In 2024, business only happens during regular office hours. For most organizations — mainly if you engage in any form of e-commerce — a sale can be completed at any point around the clock. At the same time, more traditional payment methods, such as automated clearing house (ACH) transactions, aren’t always equipped for this reality, as they rely more on batch-driven processes to close out these financial exchanges.
Given that no one likes waiting to receive their hard-earned cash, real-time payments have grown more popular in recent years. They offer a financial channel that keeps money moving at all hours. In this article, we’ll explore this payment type in more detail, looking at how it works, what benefits it offers, and the potential challenges tied to its adoption.
What are real-time payments?
As the term suggests, real-time payments describe financial transactions that occur in real-time, meaning that they can be originated, cleared, and finalized in seconds. These exchanges operate directly between the sender and receiver’s bank accounts. They can only support credit or “push” payments—the transaction must always be initiated by the sender.
Given their immediacy, real-time payments cannot be reversed. However, they can be completed any time, any day of the week (including holidays).
How do real-time payments work?
- The buyer, or sender, initiates a payment with their bank, typically through a mobile or online banking platform.
- The sender’s bank reviews the transaction to confirm that it is legitimate, authenticating the sender’s identity and verifying that sufficient funds reside in the initiating account.
- The transaction is forwarded to a real-time payments network, which is the exchange’s processor. This network is typically managed by a financial agency or banking network.
- The real-time payments network also verifies the authenticity of the request and the availability of funds, subsequently authorizing or denying the transaction and notifying all interested parties.
- Approved transactions are immediately settled, with the paying bank transferring the identified funds directly to the receiver’s bank account, making these funds instantly available for use.
Examples of real-time payments
While comparatively a new payment channel, several real-time payment networks have been created in recent years, making these transactions possible in around 80 countries across the globe. Some of the most prominent names in the industry include:
FedNow:
Intending to deliver a “neutral platform on which the private sector can build to offer safe, efficient instant payment services to users across the country”—at least according to comments made by Lael Brainer—the Federal Reserve released its FedNow payment service in July 2013.
Interac:
The Interac eTransfer service, which routes payments using user email and mobile phone numbers, boasts nearly 100% participation among Canadian financial institutions.
RTP:
The Clearing House is potentially the most widely recognized payments provider in the United States, and in 2017, the firm launched its RTP network. Altogether, RTP supports instant payments between roughly 300 banking institutions throughout the country.
SEPA Instant Credit Transfer (SCT Inst):
Part of the Single Euro Payments Area (SEPA) payment integration initiative, SCT Inst allows banks and financial institutions from across most of Europe to exchange funds within seconds.
Zelle:
Zelle allows users enrolled with the service to transfer funds in real-time between their account and the account of any other user within the network. Present estimates suggest that well over 80% of the U.S. population can access the Zelle network through more than 1,700 participating financial institutions.
Zengin:
With a history stretching back to the 1970s, Zengin represents the oldest real-time processing network on the market. The service covers nearly all private banks in Japan.
How do real-time payments compare to other payment methods?
|
Availability |
Payment type |
Price |
Timeframe |
|
|---|---|---|---|---|
|
ACH |
Everywhere |
Credit / Debit |
$.20 – $1.00 or .5% – 1.5% |
2-3 business days |
|
Same Day ACH |
Everywhere |
Credit / Debit |
$1.00 – $5.00 |
<1 business day |
|
Credit Card |
Most banks |
Credit |
1.5% – 3.5% |
1-3 days |
|
real-time Payment |
In-network banks |
Credit |
$.25 – $1.00 |
<10 seconds |
|
Domestic Wire Transfer |
Most banks |
Credit |
$15.00 – $30.00 |
<1 business day |
|
International Wire Transfer |
Most banks |
Credit |
$30.00 – $50.00 |
1-5 business days |
Admittedly, any of these metrics will vary considerably depending on the policies and capabilities of the financial institutions involved, but the table above should roughly reflect the average experience for each of these payment channels. In addition, it’s important to note that these estimated values only apply to domestic transactions (unless otherwise stated).
What are the benefits of real-time payments?
