Sandra Williams, Vice President and Client Partner, Conduent Banking & Capital Markets
Digital technologies, especially the internet and mobile devices, have transformed consumer behavior and expectations so pervasively that customers often become frustrated when a transaction is not instantaneous. So it’s surprising that, in this environment, many businesses still rely on legacy payment systems and methods to make and receive payments. What has held back some businesses from adopting new digital payments is that none of the available solutions have been able to meet all of their needs, such as certainty of payment and the inclusion of supporting data and documents.
In this blog, we’ll take a look at the various payment options available today, why RTP is different, what it means for consumers and businesses, and what the future looks like for full RTP adoption.
RTP vs. other forms of payment
As businesses consider the adoption of RTP, it’s important that they understand the technology before jumping on board. Foremost, it's critical to grasp the concept of how RTP works compared to other payment methods such as checks, wire transfers and ACH.
- A negotiated check won't fully be credited to your account until the bank the check is drawn on pulls the funds and sends them over to your bank
- A wire transfer is instantaneous, but only available for bank-to-bank transactions when the federal reserve is open
- ACH is a batch system, and payments are traditionally made overnight
- Zelle is a person-to-person payment network that allows movement of money via a known email or mobile number
- Swift facilitates information and instructions for international money and security transfers
Speed remains the constant benefit driver for the newest, emerging payment options like RTP and Zelle. The table below summarizes specifically how well each of the “same-day” electronic payment solutions currently available addresses the challenges consumers and businesses face in making payments:
Payment urgency creates instant RTP use cases
The benefits of RTP for speedy disbursements are obvious and include insurance claims, emergency payments to employees and vendor payments, to name just a few. Less obvious, but no less compelling, is the case for timely receipt of due or past due bills. A consumer at risk of having their electricity or phone service suspended can avoid that fate by utilizing an RTP. For debt collectors, persuading the consumer to shift from a promise to pay to actual payment is paramount, and RTP could be an ideal tool to produce better outcomes. Zelle is one example of a current retail user interface with plans of incorporating RTP.
How RTP works
The RTP system in the United States is an undertaking of The Clearing House, a 150-year old organization that, along with the Federal Reserve, represents the entire wire network in the country. RTP lives up to its name by working in real time, as transactions are 100% complete within seconds. Many of the country's largest banks are already signed on to use the service, but there is still a long runway before RTP achieves widespread adoption and use.
According to Lee Kyriacou, Vice President of Real-Time Payments for The Clearing House, “Real time is different. The way we manage it is the participating banks all have some funds that are put into a common kitty, which we call a joint account or pre-funded balance account. The Clearing House is the agent of the banks that puts the funds in, and that account is held at the Federal Reserve in NY, and we are the agent that manages the ledger."
RTP can occur 24/7, regardless of whether the Federal Reserve is open, and as long as the banks that are participating have funds in the joint account.
For the consumer interface, banks are responsible for setting up RTP in the ways that work best for them, including security policies. RTP requires all parties to ensure they are correctly screening — essentially doing their due diligence about who they are accepting payments from and who they are paying. Right now, each bank is figuring out how to implement this for its customers but it will all happen via digital channels.
Red tape, regulations and roadblocks
In the U.S., despite the experimental nature of the RTP system, all regulations surrounding payments still apply. For instance, banks must follow the rules such as Regulation E, and all payments on the commercial side continue to be governed by UCC4A. Non-bank providers are treated as payment intermediaries that are subject to additional requirements. The RTP system allows messages to go through the system, with information about the transfer tying the invoice to the actual payment — eliminating many of the reconciliation steps required by other payment methods.
While the immediacy of RTP has clear benefits, it also presents issues to address for the payer, as all payments are final. Unlike a credit card or online transaction with a chargeback or dispute process to fall back on, RTP is like a wire transfer: once it's gone, it's gone.
The payment system for the 2020s?
After introducing the RTP system in November 2017, The Clearing House can see a clear path to ubiquity. TCH predicted that by the end of last year, half of the checking account balances in the country would be RTP-ready with six of the largest banks in the country on board. By the end of 2019, RTP will be a supported function for the majority of checking accounts.
General consumer awareness, however, is still a few years away. How and when RTP begins to take off is up to the banks and how they decide to offer an interface to their customers.
RTP is clearly poised to play a pivotal role in future financial transactions, but there are many wrinkles yet to be ironed out. The time for payments professionals to consider implementing RTP capability at their business is now.
For information on digital payment services from Conduent, click here.
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