Real-time payments (RTPs) are transforming financial transactions for businesses across the globe. This payment method, which allows for the immediate transfer of funds 24/7, is redefining conventional banking norms. For businesses, the acceleration of transfers presents an opportunity to optimise cash flow management, simplify administrative processes and create a more seamless customer experience.

According to a report by ACI Worldwide and Global Data, real-time payment transactions are projected to surge by 63% annually to reach a total of US$511 billion per year by 2027. From the speed of e-commerce transactions to the real-time payout of gig economy workers, instant transactions have the potential to alter many different aspects of commerce.

Below, we'll discuss the fundamental workings of real-time payments and their benefits and challenges, as well as how businesses can make the most of this technological leap in payment systems.

What's in this article?

• What are real-time payments?
  
• How do real-time payments work?
  
• Real-time payment networks
  
• Benefits of real-time payments
  
• Risks and challenges of real-time payments
  

What are real-time payments?

Real-time payments are instant payments that are processed immediately and continuously, 24/7. Unlike traditional payment systems, which can take hours or even days to complete transactions, RTP systems immediately transfer funds from one bank account to another. This can occur within seconds of the transaction initiating, at which point the funds are immediately available to the recipient.

How do real-time payments work?

RTP systems facilitate the immediate transfer of funds between parties. For businesses operating across different commerce channels, this represents a significant change from traditional ways of managing transactions, reducing delays and providing much-needed cash-flow efficiency. Here's a quick explanation of how RTPs work:

• Initiation
  The RTP process begins when the payer decides to send money to the payee. The payer could initiate this in a number of places, such as online banking platforms, mobile banking apps or in person at a physical location. The payer can also use traditional inputs such as account numbers or more modern methods such as scanning a QR code. The RTP process works across multiple channels, which makes it highly flexible and adaptable to different business needs.

• Authentication and authorisation
  After the payer initiates the payment, the next step is authentication and authorisation. The payer's bank authenticates the payer's identity, usually through security measures such as passwords, biometric data or two-factor authentication. The bank then verifies whether the payer has sufficient funds for the transaction. If everything is approved, the bank authorises the transaction.

• Transaction processing
  Once the bank authorises the transaction, the bank sends the payment instruction through the RTP system, which is usually a central network operated by a financial authority or a group of banks. Unlike traditional payment systems, RTPs do not use batching. Instead, RTPs process transactions individually and continuously, allowing the system to handle payments in real time.

• Notification and confirmation
  After the payment is processed, both the payer and the payee receive immediate notifications about the transaction. This notification could be an SMS, an email or a push notification from a banking app, depending on how the payment was initiated. This instant-notification feature of RTPs gives businesses more certainty with regard to their financial transactions and therefore their finances.

• Settlement
  The last step in the RTP process is settlement. Unlike traditional payment systems – in which settlement happens at the end of the day or even later – with RTPs, the settlement takes place almost instantaneously. The payer's bank transfers the funds to the payee's bank and the money is immediately available for use in the payee's account.

Real-time payment networks

Numerous countries across the world have implemented real-time payment systems. Each system may have unique characteristics depending on the regulatory landscape, banking infrastructure and specific needs of the local economy, but they all share one common trait: they enable the instant transfer of funds. Here are a few examples:

• Faster Payment System (UK)
  Launched in 2008, the UK's Faster Payment System (FPS) is often cited as one of the first major real-time payment systems. FPS enables almost instantaneous payments between accounts at different British banking institutions.

• Immediate Payment Service (India)
  Launched by the National Payments Corporation of India, Immediate Payment Service (IMPS) offers an instant, 24/7 interbank electronic-fund-transfer service. Customers can access IMPS through different channels, such as mobile phones, ATMs, SMS and web browsers.

• The Clearing House (US)
  The Real-Time Payments network by The Clearing House is the first new core payments infrastructure in the US in more than 40 years. The RTP network provides instantaneous settlement and availability and operates all day, every day.

• FedNow Service (US)
  The Federal Reserve launched a real-time solution called the FedNow Service in July 2023.

• Pix (Brazil)
  Launched in 2020 by Banco Centro do Brasil, Pix enables users to make instant payments 24/7, every day of the year. The system is accessible to all customers who have a bank account, payment institution account or prepaid payment account.

• PayNow (Singapore)
  The Monetary Authority of Singapore introduced PayNow to facilitate real-time payments between bank accounts of participating banks in Singapore. It also allows customers to make payments with mobile numbers, National Registration Identity Card numbers or Unique Entity Numbers.

• Swish (Sweden)
  Swish, which more than half the Swedish population uses, is a mobile app that facilitates real-time payments between individuals, as well as between individuals and businesses.

