In a world where real-time payments are ubiquitous, consumers, merchants, and financial institutions expect to be able to pay friends, settle bills, and transfer money instantly. While paying now is not new — cash is an immediate payment transaction instrument — the growth of real-time payment options has helped consumers establish a new standard.
As consumers expect faster settlement periods, notifications, and consolidated reporting, this new standard is driving change for traditional payment types such as checks, credit, debit, and prepaid.
How do real-time payments work?
Existing systems offer instant, round-the-clock electronic fund transfers initiated via smartphones, tablets, digital wallets, or the Internet. Such a scheme allows the interbank transfer of funds and posting of secure transactions with real-time notifications.
Potential benefits of real-time payments
Real-time payments can benefit financial institutions (FIs), merchants, consumers, and society by improving payment visibility, enabling better cash management, and assisting businesses in better managing day-to-day operations through improved liquidity. The liquidity improvement can be especially beneficial to small merchants who are accustomed to waiting days for their settlement, potentially improving their cash flow and daily sales outstanding (DSOs).
What is driving the growth of real-time payments?
Over the last decade, we have seen tremendous technological and business model changes. From new payment platforms and solutions to updated regulations addressing payment effectiveness and security, to — perhaps most importantly — higher merchant and consumer expectations.
Technology innovation
Smartphone adoption has reached 70% in developed countries, while feature phones are frequently used to replace wallets and cash in developing economies. Domestic person-to-person (P2P) payment providers are proliferating as a result of catalysts such as social platforms, digital currencies, and near-field communication (NFC)-based payments. Rapid technological change is driving rapid industry change.
New players and business models
While the traditional financial industry once dominated the payments industry, new start-ups, spin-offs, and partnerships are introducing new payment options. Numerous new FinTech startups with a focus on mobile payments have emerged in recent years. The emphasis is usually on new services, such as security with fraud detection and authentication, improved customer experience, or making funds available to small businesses quickly after their line of credit is approved.
The next step for these organizations may be to determine whether real-time payments will become a core business component, as well as how to design an operating model to help optimize service delivery.
Merchants’ expectations
In addition to payment assurance and lower transaction fees, many small and large businesses are looking into real-time payment to improve cash flow management, reduce fraud activity, and provide incremental value to their customers.
Consumers’ expectations
Because of rapid technological change, many consumers now expect almost everything to be available in real-time — but payments frequently appeared to be stuck in the past. The age of instant gratification has arrived. Paying bills or friends should be as simple as a few clicks or touches, and the same holds true for accessing funds as soon as they become available.
Regulatory pressure
Regulators all over the world are spearheading efforts to speed up payments. The Federal Reserve Bank and the National Automated Clearing House Association (NACHA) are developing a roadmap and incentives to speed up real-time payments in the United States. Some developed countries’ regulations allow for real-time payments. This can benefit both consumers and the government, as it can efficiently track activity and help increase the overall economy’s fluidity.
Globalization
In general, consumers and businesses expect the same simple payment and transfer experience no matter where they are in the world. More efficient payment solutions have already been successfully implemented in a number of countries and for a wide range of use cases. As the number of countries adopting real-time payments grows, so will the pressure on other countries to lay the groundwork and support quick payments.
Conclusion
Real-time payments will almost certainly change the way we transact and conduct business. When that time comes, consumers will have the option of paying their bills at the last minute without incurring penalties. Businesses may benefit from increased funding availability. Financial institutions may be able to improve their services. Global economies may be more fluid than ever before.
While challenges remain to be overcome in order to achieve this utopian future state, we anticipate that real-time payments will likely generate new consumer behaviors and spending patterns, increasing revenue for payment players who are well-positioned to capitalize on this evolution.
