Innovation

Faster Payments Doesn’t Mean Real-Time Payments

By: Lou Grilli, Senior Innovation Strategist, PSCU

The term “faster payments” is popping up more frequently – not just in payments-specific trade publications, but in the mainstream media as well – as discussions focus on the need to send money to consumers and businesses directly, accurately and quickly in the digital age. Frequently, this term is used interchangeably with “real-time payments” or “immediate payments.” However, there are not-so-subtle differences between these terms and the payment systems they represent, which are important when it comes to credit union members receiving and spending money in their accounts, as well as how much it costs the member to send a payment and the potential for fraud.

Some payment forms that look like they take place in real-time are not always what they appear. Here are some basic guidelines for real-time and faster payments terminology:

  • Real-time payments (RTP) has a very specific meaning. Some of the words associated with real-time payments are “finality,” “irrevocable” and “milliseconds.” The settlement of a real-time payment transaction (moving the money from the sender’s account to the recipient’s account) happens at the same time as the payment authorization. Both occur within milliseconds after the payment is approved. The payment then cannot be stopped or reversed once it’s approved. The Clearing House’s RTP network, as well as the Federal Reserve Board’s FedNow, closely mirror the RTP definition. One use case for RTP is to replace wire transfers for big purchases such as a car or boat – however, RTP has a maximum of $100,000 which limits its applicability for real estate closings. Other uses include paying a gig economy worker (e.g. an Uber Eats delivery driver) at the end of their shift, or a B2B transaction for supplies and services.
  • The Automated Clearing House’s (ACH) Same Day ACH faster payments network literally connects to every debit account in the U.S. Many people rely on this network for their direct deposit paychecks and online bill-pay transactions. Standard ACH transactions take 2-3 days from request and authorization to settlement. A few years ago, ACH added the ability for settlement to occur on the same day as the authorization. Taking a few hours instead of a few days is certainly faster – although this technically is not a real-time payment. Insurance companies are taking advantage of Same Day ACH to send disbursements out to settle a claim, a use case that has become more relevant now that the maximum Same Day ACH payment amount has increased to $250,000.
  • Another faster payments format has many names: debit push payments, push-to-card payments and Originating Credit Transactions (OCT). They all mean using a debit card “in reverse.” Instead of making a payment using a debit card, which pulls funds from a checking account, the payment is pushed directly into the cardholder’s checking account using their debit card number. If you’ve ever moved money from your Venmo, Apple Cash, Google Pay or PayPal account and chose the express option or Pay-Me-Now feature for an extra charge, you were likely using this faster payments format without realizing it.
  • Person-to-person (P2) payments, which have seen a surge since March, are for many consumers the first exposure to what they perceive as a real-time payment. The P2P app delivers an immediate notification to both the sender and the recipient, which gives the impression of a real-time payment. However, moving the actual funds from the sender’s account to the recipient’s account, and making those funds available for the recipient to spend elsewhere, can take hours to days, depending on how the P2P app moves money. Some P2P apps are planning to move transactions onto a true real-time payments network, so this may change over time.

Many use cases can be applied across several faster payments formats. Payroll still dominates standard ACH, but some payroll transactions, such as catch-up payments, have moved to RTP and some to debit push payments. Business disbursements to consumers, including rebates, are capitalizing on Same Day ACH and debit push. Each payment method has different costs and, in some cases, the decision of which method to use is based on what information is available to the sender. ACH and RTP require an account number, debit push payments require knowing the debit card number, and P2P only requires an email address or phone number. The decision may also be based on how fast the funds need to be made available to the recipient (milliseconds, minutes, hours or days). These are all varying degrees of faster payments – but don’t confuse real-time with faster.

Lou Grilli is a senior innovation strategist at PSCU, tasked with building and shaping a superior payment and member experience capability for PSCU and its Owner credit unions. Grilli’s long career in payments includes product management, product development and thought leadership in credit, debit, loyalty, mobile payments and digital wallets. He has spent the last six years in roles dedicated to the credit union industry.