With the terminology used interchangeably in the last couple of years, real-time payments (RTPs) or instant/faster/immediate payments have been increasingly discussed in the financial services space. Real-time payments are transformational for businesses worldwide, redefining conventional banking norms. With accelerated transfers, companies can improve their cash flow management, simplify administrative processes, and create a better customer experience. Whether the use cases revolve around ecommerce transaction speed or real-time payout of gig economy workers, instant transactions could potentially impact multiple aspects of commerce.
What are real-time payments exactly, and how do they work?
Real-time payments are immediately and continuously processed instant payments, 24/7. Compared to traditional payment systems that complete transactions in hours and even days, real-time payment systems transfer funds between bank accounts almost instantly. Below, we detail how real-time payments work:
- Initiation: the real-time payment process starts with the payer, who decides to send money to the payee and initiates it via channels such as online banking platforms, mobile banking apps, or in person.
- Authentication and authorisation: after initiation, the payer’s bank authenticates their identity through security measures like passwords, biometric data, or two-factor authentication, and then verifies if the payer has enough funds available for the transaction. If all this is approved, the bank then authorises the transaction.
- Transaction processing: following the authorisation, the bank sends payment instructions through the real-time payment system (usually a central network operated by a financial authority/group of banks), which processes the transaction as it receives it.
- Notification and confirmation: once the payment is processed, the payer and payee are immediately notified about the transaction, either via SMS, email, or push notification from the banking app, depending on how the payment was initiated.
- Settlement: the final step is the settlement, which happens almost instantaneously with real-time payments. The payer’s bank transfers the funds to that of the payee, with the money immediately available in the latter’s account.
Real-time payments and how they benefit businesses and consumers
What exactly makes faster payments so appealing? For businesses, outstanding bills are settled quickly, thus improving liquidity. Moreover, business partners are paid faster, making collaboration easier and expedited on all fronts. Faster payments also provide increased transparency for both incoming and outgoing payments, reducing the effort needed to process payment transactions, while keeping costs low.
As money transfers happen in seconds, transactions no longer require manual checks or monitoring, and instant payments enable businesses to improve their cash flow. However, to fully leverage these benefits, businesses should invest in the necessary infrastructure to facilitate real-time payment transactions and implement advanced and robust security measures.
What are some of the risks and challenges of real-time payments?
Although the benefits of real-time payments are numerous, they also bring complexities that businesses and financial institutions should navigate carefully:
- Fraud and security risks: due to the instant processing, banks and payment service providers have little time to detect and prevent fraudulent activities.
- Regulatory compliance: businesses and financial institutions should ensure compliance with all relevant laws and regulations, which can be difficult for those operating in multiple jurisdictions, as regulatory requirements differ across regions.
- Risk management and governance: when using real-time payments, institutions must maintain strict best practices for handling operational risks (e.g., system failures or transaction errors).
- Tech and infrastructure investment: systems need to be updated to handle real-time transactions, which can be complex and costly.
- Interoperability: real-time payments must easily interact with other payment systems, domestically and internationally.
- Customer adoption and education: to benefit from real-time payments, businesses should ensure consumers are willing and able to use these systems.
All these aspects must be addressed thoughtfully through investments in necessary tech, regulatory compliance, effective risk management, and incentives for customer adoption.
Regulations and messaging standards that address the limitations of instant payments
Irreversible in nature due to funds being made available in the payee’s account immediately, the main challenges of real-time payments are fraud and cybercrime risk. However, standards such as ISO 20022 help ensure faster payments are facilitated securely, providing a structured and data-rich common language, readily exchanged among corporate and banking systems. Additionally, ISO 20022 messages bring forth the opportunity for enhanced analytics, which helps organisations offer value-added payment services to customers.
One of the regulations that has been making waves in the financial sector and is poised to influence the development of the instant payment space is the EU’s Instant Payments Regulation (IPR), which requires financial ecosystem players to comply with requirements for significant technical and operational upgrades of real-time payment capabilities. Banks and payment companies must enhance their infrastructure, implement strong fraud detection and sanctions screening, and design user-friendly interfaces for instant payments. By complying with and leveraging these regulations, institutions can strengthen their position in the industry.
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