• New Payments Platform (Australia)
  The New Payments Platform (NPP) in Australia supports real-time payments between accounts at participating Australian financial institutions. It also offers PayID, a feature that enables customers to make payments with easy-to-remember information. Customers can provide a mobile phone number or email address instead of using a traditional Bank State Branch (BSB) number – which identifies a particular Australian bank branch – and account number.

This is an inexhaustive list of RTP solutions. Each year, more countries develop and launch their own solutions. Learn more about where Stripe supports real-time payments.

Benefits of real-time payments

Real-time payments offer many benefits for businesses, financial institutions and customers. These include:

• Stronger cash-flow management
  With RTPs, businesses can receive funds immediately after a transaction is made. This instant transfer significantly improves cash-flow management, allowing businesses to use funds as soon as they're received, rather than waiting for days for a transaction to clear. For example, a supplier can immediately reinvest the payment from a retailer in raw materials without waiting for the usual bank processing time.

• Increased efficiency and productivity
  The immediate nature of RTPs eliminates the need for manual intervention in payment processes, increasing overall operational efficiency. Consider a utility company: with an RTP transaction, the business no longer needs to wait for cheques to clear or for batch processing of electronic payments. Instead, the business can receive payments instantly, reducing the administrative burden.

• 24/7 availability
  Traditional banking systems are restricted by "banking hours" and often don't process transactions during weekends or holidays. But RTPs operate 24/7, allowing businesses to send and receive payments at any time. This is particularly advantageous for e-commerce businesses that have customers in different time zones and operate around the clock.

• Improved customer experience
  Customers who use RTPs enjoy the convenience of making instant payments anytime, anywhere. This can significantly enhance the customer experience, particularly in sectors such as e-commerce and software-as-a-service (SaaS). For instance, a customer who purchases a digital product can pay and gain access to the product instantly, which creates a smooth and efficient purchasing journey.

• Transaction certainty
  RTP transactions provide immediate confirmation of payment, assuring businesses that those transactions have successfully completed. This can be important for industries such as real estate, where instantly transferring and confirming large sums can expedite the entire process.

• New business opportunities
  RTPs also open doors for new business models and opportunities. Consider the gig economy, where freelancers and contractors often have to wait for days or weeks to get paid. RTPs enable instant payment upon completion of work, making life significantly easier for gig workers and potentially attracting more talent to the industry.

• Data-rich transactions
  RTP systems can carry more data than traditional payment methods, providing businesses with valuable insights. For instance, an RTP transaction can include invoice details, purchase order numbers or other relevant information, making it easier for businesses to reconcile payments and manage accounts.

In order to make full use of these benefits, businesses need to invest in the necessary infrastructure to facilitate RTP transactions and ensure that they have excellent, robust security measures in place.

Risks and challenges of real-time payments

While RTPs offer numerous benefits, they also introduce new complexities that businesses and financial institutions must navigate with care.

• Fraud and security risks
  Perhaps the most significant challenge of RTPs is the increased risk of fraud and cybercrime. RTPs process transactions instantly, leaving little time for banks and payment service providers (PSPs) to detect and prevent fraudulent activities. For example, once a transaction has been processed in an RTP system, it cannot be reversed, which could lead to significant losses if the transaction was fraudulent. As a result, businesses and financial institutions need to invest in advanced fraud detection and prevention technologies that can work in real time.

• Technology and infrastructure investment
  Implementing RTPs requires a significant investment in technology and infrastructure. Businesses and financial institutions need to upgrade their systems to handle real-time transactions, which can be a complex and costly process. For example, businesses may need to implement new APIs, upgrade their existing banking and payment systems and make sure that they have the necessary security measures in place.

• Regulatory compliance
  RTPs are rapidly evolving and are subject to different regulations in different regions. As a result, businesses and financial institutions need to ensure that they are fully compliant with all relevant laws and regulations. This can be particularly challenging for businesses operating in multiple jurisdictions, as they may need to comply with a variety of different regulations.

• Interoperability
  For RTPs to be truly effective, they must be widely adopted and fully interoperable with other systems. Businesses and financial institutions need to confirm that their RTP systems can interact seamlessly with other payment systems, both domestically and internationally. Achieving this level of interoperability can be a significant challenge.

• Customer adoption and education
  For businesses to fully benefit from RTPs, their customers must be willing and able to use these systems. This requires educating customers about the benefits of RTPs and addressing any concerns that they may have, such as security or privacy.

• Risk management and governance
  RTPs entail different risks to traditional payment systems, meaning that financial institutions using RTPs should rethink their risk management strategies. Institutions need to maintain strict best practices to handle potential operational risks, such as system failures or transaction errors.

While real-time payments offer considerable benefits, they also present a number of challenges that must be managed carefully. Businesses and financial institutions that want to implement RTPs need a thoughtful approach that includes investing in the necessary technologies, ensuring regulatory compliance, managing risks effectively and promoting customer adoption.