Get paid instantly with Real-Time Payments (RTP)

Remember life back in the 90s when every time we needed to connect to the “internet”, we had to wait for dial up?

Well, the infrastructure for payments in the US is even more antiquated than that. Little has changed since the last time ACH was invented in 1978. Waiting around for an ACH payment still can take days.

Imagine if connecting to the internet was only possible two times a day, and not on weekends.

Thankfully, after 40 years things are finally changing with the advent of Real-Time Payments (RTP). Here’s what you need to know about the radically new payments infrastructure.

What is RTP?

The Real-Time Payments (RTP) initiative was launched out of the need for quicker settlement times. A consortium of 24 banks called TCH (The Clearing House) launched RTP in 2017.

Intended to bring instant, irrevocable payments to its users, this initiative introduces an ISO 20022-based rail for real-time payment services to the U.S. market – a country that was late in adopting faster remittance solutions due to technological infrastructural and regulatory hurdles.

RTP is a way to transfer money directly to your bank account in seconds. Today nearly 70% of banks are enabled for RTP, but only 15% of transactions are done through it because banks charge a mark-up on the transaction. RTP is a push-only transaction, meaning that it’s risk-free. Unlike ACH, there’s no possibility for a return since transactions are bank-to-bank.

How does RTP work?

When a financial institution joins the faster payments network, it is responsible for posting collateral, known as Current Prefunded Positions (CPPs), which are charged to its end-of-day funding account. A sending financial institution’s current funding range determines how much CPP it needs and how much it can potentially send. If the amount sent is greater than the CPPs, the Real-Time Payment system rejects the payment. If the CPP is sufficient and all other checks are valid.

TCH is a settlement mechanism in the PPAC standard. The system allows for instant, irrevocable payments.

A payment using the Real-Time Payment is initiated when the sending financial institution sends the appropriate information for a payment to be made. For real-time ACH, this information is converted into an RTP message that is made ready for routing via the NACHA Operating Rules. The network then forwards the RTP message to the receiving financial institution where it is validated with respect to content and time stamp. Once the transaction has been validated, it is either accepted or rejected by the receiving financial institution.

For many financial institutions that have receive-only capabilities, it may be hard to fully engage in the benefits that RTP offers. This could also prevent FIs from getting the most out of their system.

What problems does RTP solve?

TCH was an early leader in creating a new payment rail, Real-Time Payments (RTP), which solves several major challenges businesses face when sending and receiving payments. Like ACH, RTP is a credit-push transaction; unlike ACH, however, RTP does not require the sending institution to prefund the account of the receiver with available funds. As such, TCH’s new payment rail has some important advantages over ACH.

By enabling banks to integrate real-time payment functionality into their existing systems, it allows businesses in the U.S. to optimize their cash flow and significantly reduce working capital needs. A July 2020 research study by MasterCard, “The State of Faster Payments in the U.S.,” revealed that three-quarters of SMBs in the U.S. want real-time payments and are increasingly sensitive to antiquated payment modalities such as ACH, checks and wire transfers.

This also enables account to account transfers, faster payments result in reduced operational costs and improved cash flow management.

Switching over to real-time payments (RTP)

The integration of real-time payments into the financial sector has been a standard for a while now. However, while FIs have been integrating with RTP, members of other sectors have demanded more and more use cases outside the financial sector.

Companies and individuals no longer have to worry about the hassle and cost associated with adding and reversing transactions after they’ve taken place. As soon as a transfer has been accepted by both FIs, they can rest assured that the transaction will go through—permanently.

RTP eliminates the risk of overdraft and returns fees as there are no ACH Debits or Credits, which is an exciting advancement in the industry.

Until recently, most payment rails in the U.S. worked with a batching system. This means that all payments for a given transaction are processed and settled in scheduled times during the day.

While there is value in this type of system, it incurs a time delay between the initiation and final settlement of payment. There is a chain of events that takes place during this time period. RTP works to make payments faster by eliminating these delays. Because the payment network in the United States was built around these batches (the ACH, Zelle systems), much of the core infrastructure supports this method of settlement.

