Posted by Tiffany Taylor and Alison Arthur on 27 Jul 2021
Modern commerce can be described in one word – immediate. Customers expect on-demand transactions whether they’re hailing rides, consuming media, or paying bills. Technology has elevated business-to-consumer (B2C) interactions with the help of apps, mobile payments, and ecommerce software that streamline even the simplest transactions.
Now that consumers can pay for goods, services, and experiences with the touch of a finger, expectations are rising for immediate payments in other aspects of commerce. For example, businesses moving money to other businesses more quickly and efficiently. Insurance companies paying their customers’ insurance claims on the spot to lessen disruption to their lives. Employers paying contract employees and freelancers more expediently than issuing paper checks. And cross-border payments of all types being conducted in simpler, more streamlined transactions.
Faster payments are evolving quickly to bring new speed, connectivity, and efficiency to money movement around the world. This blog provides an overview of faster payments, what’s currently underway in the U.S., and global systems that have been developed in support of faster payments. It also provides use cases of real-life applications for faster payments in business to business (B2B), B2C, and consumer to business (C2B) transactions.
Faster Payments Defined
So, what are faster payments? This blog uses the term as a catch-all for advancements in the payments ecosystem designed to help move money between entities faster than the traditional settlement times of the past. Faster payments are also built to leverage safety and security features that can help businesses and consumers better manage the risk that surrounds payment transactions.
Faster Payments in the U.S.
How are faster payments taking shape in the U.S.? Let’s take a closer look at how payment rails are being developed and adapted in support of faster payments.
When was the last time a new payments infrastructure was launched in the U.S.? In 2017, The Clearing House (TCH) launched its real-time payments (RTP) system, the first new core U.S. payments infrastructure in over 40 years. As a net-new payment network (or “rail”), RTP enables businesses and consumers to instantly send, clear, and settle payments. In addition to speedier transactions, RTP also conforms to consumer protection criteria designed to prevent fraud and increase safety.
The RTP network is currently accessible to financial institutions that hold 70 percent of U.S. demand deposit accounts (DDAs), and the network currently reaches 56 percent of those accounts. The network is built to streamline financial transactions between businesses and consumers by supporting fund transfers, payment requests, and two-way communication between parties.
Automated Clearing House (ACH) transactions are the backbone of money movement in America. The network has been in place for over 40 years and facilitates everything from employee payroll direct deposit to mortgage payments. In 2015, Nacha (the governing body of ACH) announced improvements to ACH in support of Same Day ACH. These improvements were intended to accelerate the traditional settlement time of one to two business days to same-day settlement.
In 2018, Nacha announced further improvements to Same Day ACH that accelerate the availability of funds, increase the dollar limit of transactions to $100,000, and extend the submission window an extra two hours per business day. These improvements took effect over the course of 2020 and 2021, with the expansion of business hours effective March 19, 2021. ACH’s established ubiquity among financial institutions and businesses makes it a natural place to facilitate faster payments via Same Day ACH. In Q1 of 2021, more than 141 million Same Day ACH transactions were recorded, and this number is only expected to keep growing.
In 2017, Early Warning Services launched Zelle® to streamline person-to-person (P2P) payments among account holders at U.S. banks. The solution allows money to move by providing an email address or a phone number, thereby avoiding the need to provide sensitive banking, personal, or payment information. Users can pay one another via Zelle through their banking websites, the stand-alone Zelle app, and or other mobile apps.
Zelle leverages relationships with major national banks, credit unions, and regional/community banks to extend its reach to millions of U.S. customers. Transactions are completed within minutes, eliminating the need to write personal checks or use cash. At the end of 2020, Zelle reported 1.2 billion transactions worth $307 billion. Given this uptake and the huge reach of Zelle’s infrastructure, one can only imagine that its usage and adoption will continue to grow over time.
Faster Payments Around the World
The U.S. faces unique challenges in adopting faster payments due to legacy systems and a fragmented marketplace. However, many countries around the world have established infrastructures in place. Japan was at the forefront of faster payments, launching its Zengin System in 1973. Dozens of countries followed suit in the coming decades, with China’s Internet Banking Payment System (IBPS) and India’s Immediate Payment Service (IMPS) both rolling out in 2010. More recently, Australia’s New Payments Platform (NPP) went live in 2018. All told, there are approximately 54 real-time payment systems globally, with more to come.
Faster Payments for B2B, B2C, and C2B Transactions
Given that backdrop, what are the real-life applications of faster payments for businesses and consumers? Here are three examples where faster payments can expedite commerce.
Use Case #1: B2B Payments
Businesses depend on suppliers to keep operations running smoothly. And suppliers require on-time payments to keep their goods flowing to businesses. Faster payments can be used in these B2B situations to make immediate payments that reduce the need for invoices, bills, paper checks, and lag times. A supplier can even use RTP messages to make a Request for Payment, a non-obligatory payment “ask” in lieu of a bill or an invoice.
Use Case #2: B2C Payments
Insurance claim payouts are a prime example where faster payments can create an immediate impact on consumers’ lives and strengthen their relationships with insurance providers. In the event of a natural disaster, policyholders may require immediate payouts to help secure basic human needs like food and shelter. Insurance companies can expedite these emergency payouts using faster payments methods, cutting down the time required for policyholders to receive their funds.
Use Case #3: C2B Payments
There are situations when consumers need to make immediate bill payments to, quite literally, keep the lights on. Using utilities as an example, a customer who is delinquent on their account might be at risk of losing basic services. Faster payments can allow them to make an immediate bill payment on their account and have the funds transferred near-instantaneously.
The Bottom Line: Faster payments are becoming a reality both domestically and globally. As the US catches up to major infrastructures around the world, the use cases for faster payments are sure to expand. The positive impact of faster payments could be a game-changer for businesses and consumers alike, with the potential to streamline commerce like never before.
What can the rest of the world teach us about faster payments? Find out here.
*This is an update on an original post published June 2019
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