Are instant bank transfers really instant?
Instant bank transfers do precisely what it ‘says on the label’. They allow businesses and individuals to receive and send payments simultaneously. This can happen at any time of the day, on any day of the year. Some people who have newer bank apps will have noticed that if they spend money online, it goes immediately from their account, and they get a notification informing them of this. Where you see the difference, however, is if you are the person or business receiving the money.
Winner, winner; chicken dinner
With faster payments, the funds usually go from the sender’s account almost immediately, but it can take days before the money appears in the receiver’s account. A great example is for people who like to have an online flutter. To play for real money, the player has to make a deposit in the casino’s account. If they win and cash out, it can take up to three days for the winnings to be deposited back in their account. However, the fastest payout online casino in the USA uses the instant payment service, allowing the winnings to be cashed out without delay. The happy gambler can shout ‘Winner, winner; chicken dinner’ and not have to wait three days to buy said meal.
Keep on moving
Not so long ago, the idea of getting the money into our accounts within three days was exciting. When banking was all about checks and cash, it could take up to seven days for the funds to leave your account and even longer to clear into the payee’s account. If people wanted to pay or be paid more quickly, they had to pay extra for bankers’ drafts and, more recently, CHAPs payments. Instant payments are a new development and rely on a different clearance system (known as rails) than the current payment network. It will take a while for all businesses to integrate instant bank transfers, as we have seen with the slow approach some companies have taken to their integration of digital payment processors and digital wallets, but similarly, it will almost certainly come from consumer pressure.
Instant payments are also known as real-time payments (RTP). They are settled via digital infrastructure networks. These networks are called real-time payment rails, and they provide 24x7x365 access. This means that they are always open to process payments. The Real-time payments (RTP) are settled almost immediately via digital infrastructure that facilitates the payments. The Clearing House currently operates an RTP network.
The Clearing House
The Clearing House (TCH) has been offering this service for five years. They have noticed considerably higher volumes of traffic on their network recently. In response, they have increased the availability and functionality for financial institutions and their customers. They have reported that more banks and credit unions are joining their network each week. In quarter 3 of 2022, they processed a million transactions valued at $19.7 billion. That is an increase of 10% by volume and 9% by value in the same reporting period last year. The list of financial institutions participating in their scheme is extensive.
Not the only name in the market
It seems that the future of payments will be RTP. If we know we can receive money instantly, then this will be what we demand. In response to what is happening in the area, The Federal Reserve has announced it will launch a similar service, FedNow, in 2023. The service is now going through technical testing. More than 120 organizations are participating in the FedNow Pilot Program. These include US Bank, Exchange Bank and a raft of payment processors and solution providers.
Ken Montgomery, Federal Reserve Bank of Boston’s first vice president and FedNow Service program executive said:
“The benefits of instant payments are increasingly important to consumers and businesses, and the ability to provide this service will be critical for financial institutions to remain competitive.”
The benefits of instant bank transfers
An enormous benefit of RTP is payment certainty, as well as instant access to funds and accurate account balances. Sending institutions can not revoke or recall a payment that has been authorized. In addition, there is a process to enable financial institutions to talk to each other if funds are sent in error.
Messaging is inbuilt into the system. This means that a request for payment of a bill or service can be initiated and paid through the RTP system. The invoicing is not separate from the payment. For years, customers of fintech apps like Paypal and Venmo have benefited from being able to send money and messages together – this is standard practice. However, RTP payments are about more than just transferring money.
Are there any delays?
The technology driving RTP is not new, as The Clearing House has demonstrated since launching in 2017. However, the delay in rolling out instant transfers falls very much at the banks’ doors. This is because they have to adapt to the new digital infrastructure. The last time they had to do this on such a scale was in the 1970s when digital clearing houses were introduced. Their biggest concern is always around security, but clever fintech solutions are helping to overcome ever-changing security threats.