Achieving faster payments requires strategic thinking. The potential value of the financial data that goes along with a payment needs to be weighed against proper technology and regulation.

While payments are a core function of a financial institution, organizations must think beyond the payment. In a digitally connected world, improving the ability to transfer data is key to success for any company.

What is the ISO 20022?

ISO 20022 is an international common standard that allows financial transactions and payment information to be standardized. This eliminates the problems associated with varying methods of data formats and transmission. Establishing a common format will help financial institutions instantly establish more efficient and streamlined interoperability, streamlining transaction information between international financial institutions, originators, and receivers of such data.

Adopting ISO 20022 will help facilitate richer, more consistent messaging and data transfer, lower administration and overhead burdens, and create a seamless and standardized global system to allow for further innovation and growth in the financial industry.

What are Challenges to adopting ISO 20022?

There are two ways an FI could adopt ISO 20022, by translating or converting. The main differences are that the former is significantly quicker, and FIs who are pressured by the global ISO timeline may be tempted to use the translation service. The other option is for FIs to choose not to translate, but rather upload their data into the ISO 20022 system itself. Most FIs use their core providers for the translation service.

The biggest challenge lies in prioritization — because of all the internal projects related to cloud migration, core modernization, and everything in between, adding another highly complex and time-intensive project in parallel is a problem.

Following The Present Technological Challenges, How Do FIs Implement RTP?

Basically, there are two prominent ways that an FI can use TCH RTP: Connecting directly to the TCH network or working with a payment processing company.

The integration of payment systems can be a complex process. You may need to flow through multiple rounds of testing before the implementation is complete.

According to the Federal Reserve Payments Study, roughly 75% of adults in the U.S. prefer faster debit card payments. However, many financial institutions have failed to integrate real-time payments into their offerings due to an insufficient understanding of the landscape or a general reluctance to embrace direct connect technology, despite consumer interest.

Education is a major inhibitor of real-time payments deployment

Despite massive investments in innovation, most banking websites remain stuck in early-internet user experience design. While the internet has evolved since the early days, payments innovations at FIs have been incremental, and often lack broad awareness by consumers and businesses.

FIs know that FedNow is on the roadmap

In spite of the fact that financial institutions are well-informed regarding the need for faster payments systems, most of them can’t easily launch new rails because of legacy infrastructure. And since this space is just a portion of a strategic roadmap for many organizations, customers will have to wait a long time before seeing a meaningful change in functionality.

Some FIs have been slow to participate in the Faster Payments initiative due to a mindset of conservatism, while others have been hesitant due to political problems with the Fed itself. A significant portion of the FIs are waiting for FedNow (the faster payments expansion launched by the Federal Reserve in 2024) because they already have relationships with the Federal Reserve.

Some ACH volume will get cannibalized by RTP

Regardless of one’s stance on the state of payments today, there is consensus: in the U.S. there is a movement towards faster payments and real-time clearing and settlement in the U.S.. This movement is driven by several factors; legislation has been passed to establish Federal Reserve oversight over new payment systems, Federal Reserve oversight has been established for ACH transactions, and Federal Reserve oversight is already in place for wire transfers that exceed $100,000.

As digital wallets are becoming more accepted within the mainstream, there are more ways to pay. Many consumers preferred to use technology instead of cash for paying one another. This push towards digital payments has led many banks to upgrade their ACH system to one that is faster and more comprehensive.

RTP and Fraud

Since RTP is low risk, it is not expected to have as many chargeback and fraud cases associated with current payment methods. The reason for this is that consumers first authenticate payments with their banks and every payment is approved in real-time using a banking app either on their bank’s website or on an app on their smartphones.

While this authentication process does contribute to payment friction at merchant checkouts, it doesn’t compare to the friction it does bode the question if more friction is to be expected at a properly implemented SCA or Strong Customer Authentication.

For example, if a customer has to first log into their banking app and then go through more 2FA processes, this could add more steps in the payment process compared to

If a consumer has logged into their bank account and then has to go through additional two-factor authentication to release the payment, this could be one or two steps more than, for example, an Apple Pay transaction.  Merchants want a frictionless checkout and a risk-based approach that enables smooth checkout and minimises abandoned shopping carts.

