Use Cases for Real Time Payments

Saturday, December 05, 2015

Discovering the benefits for business

The payments landscape is constantly changing. As the modern economy has grown, so has the need for payment solutions that can work with modern technology. Thanks to modernization in a variety of sectors, common payment types have shifted away from cash and checks. Even debit and credit card payments have decreased thanks to the rise of electronic payment systems – from digital wallets to ACH transactions and peer-to-peer payments platforms. As financial technology (fintech) keeps developing, one newer technology that should be on your business’s radar is real-time payments (RTP). So, in this article, we’ll help you understand what RTPs are, how they work, and how businesses like yours are putting them to work. To start, let’s define RTP.

What are RTPs?

When it comes to paying and getting paid for goods or services, typical transaction methods don’t happen immediately. If you’ve ever waited for a check to clear or a deposit to hit your account, you know that it can take a few days for many payment types to get settled into your bank account. That’s true if you’re using the Automated Clearing House (ACH) network or if you’re depositing paper or e-check payments. Even credit card payments take a few days to settle. While cash is a true RTP, it’s not what we mean when we’re talking about RTPs. For the purposes of this article, RTPs encapsulate all the payment networks that can facilitate instant payments. These RTP rails are ideally open and able to make transfers 24/7/365, thereby speeding up the entire payments process.

So, how do RTPs work? Essentially, they are instant digital payments. A user can initiate the RTP (an electronic interbank funds transfer) through a variety of methods – smartphone app, tablet, digital wallet, and the web. When a user requests an RTP, the bank account-to-account payment occurs instantly and securely. Currently, there are a few service providers that offer RTP infrastructure. The first is The Clearing House (TCH), in which financial institutions opt in to participate in this RTP network. Many of the large banks and credit unions around the country have already adopted this RTP network.

The federal government also believes in the modernization of banking that RTPs can provide. That’s why Federal Reserve banks hope to launch their new service, FedNow, in 2023. Many believe that the Federal Reserve’s development of their own RTP functionality will help drive RTP payment services and adoption in the financial services market.

One added benefit of RTPs is that a business can attach messages to the payments. ISO 2022 – an international standard that enables common language for global financial communications – makes it easy to include any pertinent transaction information. This allows you to include the following:

  • Credit transfer: Basic multipurpose payment messaging, including remittance information.
  • Request for payment: To support e-invoice or e-billing.
  • Payment acknowledgement by receiver: Real-time status messaging from the receiver to the sender regarding payment disposition.
  • Request for information and response: Receiver requests additional information about a payment.
  • Remittance advice: Extensive remittance details are included in addition to the credit transfer message.

Now that you know more about RTPs, you might wonder “What separates them from faster payments?” Let’s take a look.

RTPs vs. faster payments: Is there a difference?

If you’ve done your research on some of the developments in payment technology, you may have seen information about faster payments. Again, this is a broad term that encompasses a few different types of payments. However, RTPs are a bit different from faster payments. That’s because they take place instantaneously. In contrast, faster payments like NACHA’s Same Day ACH aren’t instantaneous. While this technology certainly accelerates payments technology, it’s not quite as fast as RTPs.

Another technology in the faster payments space is a push payment solution. This technology – used by Mastercard and Visa – messages transactions within seconds or minutes. Push-to-card leverages existing card networks to reverse the flow of information. Instead of pulling payment data from a debit card or credit card, the technology is able to send funds to the card. However, the transaction doesn’t get settled for a bit longer. Therefore, it still takes longer than RTPs. Now, let’s take a look at some of the benefits of RTPs.

What are the benefits of RTPs?

There are lots of potential benefits and uses for RTPs. Between consumers and businesses as well as business-to-business transactions, there’s plenty to like about RTP utility. Let’s list out some of the most important benefits of RTPs.

