Real-time bank account payments have become the gold standard for safer, faster payments. The Clearing House’s RTP® Network (RTP®) system, in particular, has held sway for quite some time, providing a swift and efficient means of transferring funds.
And when we say funds, we refer to the 64 million transactions worth $34 billion processed through the RTP network in Q3 2023.
But, as the saying goes, competition inspires innovation. FedNow, the instant payments service launched last year, has challenged the industry.
So, is there much of a difference between these two systems that organizations need to understand?
This article explores the nuances and discovers which real-time payment services might be the right choice for your financial needs.
The Demand For Real-Time Payment Solutions
The growing demand for instant payment solutions, driven by businesses and individuals seeking a quicker and more convenient payment experience, has propelled real-time payment solutions to the forefront. In fact, a recent survey revealed that61% of businessesexpect to gain a competitive advantage by harnessing the power of real-time payments.
However, instant payments are not just about getting the upper hand; their features and capabilities extend far beyond, with many enterprises saying they expect:
45% bank on the increase in accounting efficiency
37% look forward to reduced risk of payment failure
35% say transparency in payment processes
What is RTP®?
RTP emerged onto the scene in 2017 as the first new payment rail launched in the U.S. in 40 years. This system is managed by The Clearing House, a membership organization collectively owned by the major banks across the country.
When it comes to how payments are processed on RTP, it's all about ISO 20022-formatted messages. Money transfers are swift and accurate thanks to these messages, which guide each transaction from start to finish. This structured approach has played a significant role in RTP's popularity.
One of the standout features of RTP is its interoperability. In essence, this means that it can easily connect with other payment networks, making it incredibly versatile. The system also employs a fully prefunded account shared among all participating financial institutions, ensuring a secure and efficient transfer of funds.
RTP's straightforward and efficient approach to real-time payments has been a driving force behind its widespread use and the ever-increasing volume of payments processed through the ACH network.
What is FedNow®?
FedNow is a new real-time payments platform managed by the Federal Reserve Bank, marking the first government-backed initiative to provide instant payments in the U.S.
It is important to note that the Federal Reserve does already have a payment portal, but it does not work in real-time, taking a few business days to process payments. FedNow provides a solution to this.
Like RTP, FedNow offers instant settlement for money transfers 24/7, 365 days a year. This means you can make transactions at any time, making it incredibly convenient for both individuals and businesses.
To ensure seamless operation, the Federal Reserve has adopted ISO 20022. This standardized approach ensures that messages related to the FedNow Service are consistent and reliable, guaranteeing efficient transactions.
FedNow's reach is already significant, as it is available to over 10,000 financial institutions within the Federal Reserve's network. This ensures broad accessibility for those seeking the advantages of instant payments.
FedNow is not intended to replace Venmo, PayPal, Zelle, RTP, or other real-time payment services.
FedNow® vs RTP®: Key Differences
Let's examine how the RTP and FedNow services differ.
Transaction Limits:
FedNow: Imposes a more conservative cap, limiting each transaction to $500,000.
RTP: On the other hand, RTP allows larger transactions, with a transaction limit of $1 million.
Settlement Mechanism:
FedNow: The settlement process in FedNow takes place through the Federal Reserve's master accounts with banks, a structure that offers its unique advantages.
RTP: Utilizes the New York Federal Reserve Bank for settling payments. These differences in settlement mechanisms may pose challenges for interoperability between the two systems in the future.
Network Accessibility:
FedNow: A notable feature is its integration with the broader Federal Reserve network. This means that smaller, local banks in communities across the United States can access and utilize FedNow for real-time payment needs.
RTP: The Clearing House estimates its network is accessible to institutions covering approximately 90% of U.S. demand deposit accounts (DDAs). However, it's essential to note that not all institutions with access have opted in, resulting in its current network reaching only 62% of DDAs.
Whether it's the government-backed FedNow or the pioneering RTP, both services are shaping the future of instant payments nationwide.
How Does This Affect Businesses?
The launching of the FedNow service represents a significant change in the U.S. payments landscape. The competition between FedNow and RTP may even spur innovation and improvements within the banking industry and technology providers, ultimately benefiting businesses.
For businesses, navigating these distinct approaches may pose some initial challenges. However, the benefits of real-time bank payments are hard to ignore. Faster and more efficient payment methods translate into quicker access to funds and streamlined financial operations.
This optimistic outlook suggests that the adoption of real-time payments is expected to surge further, offering a brighter future for businesses and the payments industry as a whole.
How VoPay’s Advanced Payment Technology Can Help
As companies seek faster, more efficient payment methods, the power of instant payments is undeniable. Being able to disburse real-time payments 24/7 will be more than just a convenience; it will be how payments are done.
Want to understand more about real-time payments and how they impact your business?