What are Current Infrastructure Challenges?

Most existing systems are not able to support RTP. First, the core FI needs to be compatible with real-time processes, which are different from current payment models, and second, the extraction of insights needs to be easily accomplished. Yet, this doesn’t mean there’s absolutely no way to innovate. In spite of this, Federal Institutions have found a way around solving both of these issues. Therefore, future innovation will probably occur on the orchestration layer instead of from the core layer.

While RTP itself is low risk, there are risks to be found during the integration process. For one, account takeovers, phishing and many other forms of fraud are widespread in the retail industry. These risks have been exacerbated during the pandemic-induced online migration of merchant services. Fraudsters now have more resources than they have ever had to conduct their attacks.

Studies have shown that over 15 billion consumers have their credentials circulating the dark web. These credentials are the results of massive data breaches at retailers and other financial entities. The movement to an online-based economy has forced merchants to battle two issues: first stopping nefarious actors from breaching their firewalls and collecting consumer data which then transferred to the open market. The second is preventing these actors from using personal data to infiltrate their system.

Failure or inability to tackle both fronts could result in dire consequences for not only the merchants but their customers and the entire retail industry.

What are ACH payments?

Now that we have examined RTP, we provide further context in its development against the backdrop of two other payment methods: ACH and Zelle.

The Automated Clearinghouse is a bank network to move money. The National Automated Clearinghouse Association creates and maintains the rules that regulate fund transfers between these banks. You may not realize this, but 80% of electronic payments are done through it.

The Automated Clearing House (ACH) payment type was invented in 1978 and is still growing today. Banks have since realized the need to improve the customer experience and lower costs of processing traditional ACH payments, which led Zelle and RTP to be rolled out in 2017 and 2018, respectively. These two rails aim to decrease the shortcomings of ACH by improving speed, transparency and providing better rates that result from increased competition among banks.

Today’s modern payment environments have been built with a variety of legacy systems built to handle a completely different generation of payments. These payment hubs have been deployed alongside core banking infrastructure, and while they work well for what they were originally designed to do, they have become outdated through the introduction of APIs and open-banking features.

Making the payment infrastructure more modern has been key to making RTP work, and it will be necessary for banks to invest in real-time capabilities. This modernization will make it easier for them to deal with global schemes, either batch-based or in real-time, in the future.

American consumers send over 25 billion ACH payments every year, which amounts to a total of $62 trillion in volume.

How does ACH Work?

The difference between credit and debit transactions for ACH is that a debit takes money out of your account and a credit puts money into your account. This makes a big difference in how risky it is to use ACH and why there's so much friction in the ACH payment rail.

ACH is a network between businesses which send and receive payments, called ODFIs  (Originating Depository Financial Institutions) and RDFIs (Receiving Depository Financial Institutions). Businesses that want to transfer money have to work with a bank that can serve as the source of the transfer, called an ODFI.

When someone makes an online transfer, there is a record that is generated. The ACH file format (or NACHA file) is a 94-character long record to execute domestic ACH payments through NACHA and the Federal Reserve.

ACH is a batch-based system, which means that NACHA establishes specific daily cutoffs to settle transactions. The first submission deadline is at 10:30 AM ET, with settlement occurring at 1:00 PM ET; the afternoon submission deadline is 2:45 PM ET  and 5:00 pm. If a payment doesn't fit into those time frames, it will be settled the next day.

The ACH transaction limitations: Error codes

The ACH network has shown various error codes, with the most common one being the Not Sufficient Funds or NSF error. This tends to happen when an ODFI attempts to get money from an RDFI without the originating account having enough funds to complete the transaction. When this happens, a reversal is initiated and ACH payments have a 60-day limit for reversal. There are over 80 error codes that could result in a reversal. Here is the full list of errors: List

However, we are focused on the limitations of the current financial infrastructure. These limitations step from the fact that the US payments market consists of a large volume of entities, ranging from major countrywide retail banks to local community banks.

The advent of the ACH in 1978 was supposed to create a much-improved payment service between banks. Nevertheless, there has been little update to the way the ACH works in today’s world. This has caused banks to begin to consider the need for reform. The motivation for this is to increase customer experience as well as lower the cost associated with traditional ACH payment processing.

