Faster Payments, Better Business: The Benefits of Instant Payments

No doubt you’ve heard of Instant Payments, the newest and fastest way to move money. This technology, which is expected to increase processed transactions by 289% by 2030* could bring substantial changes to the marketplace. But first, there is a lot to learn about Instant Payments – from how they work, to how quickly your business can start benefitting from them.

What Are Instant Payments?

Instant Payments are an evolution of the slower and less precise methods for businesses to make payments. This technology allows someone to transfer money nearly in real time. Once the payment is submitted to the processing network (FedNow or The Clearing House) the transfer usually occurs in a matter of seconds. It will be faster than any other method, even wiring money.

How are Instant Payments Processed?

FedNow and The Clearing House are payment settlement services, like the older Automated Clearing House, established in 1970s. Instead of taking 1-3 days to clear payments between financial institutions, The Clearing House and FedNow do it in seconds. The Clearing House, which offers the RTP® (Real Time Payments) service, was created by a group of the county’s largest banks. FedNow was created by the Federal Reserve and focuses on the thousands of smaller banks and credit unions around the country. Both send payments using the same messaging platform, called ISO 20022. This platform, which is used globally, also allows for businesses to send the recipient information about the payment, which helps streamline the reconciliation process.

What Are the Advantages of Instant Payments?

First and foremost, Instant Payments offer speed, precision and payment confirmation. For a business especially, that speed and precision can help to optimize cash flow, and payment confirmation provides validation of receipt. A business can set the exact time for a payment to release and know it will get there in seconds, with immediate payment confirmation from the receiving financial institution. It’s all done in real time.

Receiving Money Faster, Holding It Longer

The speed of Instant Payments is very beneficial. For instance, any business that accepts credits cards could settle that day’s transactions and receive funds on the same day – even on weekends – instead of a day or two later. Additionally, with the immediacy of Instant Payments, a business could hold on to its money a little longer to earn more interest.

Higher Limits That Businesses Need

Compared to peer-to-peer transfer apps, Instant Payments have much higher limits. The network limit for FedNow payments is $500,000. While RTP® has a limit of $1,000,000. These higher limits are much more useful for businesses.

Better Efficiency

Every Instant Payment that is sent can include important data about that payment, which will help the recipient process the payment more efficiently. Instant Payment messages are built on a common language platform called ISO 20022, which is easily exchanged by businesses and financial institutions around the world. The messaging allows for rich data like payment remittance information, invoices and purchase orders to be delivered with the payment, enabling straight through processing and more efficient payment reconciliation.

Reducing Check Fraud

While fraud will always be an issue, an Instant Payment is a credit push only, meaning the payment is initiated by the sender, helping make it more secure. Banks will be required to filter all outgoing payments through fraud analytics tools and to flag potentially suspicious payments before sending them to the networks for processing. Given the amount of check fraud out there, if Instant Payments cut down the number of physical checks in the mail, fraud could be reduced.

How Do Instant Payments Actually Work?

Instant Payments are sent using one of the two new settlement services, FedNow or The Clearing House. Both services operate 24/7/365 and settle the payments in real time, instead of overnight. However, depending on customer demand, individual banks may limit when payments can be sent.

SouthState Will Use Both Settlement Services

While it’s likely that most banks will use one of the settlement services for Instant Payments, SouthState will offer both. SouthState has been an early adopter of RTP® via The Clearing House. With FedNow coming online, SouthState is one of the few banks of its size making both services available. Because this technology is important for many of our customers, we made the investment to give them the convenience of both services.

Will Instant Payments Replace the Automated Clearing House?

It’s doubtful that the ACH will be replaced by Instant Payments. While demand for faster payments has increased, not all businesses need money moved in seconds or 24 hours a day. The ACH network could lose some volume to Instant Payments but will remain an important part of the banking system.

How Can I Start Using Instant Payments?

If you have an account with SouthState, you can already receive an Instant Payment from someone else. By late 2024, SouthState Commercial Banking customers will be able to send Instant Payments from their Treasury Navigator® accounts. Like other integrated payment options – ACH, bill pay, wire, etc. – Instant Payments will be available as well. For efficiency, you will be able to include an Instant Payment along with other types of payments in the same integrated file you send us. Senders will know up front whether the recipient can receive Instant Payments, so a payment is not sent in error. We’re designing the whole experience to be very easy to navigate.

Which Industries Could Benefit from Instant Payments?

Instant Payments will surely impact some industries. Time will tell how Instant Payments are used in the marketplace. But it’s easy to see some possibilities. For instance, restaurant workers could get paid right at the end of a shift, instead of waiting for the end of the week. Gig workers like food delivery or ride-hail drivers could get paid after each delivery or trip. Insurance companies could send Instant Payments to get claim money to recipients faster. And real estate closings could change from wiring money for settlement to sending with Instant Payments.

What’s The Difference Between Instant Payments and Batch Processing?

With batch processing, banks settle those payments overnight. Businesses sending batch payments would see their balance affected the next day. With Instant Payments, money moves in real time, so businesses will be able to monitor and predict their cash-flow with much greater accuracy.

Are Instant Payments Safer Than Other Methods of Paying?

While fraud is always a threat to any system, Instant Payments have verification safeguards built in to protect against fraud. And since they are a credit push, initiated by the sender, that helps prevent fraud as well. But just like sending a money wire, the sender needs to know the recipient is a legitimate entity. And given the amount of check fraud that occurs, Instant Payments are certainly safer than sending a physical check through the mail.

What Does This Technology Mean for SouthState?

Instant Payments is the critical catalyst of our strategic vision to be the payment provider of choice in our local and select national markets. By embracing new payment technologies, we are committed to delivering unparalleled convenience and efficiency, redefining the banking experience for our customers.

In the coming months, SouthState will update all our Commercial Banking Customers about the availability of sending Instant Payments via Treasury Navigator.

About the author:
Judson McAdams is currently EVP, Director of Treasury Management and Payment Solutions for SouthState Bank. He is spearheading the effort to make Instant Payments fully available to SouthState’s commercial banking customers later this year. With 20 years of commercial banking experience, he has held many different roles, including Head of Business Banking at Park Sterling Bank and Portfolio Manager for SunTrust Robinson- Humphrey. He attended the ABA Stonier Graduate School of Banking and has a degree in Managerial Economics from Hampden-Sydney College.

*Source: Juniper Research, Three Key Trends That Are Accelerating Instant Payments