Real-time payments in the US were not a product you could get access to, so the fastest type of payment was a credit card payment that could settle within 48 hours. That was as close to real time as you could get. There are many reasons why people want real-time payments, one being access to cash faster, whether you’re a big company or a small to medium-size business (SME) that doesn’t have big working capital.
Real-time payments are almost a necessity because they eliminate the worry about cash flow management and raising funding to develop a product to be sold. Having access to cash faster as a business represents one of the most important reasons why people care about real-time payments.
Historically, we have depended on credit card payments, as a predominant way for people to pay for products and services. In the credit card processing flow, there is something called chargeback, where customers have a certain amount of time to dispute a transaction. Real-time payments eliminate the chargeback risk for the merchant, as they no longer must wait several months to know whether a transaction will be accepted so they can keep the funds.
Risk reduction for the merchant is a big motivator for real-time payments, as RTPs cannot be reversed. Real-time payments also need to provide a high level of security and encryption. An important part for both the consumer and the merchant is knowing that if they put in their credentials, the transaction is safe, and their data cannot be breached. So, benefitting from high security is another appealing part of the product.
PIX is the most popular of them in Brazil, which works as a 24/7 real-time payment network. Something interesting about PIX is that it has already surpassed the credit card ownership in Brazil, which is around 25%. By comparison, the US is a very credit card centric country.
We can mention SPEI in Mexico (The Interbanking Electronic Payment System), which is also a real-time payment network that people adopt.
The US has their own real-time payment rails, although not on a national level, similar to Nacha, which means you could get a same-day ACH payment. Also, FedNow is the up-and-coming real time payment rail that will launch in 2023.
From a P2P perspective, the US has had products for several years. Regarding real-time payments, Venmo would be a good example, as well as Zelle, but limited in nature because they are P2P. Venmo launched a P2B product, similar to a consumer paying a business in real time via Zelle or Venmo. However, Zelle remains a predominantly P2P platform.
The first group that benefitted from this technology was merchants. Something interesting that we noticed during the COVID-19 pandemic was a surge in real-time payments because people needed money. With millions of people being unable to work, they still had to get groceries and pay bills, and so did businesses. From an SME perspective, the smaller a business, the more advantageous and necessary it is for them to have access to cash in real time.
Most merchants need access to real-time payments, not only to decrease some of the friction around not having access to cash sooner, but also to improve the overall customer experience. In the US, speed can play a critical role in CX - and the most prominent example of that is Amazon, which aims to provide an instant gratification experience. People purchase goods, receive their notifications almost instantly, and most of the time, goods arrive almost the same day, within hours, directly at their doorstep. However, things are different from a global purchasing perspective.
Hence, the second group that enjoyed the benefits of real-time payments were customers that see a drastic improvement of customer experience across various business models, from the traditional ecommerce store that needs to ship a physical good to social media platforms that are looking into new ways to acquire users.
For instance, TikTok launched a marketplace where influencers can model or promote items for other users to buy, which means that the real-time payments experience is crucial.
Real-time payment networks are local by nature, which means that if you want to accept real-time payments in Brazil, for instance, you need to integrate to PIX; if you want to access real-time payments in the US, you need to integrate to Zelle;similarly, if you want real-time payments in another country, you must integrate to another API.
Thus, the biggest challenge globally is that real-time payments are still very fragmented. From a merchant’s perspective that sells a product or service globally, they must build several integrations, with every API looking different. In other words, achieving global real-time payments will be a relatively large uplift from a technical integration perspective.
There is also a commercial aspect. Merchants may have to get approved by a local rail to actually process real-time payments, which could prove difficult. Individual markets might continue their efforts to integrate RTP so there will be increased see adoption across the world.
FedNow will launch in 2023, PIX is already up and running, and individual markets will continue to grow. We might also start to see real-time payments in Asia soon, and every market across the globe will mimic what is already there for real-time payments.
However, creating an interoperable global network represents the main challenge to solve. How do we make sure that someone in Africa can transact in real time and get money across the globe to the US or vice versa? This can easily be achieved with Thunes but if you’re not part of the Thunes network, it will be difficult to figure out how those APIs connect to each other.
Another challenge with real-time payments is the fact that a transaction cannot be disputed. Once you send money, it's final, which means that not all merchants will have access to real-time payments.
We also need to consider higher risk transactions, like the adult industry. Adult products are considered high risk so, will those companies be granted access to real-time payments? We might be looking at a certain type of license in these local markets for high-risk merchants to have access to real time payment rails.
Similarly, companies selling legalized substances or firearms are considered high risk, so they may not have access to a RTP platform because they must pass several KYC and AML elements to identify their customers but also to make sure there are refund or chargeback capabilities. So, some players might be left out of the RTP system.
It would probably take longer than five years to see real-time payments as a more highly adoptable form of payment, globally.
The initial casualty will probably be credit cards, or the alternative payment method might be available in a certain country.
For credit cards the main risk factor is time: if it takes about 48 hours for a credit card transaction to be settled, merchants would have fewer incentives to accept them. We will probably see a reduction in credit card payments in certain markets by comparison to RTP, especially for certain use cases where people might need access to cash sooner.
Something that we saw just a few short years ago was the implementation and global roll out of Buy Now, Pay Later products. BNPL has a similar use case: consumers want things now, and BNPL offers them an alternative. If they don't have the money nor the credit, there is now an option allowing payment by installments.
People’s desire to consume things very quickly is what drives the innovation around payments. So, I reckon, RTP will become a key differentiation in how people consume things, and how companies are able to address that need.
And the main difference between RTPs and BNPL technology, is that RTPs are more sustainable in nature and while they have a lot of upsides: reduced friction, increased velocity of the market, and improved cash flow for merchants, they don’t bear the risks that BNPLs do, such as encouraging impulse and irresponsible consumption. The Future of Payments is real-time, and it’s just a matter of time for all of us to see it.
Jenna is Senior Vice President for the Americas at Thunes. She has consulted multiple early-stage startups to banks and investment Firms, covering topics from GTM strategies to global expansion. Her experience has led her to become a consultant for some of the largest tech companies, including: Airbnb, Uber, Venmo, Hotel Tonight, Expedia, Rappi, & Viacom CBS. Her expertise includes payment strategy, gateway selection, APMs, payment orchestration and rate optimisation, global payouts, merchant class of trades, risk mitigation strategies, subscription billing, and partnerships.
Thunes is a B2B company that powers payments for the world’s fastest-growing businesses. Thanks to a single API connection, customers reach new markets and multiple payment options in over 125 countries without the need for countless integrations to multiple systems. Today, more than 100 banks, payment service providers (PSPs), money transfer operators (MTOs), mobile wallet operators, platforms, and fintech companies around the world use us to process cross-border payments in a cheaper, faster, more transparent, and more secure way.
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