2017 saw the introduction of RTP and Zelle, two rails built to overcome the weaknesses of the traditional ACH payments. The aim was to improve transparency, speed and offer much improved rates that fuel healthy competition between banks.

Fraud in ACH

The case for improving on ACH is a push versus pull matter, payments-wise. Push payments such as government disbursements or direct deposits are quite different from pull payments in multiple ways. For one, push payments are a lot less risky than pull payments.

Generally, pull payments which pull funds from an external account are more prone to fraud. When a case of fraud happens, the recipient’s account is credited by the ODFI, leaving it up to the RDFI to send either an NSF return code or fraud code when the funds are pulled from their bank accounts.

This process is one that numerous institutions are not aware of, and as a result, banks transfer the costs to their customers, charging millions of dollars in ACH return fees and overdraft fees.

Incompatibilities with ACH

The modern payments methods in use today have been created on the foundation of a host of legacy systems, ensuring that the new payment environments can suitably handle different types of payments. Contrary to popular belief, these payment structures have been created to function alongside traditional banking infrastructure. And while the traditional banking infrastructure works effectively in its original design, open banking features and APIs have rendered the infrastructure obsolete.

Push payments, like direct deposit or government disbursements, differ in several ways from pull payments, but let’s start with the most important difference. Push payments tend to be less risky than pull payments.

The majority of fraud originates from “pulling” funds from external accounts. In this case, the ODFI credits the recipient’s account and leaves it up to the RDFI to send a fraud or NSF return code when they pull funds from their bank account. This is a process that many institutions do not know about. As a result, millions of banks charge millions of customers millions of dollars in overdraft fees and ACH return fees.

In reaction to the growing need for faster payment solutions, companies such as Robinhood and Coinbase have tried to solve the issue of NSF by applying credit-scoring algorithms to individual customers. As a user, one might notice the availability of instantly tradable funds on these platforms, even though the money from their bank account does not clear until several days later. How does this happen? Robinhood essentially builds out internal models to determine NSF risk.  If the risk is quite low, Robinhood loans some money to them for the amount that it takes the company to retrieve the money from the owner's bank account.

Also, Chime offers a product called Direct Deposit Advance (DDA), which helps users receive access to their direct deposit two days before it appears in their bank account. Using DDA, customers can request a loan from Chime for up to the amount of the direct deposit and receive their funds within minutes of applying. With NACHA Fast Funds (FF) and real-time payments (RTP) this feature becomes faded.

Conclusion on ACH

The Automated Clearing House (ACH) network has been around since the 1970s, and is a fixture of how we move money across the country every day. It’s been modernized in recent years to allow people and businesses to carry out transactions online and through phone apps, but not in real-time. Zelle and TCH are seen as a response to this erosion of need for ACH.

What is Zelle and how does it work?

Zelle is a brand of the Early Warning Services Corporation, a corporation jointly owned by the largest 7 banks. Zelle is a peer-to-peer payment app that allows users to send microtransactions ($1,000 to $5,000).

Zelle has positioned itself as a peer-to-peer service and has been dedicating more resources to service small and medium-sized businesses (SMBs) and marketing faster payments with less reliance on checks. Approved for individuals who fall within their FI’s allowable range, Zelle facilitates improved cash flow and ease of use for SMBs. However, the vast majority of FIs have not implemented this for their users.

Zelle offers an instant payment option, which has been used to mimic real-time payments even though in reality, transactions actually settle via ACH in batches. In addition, Zelle has been a preamble to RTP – real-time gross settlement – which is a money rail.

Now that we have looked at the past and present status of the ACH and Zelle payments systems, this provides context for the emergence of real-time payments. Still many areas remain as RTP transitions into full scale use in the US.

How do I adopt Real-Time Payments (RTP)?

Since RTP traditionally integrates with banks and can be challenging to adopt into your business’ financial operations, Photon Commerce’s financial technology provides a suite of easy to use APIs for any business, small or large, to leverage the power of RTP.

Contact payments @ photoncommerce.com to learn about how you can get paid faster and schedule payments with precision down to the second.