Choosing which payment type makes the most sense for your business can be challenging, so you should always compare the relevant advantages and disadvantages of each model before proceeding. Typically, with a real-time payment strategy, you can expect:
Real-time payments are faster
Obviously, the primary advantage offered by real-time payments is the accelerated cash flow they deliver. When transactions—and the availability of your funds—occur in seconds, you can remove the artificial delays common to most payment types, making it easier to actively track and manage working capital. Further, when sending out real-time payments to your suppliers or vendors, you can be confident that they’ll arrive on time, every time.
Real-time payments can be made at any time of day or night
Unlike ACH transactions or wire transfers, real-time payments can be completed at any time, irrelevant of banking hours. So if your business needs to make a critical payment in the middle of the night or during a bank holiday, you can.
Real-time payments make your accounts more transparent
If your account statement is full of a series of pending transactions, it can be difficult to accurately determine how much money is specifically in your accounts. And this confusion can increase the risk of overspending or incurring overdraft fees. With real-time payments, you can avoid having funds locked up unnecessarily while transactions are being finalized, meaning you know exactly what and when you can spend.
Real-time payments can be more accurate
Given that both the sender’s bank and payment network confirm that the appropriate funds are available before the transaction even occurs, these types of payments rarely experience a failure outside of a technical glitch. At the same time, each transaction can include a fair amount of supplemental metadata, making it easier to identify and resolve processing errors when they do occur.
Real-time payments have some security benefits
As a push payment type, the sender always initiates real-time transactions, making it impossible for fraudulent payment requests to rob you of your money. At the same time, since both the sender and receiver are provided with confirmation messages at the end of the transaction, criminals will have a much harder time secretly completing erroneous transactions. Further, these payments are irrevocable, meaning that a disreputable buyer can’t inappropriately reverse the charge after a service has been completed or a product delivered.
Real-time payments can be less expensive to make
Comparatively, real-time payments offer one of the cheapest, most cost effective options on the market, allowing your business to cut its processing costs while capturing all of the advantages already discussed. And most networks charge a flat rate for transactions, meaning that you won’t spend more when you spend more.
Challenges of real-time payments
Of course, this approach—like every approach—also comes with its own set of risks. So before you standardize on a real-time payment strategy, you should consider the following:
The speak of real-time payments comes with security issues
The speed delivered by real-time payments means that you’ll have less time to identify and address fraud before funds leave your account. So while those three day processing delays were less convenient, they did give you ample opportunity to notice irregularities or errors related to your outgoing and incoming invoices. And while we mentioned that the irrevocable nature of these transactions offered protection from disreputable buyers, this limitation also makes it hard to recover your funds if you do fall victim to financial malfeasance.
Real-time payments are less common
As previously noted, real-time payments are much less common than wire transfers or other more traditional transaction types. So you may be limited in which financial institutions you can work with. Similarly, your customers may not be as familiar with this transaction scheme or even have access to it. And buyers typically expect—if not demand—convenience when it comes to giving you their money.
The technology for real-time payments can be expensive
While the individual transactions occur at a competitive price point, investing in the necessary technology and infrastructure needed for real-time payments can quickly eat up your IT and operating budgets. In particular, you’ll likely need to update your systems to make sure that they’re readily available around the clock. Alongside these increased technology costs, you’d also be wise to dedicate more resources—time, labor, and money—towards anti-fraud and risk management efforts.
Regulatory compliance for real-time payments is still being developed
Considered a “recent” development in payment technology, the regulations surrounding real-time transactions are constantly evolving, with each region drafting and imposing its own guidance. And keeping up with these shifting expectations—especially if you operate across multiple geographies—can prove challenging.
Make payments easy with Invoiced
So whether you choose to shift to a real-time payment strategy, stick with a traditional approach, or embrace a strategy somewhere in between, our Accounts Receivable Automation software can help you keep your cash flow moving quickly and smoothly. After all, there’s more to getting paid than just processing transactions. And our automated invoice workflows coupled with comprehensive payment tracking and validation tools will keep your transactions moving without delay.
Schedule a demo today and see what our software can do.
Or explore what our parent company, Flywire, has to offer. Flywire can deliver vertical-specific software and payments technology able to integrate seamlessly with your ERP systems, letting you optimize the payment experience for your customers while eliminating operational challenges. Currently, Flywire supports over 3,700 clients with diverse payment methods in more than 140 currencies across 240 countries and territories worldwide.
