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Instant Payments to Spark Changes and Challenges for Other Payment Options

Sam Aarons, Co-Founder and CTO of Modern Treasury, discusses the impact of instant payments.

The U.S. lags the rest of the world when it comes to widely available, real-time bank payment systems, in part because the U.S. has some of the oldest, most reliable electronic payment systems in the world.

But like Netflix and Amazon conditioned consumers to expect on-demand entertainment and commerce, Zelle and Venmo have conditioned consumers to expect instant payments. As consumers become even more educated about instant payments, companies will investigate real-time payment options for products and services.

Impact to other payment rails

The U.S. now has the five-year-old Real-Time Payment (RTP) network, which was the first new payment rail in the U.S. in four decades. US Bank research finds that 38% of companies already use RTP and 56% will by 2024.

Real-time payments will get a big boost when FedNow, backed by the Federal Reserve, launches later this year. FedNow is expected to draw even more banks, including regional ones, into the real-time payment era because it will be a less costly option than the existing RTP network.

While real-time payment networks enable instant payments 24/7/365, don’t look for them to totally replace other payment rails, which have long proved exceptionally resilient. Wires, for instance, originated with the telegraph era. The first checks emerged in the U.S. at the end of the 17th century. What’s more, new payment rails take awhile to build momentum. Even major credit cards took more than a decade to go mainstream.

Regardless, the greater availability of instant payment rails will impact existing payment rails, including:

  • ACH. Automated Clearing House, or ACH, is a network for processing electronic payments. ACH is the most cost-effective alternative to checks and credit cards. However, funds take one or more days to clear. That makes ACH a great option when speed doesn’t matter, such as when making monthly mortgage payments. Look for a shift from ACH, and even same-day ACH, to real-time options when instant payment matters, such as when paying a contractor for new appliances to make sure they get installed.
  • Smaller wire transfers. Wire transfers, which settle in minutes or hours, will continue as the preferred payment method for large sum transactions, such as real estate dealings, that cannot be rescinded and require verification. Real-time payment options may replace some smaller sum wire transfers because they will be more cost effective.
  • Credit cards. The majority of retail, and a significant amount of business transactions, have been captured by card networks given their broad coverage and convenience. But cards also come with fees. That makes them vulnerable to other payment options. Consumers might shift to paying monthly bills via real-time payment options, for example. Enterprises, too, might find advantages to using real-time payment networks vs. credit cards with merchants wanting to avoid credit card fees.
  • Paper checks. Every new payment option hastens the decline of paper checks, which can take days to settle. Look for paper checks to remain standard in several huge categories, such as payroll or government disbursements. However, even these are being chipped away. The growth of “on-demand pay,” which means workers can access earned wages before their typical payday, is shifting more payroll electronic. In the case of emergencies, the government may want to disburse funds instantly, too.

Growth of instant payments

While instant payments may seem new, they’re not. Real-time payments now live in 60 countries, FIS calculates. The Global Payments Report notes that almost three-quarters of the world’s population have—or will soon have—access to instant payments. Europe and the Asia Pacific lead the way.

“Once touted as primarily focused on consumer and retail use cases, real-time payments are increasingly targeting business and corporate applications,” the report notes.

As has long been the case, different payment rails work best for different use cases. Instant payments will find a home among a broader range of U.S. consumers and businesses as availability spreads.

As they do, faster, easier money movement will lead to better economic connections and payments embedded into more products and services.

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