Table of Contents: What are Real-Time Payments? | How do Real-Time Payments Work? | Adoption of Real-Time Payments | What is FedNow? | Benefits of Real-Time Payments | The Future of Finance
In our fast-paced world, consumers want instant gratification. This is becoming true in the payment space, as the adoption of digital payment platforms increases. McKinsey reports that 82% of Americans conducted a digital payment in 2022 – up from 78% in 2021.
While person-to-person (P2P) payment tools like Venmo grow in popularity, businesses are beginning to expect that same convenience. Organizations are implementing real-time payment (RTP) platforms to meet the requests of their vendors.
As businesses plan for the year ahead, many are prioritizing real-time payments and adopting emerging platforms like FedNow.
“Real-time payments I think are going to disrupt some of the older ways of working. It’s going to cause even more of a paradigm shift than what’s happening today inside the industry, [encouraging] a move to digital automation.”
What are Real-Time Payments?
RTPs are a form of digital payment that is processed instantly. Traditional payments may take several days to clear, but RTPs are typically settled within seconds.
RTP systems transfer funds from one bank account to another. Funds are available to the recipient almost immediately after a transfer is initiated. Businesses prefer RTPs because they accelerate cash flow and reduce the administrative burden of collecting and reconciling payments.
How do Real-Time Payments Work?
RTPs can occur via online banking platforms, mobile payment apps or in person. Depending on the channel, the payer may have to input account numbers, scan a QR code or initiate the process another way.
With RTPs, the payer sends money to the payee. The payee cannot pull money from a payer’s account via an RTP platform. Most RTPs deal with credit only, so insufficient funds are less of a risk for either party.
Once the process is initiated, the payer’s bank authenticates the payer’s identity. When the payment is approved, the bank authorizes the transaction and sends payment instructions through the RTP system.
After the payment is processed, both parties receive a notification. The payer’s bank sends the funds to the payee’s bank, and the money is instantly available to the payee.
This process differs from traditional payment methods in several ways:
- RTP platforms don’t process payments in a batch. Each transaction is processed individually.
- Transactions are processed continuously, not at a certain time towards close of day.
- RTP platforms work 24/7, unlike traditional platforms that don’t process on weekends, holidays or after hours.
- Some RTP platforms may limit transaction amounts.
- Since RTPs are fairly new, not all banks or organizations support these types of transactions yet.
Adoption of Real-Time Payments
In September 2023, AvidXchange conducted a 2024 Trends Survey to gauge priorities within the finance departments of mid-market companies. We found that 49% of organizations used real-time payments to pay suppliers and vendors in 2023. Eighty-one percent of those we surveyed said their team has seen an increase in requests from suppliers and vendors for real-time payments.
Real-time payment was the method 21% of the finance leaders we surveyed used most often to pay suppliers and vendors, followed by credit card (20%) and Automated Clearing House (19%). Three percent of survey respondents said their company used FedNow most often for vendor and supplier payments.
What is FedNow?
FedNow is a real-time payment platform developed by the Federal Reserve. It launched in July 2023. The Federal Reserve said it plans to release additional features in phases over time.
FedNow was developed to help financial institutions adopt real-time payment options to meet customer demands. Currently, the only major differentiator between FedNow and other real-time payment networks is that FedNow is run by the U.S. central banking system.
With this type of high-profile backing, we expect more organizations will adopt RTP options in the coming years.
Benefits of Real-Time Payments
RTPs deliver many advantages for suppliers and vendors, including:
- Faster reconciliation and payment settlement
- Improved cash flow
- Less need for resources devoted to payment collection
RTPs also deliver business benefits to the payer, such as:
- Improved vendor/supplier relationships
- Reduced expenses per transaction compared to alternative payment methods
- Fewer late payments and related fees
The Future of Finance
It’s clear that RTPs will play a role in many finance departments as we move into 2024, as they offer benefits to both organizations and their suppliers. The prominence of FedNow will undoubtedly help improve adoption.
To learn more about the other issues on the minds of finance leaders heading into a new year, check out the full results of our recent survey. Download our free report, “2024: Anticipating Tomorrow’s Trends,” in which we share more about RTPs and other emerging industry trends.