Driven by consumer demand for an enhanced payment experience and the financial industry’s shift toward a global standard for financial operation systems, the adoption of instant payment systems is accelerating. Instant payment systems, also called real-time payment systems, facilitate the immediate transfer of funds, immediate confirmation of the transaction and constant availability. Although these features may be advantageous to individuals, businesses and financial institutions, many smaller financial institutions have yet to embrace these payment innovations due to the complexities and vulnerabilities they can introduce. In this article, we explore the benefits of instant payment systems and outline how we can help financial institutions navigate the path to successful and confident adoption.
Features of instant payment systems
The definition of instant payment varies depending on the context and country in which it is used. For example, the European Central Bank (ECB) defines instant payment as a payment method that results in immediate debiting of the debtor’s account, immediate crediting of the creditor’s account, immediate confirmation of the transaction, and constant availability — 24 hours a day, 365 days of the year. While other payment innovations may offer some of these features individually, instant payments are unique in offering them all.
Advantages of instant payment systems
There are several types of transactions that can benefit from faster payments, funds transfer and funds availability. These include:
- Person-to-person (P2P) payments – such as reimbursing a roommate for shared rent or paying the neighbor to watch your dog.
- Person-to-business (P2B) payments – such as paying a coffee shop for a cup of coffee.
- Person-to-government (P2G) – such as paying federal taxes or paying for a driver’s license.
- Government-to-person (G2P) – such as tax refunds, Social Security benefits or stimulus payments.
- Business-to-person (B2P) payments – such as a business refunding money to an individual for a returned purchase or paying employees their wages.
- Business-to-business (B2B) payments – such as payment to vendors for their services.
- Business-to-government (B2G) payments – such as federal or state tax payments.
- Account-to-account (A2A) transactions – a transfer of funds from an individual’s account to another account, typically owned by the same individual.
By offering immediate transfer of funds, instant payment systems help facilitate large-value, urgent and multicurrency payments, improving global reachability and the experience of both merchants and consumers. Instant transactions empower customers to capitalize on market conditions without relying on credit, make large purchases more quickly, and optimize money management and cash flow while reducing brokerage firms’ and financial institutions’ credit risk. Instant payment removes the potential for returned payments, saving both payer and payee costs and inconvenience. Instant payments also eliminate settlement-related credit risk because settlement occurs before the payment is posted to the payee’s account.
Although immediate confirmation of payment has long been a feature of card payments, instant payments take this benefit one step further by using the underlying account as the origin of the funds, which offers merchants a more cost-effective method of accepting payments that provides the paid funds with a shorter turnaround time. To some extent, cash and checks also could be replaced with instant bank transfers, with a much lower cost of clearance and settlement.
In recent years, e-commerce and mobile commerce (m-commerce) providers have sought to provide a frictionless payment experience for both customers and merchants; instant payments help address this challenge. Instant payments create the possibility for functionality that allows for seamless payment and delivery service regardless of whether the payment occurs before, during or after the purchased goods have shipped. Instant payment also reduces the time before payment is released to the seller, so the seller can ship purchased products to the customer sooner, enhancing the e-commerce experience for all parties.
Although instant payments do not modify the underlying clearing and settlement infrastructure, most traditional clearing and settlement processes are not designed to work under the condition of constant (24 hours a day, 365 days a year) availability. An instant payment infrastructure is designed to be operational without any significant downtime that could disrupt any of its essential functionalities.
In addition to its constant availability, most clearing mechanisms use batch payment processes. Large settlement systems divide payments between large-value and small-value payments. The differentiation becomes more relevant in the clearing and settlement stages. In the traditional approach, large-value payments are cleared and settled individually — often by real-time gross settlement (RTGS) systems — whereas low-value payments are grouped and processed in batches. In order to achieve instant payment systems’ constant-availability functionality, the clearing and settlement mechanisms must be able to process a high volume of individual low-value payments without compromising performance. In other words, a system with RTGS properties is needed to further improve cost and performance.
Current trends and future projections for instant transactions
Mobile and online P2P payments, in particular, are becoming more popular with millennials and younger consumers. However, this trend could trickle up to these consumers’ parents and grandparents and encourage broader adoption. Today consumers complete most mobile P2P transactions through FinTech platforms, which reduce or eliminate financial institutions’ role in P2P payments. However, UL Solutions industry experts offer financial institutions services to help them integrate instant payments into their processes and systems and promote customer adoption. Our industry experts not only provide best practices, insights into trends, and security guidance regarding authentication and onboarding, but they can also help customers design their own processes, procedures and APIs. We assist our customers with building trusted security, compliance and interoperability into their operational infrastructures globally and locally. To learn more about UL Solutions real-time and instant payment implementation services and discuss your specific needs, contact us today.