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What Are Real-Time Payments (RTP)?

What Are Real-Time Payments (RTP)?

Real-time payments (RTPs) are payment methods that allow funds to be transferred almost instantly between financial institutions. Unlike traditional payment methods that may take several business days to complete, real-time payments offer immediate access to funds, providing a faster and more convenient way to make transactions.

Real-time payments are facilitated through a digital infrastructure that connects various financial institutions and payment providers. This real-time payment network enables secure and rapid funds transfers, accelerating payment confirmations and enhancing the customer experience.

A brief history of RTP

RTPs have revolutionized transactions in the digital age, but their history dates back several decades.

The concept of real-time payments originated in the ‘80s when the Federal Reserve implemented the Automated Clearing House (ACH) system, enabling electronic fund transfers. However, these ACH transactions weren’t instant and typically took up to several business days to process.

In 2017, the Clearing House launched a real-time payment network to address the shortcomings of traditional payment systems like ACH and wire transfers. This new network provided a more efficient and immediate method for transferring funds, becoming the first and largest real-time payment platform in the U.S.

So, how does real-time payment processing work?

How do real-time payments work?

Real-time payments involve a relatively straightforward process to ensure a streamlined and instantaneous funds transfer solution to complete all transactions.

To better understand the RTP process, you can learn more about the nine steps involved:

  1. Initiation of payment: The payer initiates a payment through a digital platform, such as a mobile banking app, website, or other electronic channels.
  2. Payment authorization: The payment system then validates the payer’s credentials and ensures the availability of funds. Once validated, the payer authorizes the transaction using authentication methods like passwords, biometrics, or PINs.
  3. Payment clearing: The payment information is submitted to the payment clearing system, where it undergoes initial validation. The system then verifies the payer’s account, recipient information, and the amount to ensure accuracy.
  4. Interbank communication: Once the necessary information has been verified, the payment clearing system communicates with the originating and recipient banks. This communication establishes the intent to transfer funds and initiates the process.
  5. Funds transfer: The originating bank transfers the funds to the recipient’s bank in real-time. This often involves using central clearinghouses or payment networks to facilitate secure and immediate funds transfer between financial institutions.
  6. Recipient notification: Once the funds are successfully transferred, the recipient receives immediate notification of the incoming payment. This notification can be through various channels, including text messages, email, or app notifications.
  7. Funds availability: The recipient’s bank makes the funds available to the recipient in real-time. This step ensures the recipient can access and use the funds immediately upon receipt.
  8. Transaction confirmation: Once the funds are available, the payer and the recipient receive confirmation of the completed transaction. This confirmation includes details such as the transaction amount, date, and confirmation code, providing both parties with a payment record.
  9. Record keeping: Finally, the payers’ and recipients’ banks and the payment clearing system maintain transaction records for auditing, reconciliation, and reference purposes. This contributes to transparency and accountability in the payment process.

Now that you understand how real-time payment processing works and the key players involved, you can learn more about the benefits of RTPs.

What are the benefits of real-time payments?

RTPs offer numerous benefits for individuals and businesses, including their robust availability, improved cash flow, and overall efficiency.

One key advantage of real-time payments is their 24/7 availability. RTPs aren’t constrained by traditional banking hours, meaning they offer around-the-clock availability. This 24/7 availability promotes flexibility for emergency and time-sensitive transactions.

RTPs also promote more cash flow and operational efficiency. While most payment methods take several days to complete transactions, RTPs allow businesses to access funds immediately. This immediate access enables companies to allocate funds more efficiently, eliminating time constraints caused by long processing times.

With these benefits in mind, you may wonder how RTPs stack up against other payment methods.

Real-time payments vs. other payment methods

Real-time payments offer several advantages over traditional payment methods such as ACH, Same Day ACH, and wire transfers.

ACH and wire transfers face shortcomings that RTPs aim to overcome. ACH transactions, though widely used, have a slower settlement period of one to three business days, leading to sluggish fund availability.

On the other hand, wire transfers offer a faster option but often incur higher costs than RTP rates. These transfer methods are also subject to limited availability, typically processed during specific business hours, and lack 24/7 functionality.

In contrast, the RTP network offers a near-instantaneous settlement, continuous availability, and a streamlined user experience, addressing the growing demand for quicker and more efficient transactions. RTP also incorporates advanced security measures, mitigating fraud risks, and supports richer data with payments, providing a more comprehensive and modernized solution than traditional alternatives.

To gain a better understanding of how RTPs compare to other popular payment methods, here’s a quick side-by-side look at RTP rates, settlement times, payment directions, and bank coverages:

Payment Method Cost per settlement Settlement time Payment direction Bank coverage
ACH $0.20 – $1.50 1 – 3 business days Credit & debit All banks
Same-day ACH $1 – $5 Same business day Credit & debit All banks
Wire transfer $25 – $50 Within a few minutes to hours Credit Most banks
RTP $0.25 – $1 Instant Credit Some banks

 

Overall, RTPs offer faster processing, more availability, enhanced security, and a streamlined user experience, making this payment method appealing.

EBizCharge streamlines RTPs to meet payment demands

Real-time payments have ushered in a new era of efficiency and immediacy in financial transactions. As businesses and individuals seek faster and more reliable solutions, RTPs can satisfy these demands.

Thankfully, payment processing providers like EBizCharge offer a reliable platform, facilitating swift and secure transactions for a more efficient RTP experience to keep up with the fast-paced digital era.

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