Real-time Payments (RTP)

Real-time payments (RTP) are transforming financial transactions for businesses worldwide and redefining conventional banking norms. Accelerating transfers helps companies to optimise cash flow management, simplify administrative processes and create a more seamless customer experience.

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What are real-time payments?

Real-time payments (RTP) are a method of electronic funds transfer that allows for almost immediate money transfer between bank accounts. It transfers funds between two bank accounts instantly, at any time of the day or week, including holidays and weekends. 

 

RTP has major commercial applications in payroll, utility bill payments, and retail payments. It improves confidence and transparency in payments, helping consumers, banks and businesses manage their money. It also improves the payment experience and reduces transaction risk. 

 

There are several global RTP networks, including: 

  • The Clearing House (US): The Clearing House is a membership organization owned by all the major US banks. Regardless of size, any federally insured depository institution can join the RTP network without being a member of The Clearing House.  
  • Pix (Brazil): Developed by Brazil’s Central Bank (CB), the Pix system is one of the most successful RTP deployments globally. Just three years after its launch, the system boasts 163 million users and over 66 billion transactions.
  • UPI (India): UPI was launched in 2016 in India by the National Payments Corporation of India. As of 2023, its total volume has reached $5.2 trillion, with 400 million users and 500 banks and payment service providers.  
  • PromptPay (Thailand): Launched in 2016, this RTP solution reached a 34% share of total payments volume by 2022 and accounted for 42% of all e-commerce operations in Thailand. 
  • IBTS (China): Chinese private banks have responded to the growth in digital wallets by launching IBPS, an RTP solution focused on domestic consumers and merchants, and CIPS, a system used for cross-border payments. 
  • South Korea CD/ATM: South Korea has one of the oldest real-time payment networks in the world. CD/ATM was created by Interbank in 1988, processing real-time transactions through a network of ATMs. Since then, it’s been updated to operate through central banks. 

How real-time payments work

The real-time payments network was created to address the shortcomings of automated clearing house (ACH) and wire transfers, mainly in speed and cost. Real-time payments cost-effectively increase the speed of bank transfers, reduce transaction risk by eliminating payment reversals and returns and support attaching richer contexts to payments.  

Characteristics of RTPs

  • Process transactions individually, allowing the system to handle payments in real time 
  • Live and operates 24/7, including weekends, holidays and after business hours 
  • Recipients receive payments within seconds of initiating the transaction 
  • All payments are final when completed and can't be reversed 
  • Operate on credit only, eliminating payment failures due to insufficient funds 
  • Works across multiple channels, which makes it highly flexible and adaptable to different business needs 
  • Carry more data than traditional payment methods, such as invoice details, purchase orders or other relevant information 

Real-time payment transaction process

  • Initiation. The payer decides to send money to the payee. This can be initiated in several places, such as an online banking platform, mobile banking apps or in person. 
  • Authentication and authorisation. The payer's bank authenticates the payer's identity using security measures such as passwords, biometric data or two-factor authentication. The bank then verifies whether the payer has sufficient funds for the transaction and will authorise the transaction. 
  • Transaction processing. The bank sends the payment through the real-time payments system, which processes the transaction as it receives it. 
  • Notification and confirmation. Both the payer and payee receive immediate notifications about the transaction. 
  • Settlement. Settlement takes place almost instantaneously. The payer's bank transfers the funds to the payee's bank, and the money is immediately available for use in the payee's account. 

The ABCs of Payments

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Benefits of real-time payments

Real-time payments offer many benefits for businesses, financial institutions and customers. These include:  

  • Stronger cash flow management. With RTPs, businesses can receive funds immediately after a transaction, allowing them to use funds as soon as they're received rather than waiting days for a transaction to clear. 
  • Increased efficiency and productivity. RTPs' immediacy eliminates manual intervention in payment processes, increasing overall operational efficiency. 
  • Improved customer experience. RTPs offer the convenience of making instant payments anytime, anywhere, significantly enhancing the customer experience. 
  • New business opportunities. RTPs allow for new business models and opportunities, such as gig workers and freelancers. 
  • Easier to reconcile payments and manage accounts. RTPs allow more data to be attached to each payment, making resolving errors easier and reducing processing delays to improve efficiency. 

Risks and challenges of adopting real-time payments

While RTPs offer several benefits, they also have some drawbacks: 

 

  • Limited transaction amounts. With RTPs, the limit is $1 million per transaction, gradually increasing from $25,000 when the network first launched. 
  • Not as widely supported. More banks support ACH and wire transfers than RTPs. 
  • Fraud and security risks. The RTP network processes transactions instantly, leaving little time for banks and payment service providers to detect and prevent fraudulent activities. 
  • Technology and infrastructure investment. Businesses and financial institutions need to upgrade their systems to handle real-time transactions, which can be complex and costly. 
  • Regulatory compliance. Businesses and financial institutions must ensure they comply with all relevant laws and regulations. This can be difficult for businesses operating in multiple jurisdictions, as they must comply with several regulations. 
  • Interoperability. RTPs must interact seamlessly with other payment systems, both domestically and internationally. 
  • Customer adoption and education. For businesses to fully benefit from RTPs, their customers must be willing and able to use these systems. 
  • Risk management and governance. Institutions using RTPs must maintain strict best practices to handle potential operational risks, such as system failures or transaction errors. 

From the speed of ecommerce transactions to the real-time payout of gig economy workers, instant transactions and payments innovation have the potential to alter many different aspects of commerce. The real-time payment network represents a new phase of evolution within the U.S. payments industry and provides a platform for product innovation. 

Further reading

Check out these resources to learn more about real-time payments and its role in people-centric innovation.

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