Speedy payments

This is the most obvious benefit of RTPs and it has a lot of applications to both consumers and businesses. Obviously, getting money faster is always a good thing. From paying friends more quickly and actually having that money in your pocket to settling bill payments more quickly, there’s a lot of good that can come from the speed of RTPs.

For businesses, one of the biggest keys for RTPs is the speed in which the transactions occur. Because a transaction completes instantly, businesses can keep more cash on hand – helping them with their cash management. Instead of being out for a week or two due to payroll considerations or supplier payments, businesses can now run payroll or other payments deducted from their accounts in just one day.

RTP status

With the increased speed at which payments occur, it’s easier for businesses to track and monitor their payment status. In more traditional invoicing and payment structures, there are multiple steps a business has to follow in order to send or receive payments. From POs, Invoices, checks, to ACH funds transfers, your business has to stay on top of these steps before seeing the money deposited in or pulled from your account. However, with RTPs, this whole process is streamlined to make it easier to track. The ability to include any remittance information means it’s easier to stay on top of your cash flow – both in and out.

Plus, by being able to include more data with each payment, businesses can reduce their dependence on paper recordkeeping. This increased importance of payment status also is key for payroll, in which you can add necessary information for an employee’s records.

Paying taxes and receiving refunds

Another interesting benefit of RTPs is its application to taxation. We know how difficult the tax filing process can be. RTPs offer an avenue to streamline the entire tax process – from paying payroll taxes for employees to filing corporate tax returns and paying taxes or receiving refunds. These RTPs can also help minimize any long hours of labor or the waste and cost implications of paper checks.

Gig work and real-time assistance

Another use case for RTPs impacts both gig workers and anyone struggling to make ends meet. For gig workers, the immediacy of payments means that upon their work completion, they can get paid. No more waiting until the end of the month or the next pay cycle. Instead, they can get paid for their work right when they finish. For those who struggle to make ends meet, RTPs offer an opportunity for governments, charities, and other entities to provide immediate financial assistance. This can give liquidity to those who need it right away.

Insurance premiums and disbursements

RTPs allow businesses to stay on top of all of their bills, including recurring payments like insurance. RTPs can help your business stay on top of all of its premiums and can help should you need a disbursement. Should something happen to your business, your vehicle fleet, or warehouses, RTPs can ensure you get the cash you need to react accordingly right when you need it. This can make a big difference, in comparison to waiting for a paper check to come in the mail a few days after any instance.

Business loans

For small business owners, having access to the capital you need to keep your business moving forward is paramount. RTPs have the potential to change business financing, as creditworthy borrowers could get the cash they need for starting a business, expanding their business or buying more products or machinery instantly. This can accelerate the business plan for many business owners, helping them to bring their visions into reality.

Expense reimbursement

If you employ people at your business and they have business-related expenses, the traditional reimbursement methods can take a long time. This can aggravate your employees, as they want to be reimbursed for the money they’ve spent. RTPs can help improve employee-employer relationships by allowing you to reimburse employees in real-time. They’ll appreciate the speed at which they have money in their account and you’ll be able to account for all your business-related expenses much better.

Now that you’ve seen the applications of RTPs, let’s look at what’s next for RTPs.

What’s next for RTPs?

As the economy continues to trend to faster and faster payment options, RTPs will only become more important in the payments ecosystem. The ability to implement RTPs at your business can open up new opportunities for your business. As more and more RTP networks develop, it’ll be important to see the interoperability between these systems. Getting these systems to communicate with each other will be key to the success of RTPs both domestically and internationally.

When it comes to your small business, you know the benefits of relationships. After all, your business is built upon the relationships you grow with your customers, your suppliers, and other partners. As the economy sees more demand for RTP capabilities, you’ll want to be ready to implement your own RTP strategy at your business. This can be a big benefit to your business and your partners. After reading this article, you should have a better roadmap of how to implement the benefits of RTPs for your business. Need help getting started? Talk with your financial institution or payment processor to learn more about implementing RTPs at your business.

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