RTP has major commercial applications in payroll, utility bill payment, insurance and even retail payments to name a few. With instant funds settlement, it has the potential to improve the payments experience and reduce transaction risk.
Currently, 25 banks in the US support either receiving or sending RTP.
History of RTP
RTP was first launched in 2017 and is the newest electronic bank payment method available today. The network is managed by The Clearing House, a membership organization owned by all the major US banks. It was the first new payment rail to be launched in the US in the last 40 years. Any federally insured depository institution can join the RTP network. They don't need to be a member of The Clearing House.
The RTP network was created to address the shortcomings of ACH and Wire Transfer. ACH takes at least one business day to move funds (although same-day ACH can move funds on the same business day), creating risk and uncertainty for all parties in a transaction. Banks and companies need to withhold funds for longer to offset this risk, making money movement costlier and more expensive. Wire Transfers are faster, taking anywhere from a few minutes to a few hours to complete. But they are also more expensive, costing as much as $50 per transaction.
RTP increases the speed of bank transfers in a cost-effective manner, reduces transaction risk by eliminating payment reversals and returns, and supports attaching richer context on payments.
How do RTP payments work?
Unlike ACH, RTP only supports credit or 'push' payments. You can not 'pull' or debit another bank account using RTP. Since it enables instant funds transfer, all payments are final when completed and cannot be reversed. This also eliminates payment failures due to insufficient funds, which is a common occurrence in ACH. For example, if an insurance company debits a customers bank account for a premium payment and their account doesn't have enough funds, their bank can refuse the payment. Since RTP is credit only, there is no risk of payments failing due to insufficient funds.
It also allows for more data to be attached to each payment. For example, a marketplace like AirBnB could include details about the reservation like duration and reservation ID on payments made to hosts, or an accounts payable solution could include the invoice number on payments sent.
RTP is also available year round unlike ACH and Wire Transfers which don't operate on weekends, bank holidays and outside business hours. Since they process payments in batches, you need to keep track of the cut-off time for your bank to know when your payment will be processed. Most banks have different cut-off times.
All RTP payments are processed by The Clearing House. When you pay your utility bill for the month using RTP, your bank sends message to network which includes the details of the payment. The Clearing House then processes the message and routes it to utility company's bank, completing the payment. RTP uses the ISO-20022 standard for the messages used to initiate payments and retrieve transaction status.
There are some drawbacks to RTP since it's a new system. There's a limit of $100,000 per transaction, up from $25,000 when the network first launched. This will continue to increase as the network matures. Also, a much larger number of banks support ACH and Wire Transfers compared to RTP.
How does RTP compare to other payment methods?
When comparing payment methods, you need to consider their speed, cost and coverage. Speed is typically measured by settlement time, or how long it takes for funds to move from the originating account to the receiving account. Cost is measured per payment and coverage refers to how many banks and financial institutions in the US support the payment method. The direction supported by the method is also important.
Note that the costs per payment for each method are in approximate ranges. In practice, they vary significantly depending on your bank, transaction volume, average transaction size and other factors.