, every American would have been able to receive their stimulus the day it was approved.


The good news is that soon we won’t have to think about the “what ifs”. More institutions are connecting to TCH’s RTPⓇ network, and with the arrival of FedNow, real-time payments should very soon be the standard that ushers the U.S. into the next generation of commerce.

 

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Comments: (2)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 21 May, 2021, 14:281 like 1 like

Great article! I've read - and written and implemented - dozens of articles about RTPs in UK, India, China, etc. But, as far as I can recall, this is the first one I recall reading about RTP in USA.

I have a coupla specific questions on what you've written:

  1. "A data-rich messaging format like ISO 20022 is also necessary (for RTP)". While I totally agree that ISO 20022 would alleviate a lot of pain in extant RTPs around narration, AFAIK none of the leading RTPs in the world actually uses ISO 20022. UK FPS uses ISO 8587. I think so does India UPS. Does TCH RTP use ISO 20022? Will FedNow use ISO 20022? In a slightly different context of EU cross border payments, I've remarked that ISO 20022 is proving to be like Waiting for Godot, if you know what I mean by the analogy with that elusive character in the Samuel Beckett play.
  2. "(Zelle) has recently been integrated with The Clearing House’s RTPⓇ network". What real time payment rail was Zelle using before this TCH RTP integration happened? Any idea why Zelle ditched it in favor of TCH RTP now??
  3. "Had the government been able to leverage a faster network". Why wasn't the US govt able to leverage the 4 year old TCH RTP for sending out stimulus payments to US residents? 

Look forward to your replies. Thanks in advance.

While on the subject, there's another related topic, namely, pros and cons vis-a-vis Counterparty Risk, Liquidity between RTP and T+0 / T+1 payment rails.

I read an excellent white paper from DTCC on this topic, albeit re. securities, on the back of calls for accelerated settlement triggered by the Gamestop / Robinhood incident but I haven't been able to find anything on this topic re. payment systems viz. RTGS / RTP v. BACS / ACH / NEFT payments. Much appreciate if you can point me to some readings on this topic - or, better still, write a follow-on post on it:)

Christian Hibbard
Christian Hibbard - Alacriti Payments - Piscataway 21 May, 2021, 18:24Be the first to give this comment the thumbs up 0 likes

Hi Ketheraman, thanks for your response! I'm trying to help remedy the dearth of US-specific content. I'll do my best to answer your questions but much of it is my intuition at this point, as good answers are hard to come by without a direct line to those in charge of these rails.

1) Fednow has committed to following the ISO 20022 standard at launch. As for TCH RTP, it's slightly more complicated. They've implemented ISO 20022 for all bank-to-bank communications. However, my understanding is that each institution which connects has to develop their own interface and standards for the customer to initiate payment, hence the role of technology providers and "sponsor banks" for TCH RTP.

As a side note, FedWire is supposedly transitioning to ISO 20022 as well, though it's been delayed...

As for international adoption, the first that comes to mind is Australia’s New Payments Platform, which I believe has been following ISO 20022 since launch. When it comes to EU cross-border payments I don’t have much experience, but I;m sure this Godot guy will show up eventually...

There is always the possibility that by the time they get around to adopting ISO 20022, the ISO will have updated to the next standard--quantum payments? Who knows.

2) Zelle is an interesting case, it’s had a few iterations over it’s ~10 year lifespan (if you consider clearXchange to be the same service). I’m not familiar with the nuts and bolts of Zelle’s backend, but my assumption is that it provided an internal system of initiating and clearing communication between its member banks, given it was owned and operated by the largest US institutions, with settlement occuring later via a traditional rail-don’t quote me on that though.  Zelle’s RTP integration is not a replacement of any prior system, but rather an additional rail on which Zelle can communicate, seemingly to speed up the settlement process.

3) I’m not sure! I’m sure the government is capable of using instant rails, and this will no doubt be reinforced by the launch of FedNow. If they do currently, I couldn’t find documentation thereof. The closest I could find is the IRS’s same-day ACH integration for some refunds. An interesting note: clearXchange, Zelle’s predecessor, did market itself as capable of G2C transactions, but I can’t say off the top of my head whether they saw any traffic. 

I’ll keep an eye out for any good resources re: risk and liquidity between rails. The best I can offer now is that this space is exactly where many tech providers are hoping to offer their services. A huge opportunity for value-added services exists in the risk management and interoperability space. The pace of RTP transactions precludes the traditional “float-period” fraud/error detection, and the truth is it’s an open question which solution serves the space best. As for counterparty risk, an instant transfer network ideally precludes it, given that the payment is deducted immediately. Of course in actual practice I’m sure people will find new places to throw wrenches!

Sorry if I can’t give you the clearest answers, much of this is new to me but I hope this helped I can put you in touch with some of the experts I work with if you have further questions about the US payments space!

 

 

 

Christian Hibbard

Christian Hibbard

Marketing Associate

Alacriti Payments

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