For some years now, real-time payments have been the talk of the town. For the finance industry, they’re the equivalent of 5G for the tech world: an elusive and promising bright future. But what are real-time payments, exactly?
Well, the truth is real-time payments have been around for as long as money has existed. The difference is that, before, receiving an instant payment was much simpler. We lived in smaller environments, trading with people we knew and lived close to. We paid in cash (or cacao) whenever we needed something, and the transaction was finalized immediately.
But now, we live in a global world. We buy things online and we have friends and relatives overseas. This has opened us up to endless possibilities and experiences, but it has also made the business of long-distance money a little more complicated.
The meaning behind real-time payments
Money makes the world go round, but it also needs to actually go around the world. Of course, the Internet has taught us that everything can be done in an instant, and that would’ve been true for money if only money weren’t such a precious asset. Nobody wants to send money through an unsecure channel, so in order to protect your funds as they cross international borders, financial service providers need to execute several processes behind the scenes.
So, what does a real-time payment mean? It means that, thanks to technological advances and different partnerships taking place in the finance ecosystem, financial service providers are now able to offer an instant (or near-instant) digital payment solution.
Below, we’ll go more in detail on what needs to happen in the blink of an eye in order for a payment to be finalized instantaneously.
Understanding real-time payments
Real-time payments can happen through smartphones, tablets, digital wallets, and the web. According to a Deloitte report, these are the four steps that need to happen during a real-time payment transaction.
- Authorization. The bank or provider verifies that you have the necessary funds available for payment.
- Posting. The funds are made ready for withdrawal from the account.
- Settlement. The financial institutions behind the sending and the receiving ends settle outstanding obligations (i.e. they shake hands and agree on the transaction).
- Notification. Funds are received and both sender and receiver are notified of the transaction’s completion.
For a customer to be able to finalize a payment in real time, a robust payments ecosystem must be powering the transaction. To the consumer’s eye, paying will seem fast and straight-forward. But for the company providing the service, the behind-the-scenes requires a lot of conscientious integrations that are both efficient and safe for customers and their money.
Real-time payments also come in all shapes and sizes.
- Business to Business (B2B): payments to suppliers, partners, or providers
- Business to Consumer (B2C): wages, returns, settlements
- Consumer to Business (C2B): bills, in-store purchases
- Domestic Peer to Peer (P2P): sending money to friends or family who live in the same country
- International Peer to Peer (P2P): sending money to friends or family overseas, remittances
As you can see, real-time payments can be applied to any line of business regardless of customer base.
How businesses take advantage of real-time payments
Businesses can capitalize on real-time payments both for their own benefit and for that of their customers. Through streamlining the payment process, more people can have access to fast money transfers. Here are some examples:
- Increased visibility. Take our money transfers, for instance. Once you’ve sent the money, you’re able to use the track-a-transfer feature to consult the status of your transfer. This lets you know exactly what’s going on, which comes in handy in case there’s an unexpected issue. A misspelled name, an issue with the receiving bank, etc.
- Improved liquidity. No one in the workforce is a stranger to long waits to receive payment. While bigger companies might have an easier time waiting on these settlements, small businesses and freelancers who depend on the day-to-day funds can greatly benefit from a faster payments system.
- Serving the under-banked. Mobile wallets are on the rise in many rural areas with little access to formal banking. Through creating a broader payments network that factors in these mobile wallet providers, we can foster financial inclusion while also providing a better service to those who are already part of the financial ecosystem.
Of course, if real-time payments were easy to achieve, we would’ve all flipped the switch a long time ago. Although real-time payments are fast and efficient, there’s a lot of work that goes into it. Behind the scenes, you need a robust network capable of integrating all the players necessary to verify and pay the transaction.
However, customer expectations for speed and security have only increased during these COVID times, and many companies have joined in the race of perfecting the real-time payments product. That being said, a robust payments ecosystem like that is hard to build from one day to the next, which is why partnerships with established financial technology companies is proving to be the fastest and most reliable solution to joining the real-time payments race.