What are Real-time Payments?

Real-time payments are a payment type where the transmission of the payment message and the availability of “final” funds to the payee occur in real time or near-real time and on as near to a 24-hour and seven-day (24/7) basis as possible.

The terms “real-time payments,” “faster payments,” and “instant payments” are often used interchangeably to describe this type of modern payment infrastructures, which are generally domestic and sometimes regional in nature.

What Are the Typical Use Cases for Real-time Payments?

With the world moving to a new level of instancy, every organization should understand both the value impact and the use cases for real-time payments when it comes to its own business context.

There are many great examples of how companies are using instant payments, especially with large volume low value payments, to save costs and increase speed.

Below are some of the use cases Kyriba clients are benefiting from:

  • Time-sensitive payments are perfect for real-time payments, for example emergency payroll, disaster relief, and AP exception payments from industries such as distribution and logistics.
  • Intercompany transfers are low risk and a common use case. With real-time payments, companies can efficiently deploy working capital across their subsidiaries.
  • Instant insurance claims disbursement is a typical example of improving customer experience with real-time payments. The same also applies in the gig economy where business or service transactions can be settled immediately on the spot.
  • Request-to-pay is also becoming more common, where suppliers embed real-time payment instructions within an email to simplify the invoicing process, either to encourage early payment or to accelerate late payments.

What Are the Benefits of Adopting Real-time Payments?

There are many good reasons to add real-time payments to your payment mix, mainly because of the unprecedented visibility and transparency this new payment type brings to both the payer and the payee.

Some of the most outstanding benefits of using instant payments are:

  • Improved supplier relationships: making early or on-time payments is an easy way to improve rapport between vendors and clients. With instant payments, invoices can be paid immediately and some vendors will offer discounts for early payments.
  • Control over working capital: faster payments mean more accurate cash visibility that allows companies to unlock working capital, releasing funds for debt repayment and/or reinvestment
  • Increased security: with full visibility of payment details including end-to-end tracking and confirmation of credit, risk of fraud decreases
  • Improved ROI: lower bank wire fees and reduced time spent researching, correcting, and resending failed payments translate to significant cost savings for businesses
  • Immediate settlements: with the ability to transfer payments and pay bills 24/7, payment delays are eliminated, transaction history is current, and account balances stay up-to-date
  • Non-repudiation: because instant payments carry a digital footprint specifying the time, date, origin, and destination of each transaction, no one can dispute that a payment was sent, received, and processed.

How to Enable Real-time Payments

Globally there are more than 70 countries where domestic or regional instant payments are available. For example, you can find real-time payment systems in:

  • Americas (USA, Canada, Brazil, Mexico)
  • SEPA countries (over 25 countries supported)
  • Asia (Singapore, Japan, Thailand, Australia, Hong Kong)

In different countries and regions, instant payments might have different names too. For example:

Corporates can access real-time payments via FTP or Bank API (e.g., CashPro by BoA, CITI, JPMC), depending on which is supported by your partner banks.

On top of the bank connectivity, the following payment formats all support instant payments:

  • JSON
  • ISO 20022 XML
  • Fixed formats
  • CSV formats

What Is a Typical Payment Flow of Instant Payments?

The Federal Reserve explains on its website how instant payment flow works among its network participants. It represents well how real-time payments work in general, with everything taking place in as quickly as just seconds.
FedNow Payment Diagram

Source: FedNow “About The FedNowSM Service”

  1. 1. In step 1, a sender (i.e., an individual or business) initiates a payment by sending a payment message to its financial institution through an end-user interface outside the FedNow Service. The sender’s financial institution is responsible for screening the payment according to its internal processes and requirements.
  2. 2. In step 2, the sender’s financial institution submits a payment message to the FedNow Service.
  3. 3. In step 3, the FedNow Service validates the payment message, for example, by verifying that the message meets message format specifications.
  4. 4. In step 4, the FedNow Service sends the contents of the payment message to the receiver’s financial institution to seek confirmation that the receiver’s financial institution intends to accept the payment message. At this point, the receiver’s financial institution will have the opportunity to confirm or deny that it maintains the specified account.
  5. 5. In step 5, the receiver’s financial institution sends a positive response to the FedNow Service, confirming that it intends to accept the payment message. Steps 4 and 5 are intended to reduce the number of misdirected payments and resulting exception cases that can occur in high-volume systems.
  6. 6. In step 6, the FedNow Service debits and credits the designated master accounts of the sender’s and receiver’s financial institutions (or their correspondent financial institutions), respectively.
  7. 7. In step 7, the FedNow Service sends a payment message forward to the receiver’s financial institution with an advice of credit and in parallel sends an acknowledgement to the sender’s financial institution, notifying it that settlement is complete.
  8. 8. In step 8, the receiver’s financial institution credits the receiver’s account. As a term of the FedNow Service, the Federal Reserve Banks anticipate requiring the receiver’s financial institution to make funds available to the receiver almost immediately after step 7. This crediting to the receiver’s account as well as the debiting of the sender’s account by their respective financial institutions happens outside the FedNow Service.

Source: FedNow “About The FedNowSM Service”

Example of Adopting Real-time Payments

Kyriba client Hunt Companies was among the early adopters for real-time payments in the US and is a great example to demonstrate the associated benefits. The main challenges Hunt Companies faced before the use of instant payment were as follows:

  • Significant bank fees resulting from the huge volume of payments
  • Lack of visibility into payment status, especially the rejected payments
  • Significant time spent by the team to research and resend failed payments

With RTP® Hunt Companies has seen the following business outcome:

  • A reduction of bank fees from $6 on average for a wire transfer to less than $1 for RTP®
  • An impactful number of productivity hours gained per month by Hunt’s finance team
  • In just three months, the client has seen a 375% increase in the number of payments using RTP® month-over-month