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 country’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.
