The Complete Guide to Real Time Payments

Real time payments (RTPs) are processed quickly with little hassle, benefiting consumers and businesses alike. Though the RTP system may be paving the way for the future of payments, it has some challenges that businesses should consider when setting up their payment systems.

Our complete guide to real time payments covers how RTPs work, the benefits of the RTP system, and the challenges that may arise when using these types of payments.

What Are Real Time Payments (RTPs)?

Real time payments, or real time transfers, provide immediate fund transfers at any time or day, including weekends and holidays. The payment is initiated, cleared, and settled much faster than traditional payment methods such as wire transfers or ACH, typically within seconds. They are an essential part of the open banking protocol, which allows for secure access to financial data that speeds up processing times.

The speed with which payments can be conducted with the RTP network ensures instant access to funds for businesses, and customers don’t have to worry about keeping track of funds that may come out of their bank later.

What Are the Benefits of RTP?

RTPs improve business operations and customer experiences through convenience, transparency, and efficiency.

Improves Transparency and Confidence in Payments

Real time payment systems increase transparency between businesses and customers. Since RTPs enable instant transfers, businesses will know immediately whether the customer has the funds to cover a payment. Customers won't need to wait for their payments to clear before receiving their items or having their orders processed.

RTPs also allow for more in-depth communication during the payment process. Notifications for requests for payment or confirmation of payment help keep all parties in the loop concerning when payments need to be made and when they have been completed.

Enhances Cash Flow Management

Another major benefit of RTPs is that they allow businesses to improve cash flow management. With traditional bank times of operation and payment methods, businesses may have to wait days to receive funds from a payment. RTPs give the business access to immediate funds that they can use to reinvest in the business. For example, they could make supplier payments to restock items that may now be running low after the purchase.

On the other side, the customer can better manage their cash flow if the funds are taken out of their account immediately. Many customers find it convenient that they don’t have to remember when the payment will leave their bank accounts, which can help with budgeting.

Offers Standardized Messaging

Messaging standards are a set of rules that define how messages are sent between networks. For example, many networks using RTPs will use the ISO 20022 messaging standard. These standards ensure that messages (or transactions, in this case) between one institution and another can be easily understood by each institution’s technology. The common language and message structure help reduce costs, improve communication, and process payments quickly.

Businesses that offer RTPs likely won’t need to worry whether the transaction can be processed due to messaging unless a network uses a vastly different messaging standard.

Optimizes Back-End Processing

RTPs use a faster payment system that streamlines the back-end processes for accepting in-person and digital payments. This reduces costs and the steps needed to reconcile payments, especially for businesses that rely on invoicing. For example, some invoicing tools will take data from RTPs that auto-assign payments to specific invoices and reconcile the payments automatically.

RTPs are accompanied by lots of data that can help businesses manage books, such as customer information, payment information, purchase orders, and more. All this data can be stored for future use to make the checkout and billing processes more efficient.

Improves Liquidity for Day-to-Day Business Operations

A business needs access to liquid funds to cover liabilities, short-term obligations, and day-to-day business expenses. If payments aren’t processed quickly enough, a business could be at risk of missing payments or reducing its working capital.

RTP banking and billing processes improve the liquidity of customer payments since they are processed within seconds. The business can use those funds the same day to cover necessary bills and expenses, ensuring they always have funds for operating expenses or emergencies.

What Are the Challenges and Risks of RTP?

While RTPs have many advantages, the system does have challenges and risks that businesses should consider before implementing it as a payment option.

Requires Enhanced Control Over Payments

RTPs are irrevocable, which means the payer cannot deauthorize the payment after initiation. If you send money to the wrong person or end up not receiving an order you placed, getting your money back can be more tedious than canceling a payment or voiding a check.

Businesses may also be at higher risk of chargebacks or friendly fraud if customers suddenly change their minds after processing the payment. Businesses that receive disputes from customers are responsible for providing proof that the payment was originally made in good faith, which can be a time-consuming and costly procedure that often isn't worth the purchase amount. In addition, businesses that don’t have the proper controls and systems in place may find themselves liable for transactions they can’t recover.  

Needs Standardization and Interoperability Between Networks

Interoperability describes the connections between networks that are necessary for transacting and processing payments. For RTPs to work, networks from various financial institutions, businesses, and customers must be able to communicate. If the networks cannot work together, it limits your ability to send payments, severely decreasing the system’s convenience.

A crucial part of interoperability is the use of uniform standards, such as the standardized messaging mentioned earlier. Multiple types of standards come into play while transacting payments, including security standards, compliance standards, and more. If these standards are not uniform across various networks, payment networks will not be able to work together to process payments.

Standardization and interoperability build the digital infrastructure needed to make RTPs possible.

Opens a Possibility for Data and Cybersecurity Risks

While immediate payment makes RTPs convenient, it can also increase the risks of fraud. The increasingly digital nature of payments also increases the chances of hackers stealing payer information. Depending on the checkout processes involved with a company’s RTP system, the authentication methods (such as passwords or PINs) may not be enough to stop hackers.

In addition, many banks and large billing departments have siloed data according to different payment methods, which makes it difficult to analyze fraud data and spot vulnerabilities.

Calls for Rigorous Compliance With Laws and Regulations

Real time payments are regulated by numerous industry organizations and governmental entities throughout the world. In the United States, RTPs are typically sent through a network called The Clearing House. It is regulated by the Federal Reserve System, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC). However, the Federal Reserve also introduced its FedNow service in 2023 which also allows businesses to process instant payments. It is designed to complement the Clearing House by making real time payments available to a wider audience of financial institutions.

When setting up an RTP system, you need to create processes to help ensure you’re meeting compliance requirements. Your payment data needs to be meticulously organized so you always have accurate information on hand.

You must have security and fraud prevention in place to protect both your business and your customers’ personal or financial information. Your business should also have regular check-ins to make sure that your compliance is up to date.

While some gateway payment processing platforms will have compliance standards in place to help with these tasks, it can still be overwhelming for small businesses that may not have the time, money, or knowledge to build compliance policies.

How Do Instant Payments and the RTP System Work?

Real time payments work similarly to traditional payment methods, but they are processed much faster. The first step, known as initiation, occurs when the payer decides to send money to the payee. This could apply to online payments, mobile apps, in-person payments, and more. The person may enter their card numbers, scan a QR code, or log in to a digital wallet.

The bank must confirm the payer’s identity and authorize the payment. The payer may need to enter passwords, complete two-factor authentication, or provide biometric data such as fingerprint or face identification. The bank can check that the payer has sufficient funds and authorize the transfer. Then the payment clears. Since each transaction is processed individually, you don’t need to wait until the next business day to receive funds.

Settlement is when the funds are physically transferred from one bank account to another. Depending on how the payment was initiated, the payer and payee may instantly receive notification that the payment has been completed.

Simplify Payments With Fast and Secure Billing Software

If your business needs a payment system to process real time payments, Revolv3 can help. Revolv3 has optimized its platform to ensure fast payments and improve approval rates. Dynamic routing finds the quickest and most affordable route through the network, and Revolv3 doesn’t charge for declined payments. Contact Revolv3 today to learn more about our innovative technology.