By 2025, Most Transactions Will Be Settled in Real Time
By 2025, the majority of financial transactions will be settled in real time. There’s good reason for this prediction. Merchants and customers are demanding faster ways to pay or collect funds, and larger companies, as well as government agencies, are jumping on the trend, too.
Indeed, two of the major real-time payments players in the United States are The Clearing House Payments Co., which launched its Real Time Payments network in 2017, and the Federal Reserve’s FedNow service, set for its commercial launch this month.
Here are some supporting facts for my prediction:
ACH Isn’t the Best Option Any More
Standard electronic payments or money transfers are normally completed via the Automated Clearing House, or ACH, which handles everything from Social Security and salaries to mortgages. However, those transactions are not done in real time, and can be delayed by bank holidays and weekends.
Real-time payments, or RTP, are managed by The Clearing House and governed by major U.S. banks. RTP is gaining traction, and once the FedNow program launches, more and more payments will have access to these services, and instant payment will likely become the new normal. By 2030, the ACH payment system may no longer exist!
The FedNow Service Program
The FedNow Service Program is scheduled to launch in July. It will pave the way for instant, real-time payments to become even more popular and accessible. Developed by the Federal Reserve, the program allows financial institutions of every size—and in every community throughout the United States—to provide safe and efficient around-the-clock payment services every day of the year.
It will likely take companies at least two years to adjust their business models to effectively use RTP to settle transactions in real time.
Everyone Wants to Get Paid Faster
Face it, instant payments are the future, and industries are recognizing the significance of this fact. If merchants are paid faster, customers are paid more quickly—a win-win for both parties. Here are two industry examples:
The Automotive Industry
Vehicle purchases are typically large transactions in excess of $10,000, which carry a lot of risk. An ACH payment can take up to three days before an issue like insufficient funds—or something else—arises. RTP can mean a faster transfer of ownership instead of waiting for a check to clear. The seller can quickly confirm receipt of payment.
In the event of an accident, RTP can also aid in speeding up the processing of claims. Insurance companies will have the ability to transfer funds to repair shops or customers instantly, reducing time and resources to get back on the road and improving customer satisfaction. This has the added benefit of helping repair shops and other vendors increase cash flow and reduce the need for financing or credit.
Here, more and more refunds are being issued due to recent changes in regulations. RTP is replacing paper checks to streamline the process. Some examples of improvements include:
- Copays and deductibles: Patients can pay their copays and deductibles instantly using RTP, which can reduce the administrative burden for healthcare providers and help consumers manage their healthcare expenses more effectively;
- Telemedicine visits: The ability to pay for appointments instantly helps improve the overall patient experience by reducing administrative delays and making it easier for patients to access care;
- Medical equipment and supplies: Consumers can purchase medical equipment and supplies instantly using RTP, meaning chronic conditions or other health needs are managed effectively, without the time lost to manual processing of paper checks.
But RTP also has drawbacks. It’s important to look at both sides of the matter and consider challenges to widespread adoption of RTP. Some of these obstacles can slow companies when adjusting their business models. They include:
- Infrastructure: RTP requires robust and secure payment infrastructure that can handle large volumes of transactions. Some financial institutions may not have the necessary technology in place to support RTP, which could slow down adoption;
- Regulation: RTP is subject to complex regulatory frameworks. Some financial institutions may be hesitant to adopt it if they are concerned about compliance;
- Interoperability: RTP requires a high degree of interoperability between financial institutions and payment systems. If different payment systems are not able to communicate effectively with each other, that could limit the usefulness and adoption of RTP;
- Consumer adoption: Even if financial institutions can adopt RTP, consumer adoption may be slow if users are not familiar, or comfortable, with the technology.
Even with all the challenges, the good news is that the financial industry, and specifically payment-service providers, are actively addressing the issues that can come with widespread adoption of real-time payments.
Robust and secure payment infrastructure is being developed to handle large volumes of transactions, while compliance with regulatory frameworks is being put in place to encourage adoption. Industry players are also promoting interoperability among different payment systems to maximize the usefulness of RTP.
Furthermore, companies are educating consumers on the benefits of RTP and promoting awareness to increase consumer adoption. With these efforts, the industry is well-positioned to overcome the challenges and fully realize the potential of RTP, transforming the way we make and receive payments.
Companies and customers alike already recognize the value of RTP and will continue to be eager to adopt it. The coming launch of the FedNow program, paired with the developments I’ve outlined above, shows that we are poised to enter a (not-too-distant) future where all transactions will be settled in real time. We can’t always predict how the evolution will happen, but we absolutely can predict that it will come.
—Larry Talley is the founder and chief executive of Everyware.