The Emergence of Real-Time Payments in the U.S. B2B Arena

All aboard!

The Clearing House’s (THC) Real-Time Payments system, which debuted in November 2017, is the first new U.S. payment rail in 40 years, bringing the world’s largest economy (with a nominal GDP of approximately $21.44 trillion) and a giant spoke in the international banking system solidly into the real-time economy, technology-wise.  (Other “spokes” have real-time payments networks in place. Most notable is the United Kingdom, where its Faster Payments initiative is entering its second decade and the network infrastructure coming up on Release 2.0).

THC’s Real-Time Payments (RTP) system claims to cover 50% of the demand-deposit accounts in the U.S. currently, with a stated goal that “every financial institution in the U.S. has an easy way to access the RTP network by 2020.” It continues to pick up momentum and advance technologically, including the introduction of Request for Payment technology.

According to The Clearing House, “Real-time payments over the RTP network will provide consumers and businesses with the ability to conveniently send payments directly from their accounts at federally insured depository institutions 24/7, and to receive and access funds sent to them over the RTP network immediately.”

The Journey to Real-Time Payments

Of course, as consumers, we’re already accustomed to the concept of real-time payments in most parts of our daily lives.

For decades, we’ve been able to buy and pay “instantly” for virtually anything via credit card networks or our debit cards (done!)  We’re paying for our broadband, electricity and rent/mortgages with standing-order or on-demand ACH payments directly from our checking accounts (done!) or with vendors and each other via Zelle. Using the Venmo P2P payment app (from PayPal), we can split our dinner check with friends before leaving the table. We can even exit an Uber without consciously paying (soon to come to your local Amazon Books or Whole Foods stores?)

Payments have steadily disappeared into our daily lives in the U.S., to the extent that they’re often invisible (think Uber, with its $40.18 billion valuation^[1]). 

Part of this is, of course, illusion. Underneath, consumer payments have traditionally used ACH with its batch processing,^[2] which consumers and businesses eventually pay for, somehow, in fees or otherwise.  But the lasting impression is that the consumer payment experience has gotten more immediate and thus has radically improved. 

Business payments?  Not so much, for anyone but the biggest banks and largest transactions anyway. Which long made sense, arguably, in that business payments are more complex and the stakes (in dollar amounts and operational overhead) are higher.

Which is why TCH’s Real-Time Payments system is a watershed moment. “It promises to organically transform the payment experience across the board, so businesses can capitalize on a 21^st-century payment method built for 21^st-century users’ mentality of ease and efficiency,” says banking and payments expert Melissa Rose, Senior Product Manager, Bottomline Technologies.

Without devolving into a geopolitical or deep technological discussion (no shortage of pundits opining on either of these aspects), let’s look at what really matters about real-time for business payments: who stands to benefit from this—and why. 

Real-Time Payments, Redefined

Real-time payments is a catch-all term, so let’s start with a definition.

First, it’s both an established concept and a vision.  The U.S. has long had a real-time payments infrastructure, between Fedwire and ACH,^[3] but not a ubiquitous one. Second, it’s the branded new payment system in the U.S. from The Clearing House, which is owned by 24 of the world’s top commercial banks. Third, it’s a breakthrough: the Request for Payment technology (embedded in the THC RTP system) moves the actual payment transaction plus related operating data about the payment on a single virtual rail (channel), enabling “conversational payments” that speed things along.  Because of this, it could be a boon for banks, businesses and those they serve, by making B2B, B2C and C2B payments collaborative and invisible. 

It’s also important to look at what real-time payments are not (yet): broadly available real-time settlement.  As a reminder, payments depend on the long-standing banking infrastructure and its largely batch-oriented processing.  TCH’s RTP system aims to make real-time settlement practical for interbank transactions, while safe, secure and convenient for transactions of all sizes (TCH recently upped the limit on general transactions from $25,000 to $100,000).

The real “secret sauce” is the extended data being generated and captured about payments and served up by the TCH Real-Time Payments system. This will essentially rewire the payment workflow as we know it today, and offer a mother lode of data for banks to create new workflows that deliver the benefits to consumers and businesses alike.

“In the past, we had three contact points: payment initiation, payment approval and receipt of payment confirmation – which indicates the payment has been processed by the origination bank,” says Rose. “Now, suddenly, you can extend that to incorporate many, many more data elements in the payment with which people can do something. Right now these new elements might be more payment exhaust than fuel, but it’s there to be utilized, captured and put into machine learning and other technologies that take that exhaust and turn it back into fuel.”

Watch for Part 2 of this series to find out the benefits of real-time payments.

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1. As of February 19, 2020
2. Increasingly narrowing, with the addition of Next-Day or Same-Day
3. Fedwire is a real-time gross settlement (RTGS) system that’s pricey to use and thus has largely been used by large institutions for large-dollar-amount transactions; everyone else used ACH, with its three-day (and shrinking) settlement window.