Instant Payments: Revolutionizing the Future of Transaction Processing

Reflecting on the evolution of payment methods, we've come from the days of slow-processing checks to more rapid solutions like Automated Clearing House (ACH) and Same Day ACH. Now, the introduction of instant payment systems marks a new era of even faster payments.

Faster payment capabilities, like Zelle^®, have existed for a few years for consumers, but businesses haven’t had much access to this space until recently. In 2019, The Clearing House released the Real Time Payment Service^® which allows for instant transfers that settle within seconds, 24/7/365. Although this service alone didn't spark widespread adoption, the launch of The Federal Reserve’s FedNow^® Service in July 2023 will continue to significantly influence banks nationwide to embrace these networks.

The Impact to Businesses Across the Nation

An instant payment is a real-time, electronic transfer of funds between parties, completed within seconds, and available for immediate use by the recipient. The debiting of the payer’s account and crediting to the payee’s account provides immediate confirmation and finality of the transaction.

The primary advantage of instant payments is the accelerated processing time. Additionally, the service enhances communication through Request for Payment (RFP) capabilities and other ISO20022 messages (standard ISO message format for EDI between financial institutions). Businesses can send payment requests to other businesses indicating invoice number, amount due, payment terms, payment due date and other payment elements, if the receiver and their financial institution are also connected to the network(s). That receiver can review and respond to that request with a credit transfer to pay the invoice. In turn, while credit transfers are certainly the primary highlight of the service, there are a lot of additional non-monetary capabilities like RFP and other message types that'll allow for streamlined invoicing and payment administration.

The Future of Your Payments

As a business, one might be wondering what is going to happen to check, ACH, wire, card or other payment channels utilized today to support accounts payable? The good news is that these options aren’t going away. Businesses can take inventory of their payables mix today and see where instant payments might best fit. Each option offers unique properties in terms of speed, revocability and cost.

Businesses of all sizes can leverage instant payments in multiple ways, including paying suppliers and vendors, expense reimbursements, emergency payroll, tax payments, earned-wage access, incentives and bonuses, cash concentration and refunds. Whether they’re a large manufacturing corporation paying a supplier for an inventory replenishment or a small bar paying a musician for performing a gig at their establishment, the possibilities are endless for businesses to participate.

Barriers to Ubiquity

Despite the release of the FedNow^® Service in July 2023, there's still a long way to go before instant payments achieve widespread adoption. One primary barrier is the pace of adoption. Implementing these services comes at a cost and requires a fair amount of resources and planning, both internally and with external technology providers. With 10,000+ financial institutions operating in the U.S., it may take a few years for all institutions to join these networks. The Federal Reserve does expect 100% participation in the FedNow^® Service, but again, it might take a few years to achieve that goal. A sender can only send an instant payment to a receiver who banks at an institution that's also connected to the network. Therefore, the quicker that financial institutions prioritize participation, the sooner instant payment ubiquity can be reached.

Considerations for Businesses

1. Understand FedNow’s Features

• • Educate yourself and your team with the features of the FedNow^® service and identify relevant use cases for your business. Consider how instant payments may differ from traditional methods, such as faster processing times and 24/7 availability.

2. Assess Current Infrastructure

• • Evaluate your existing payables and receivables processing and technology infrastructure. Determine if any upgrades or changes are needed to support real-time payments effectively.

3. Work to Update Payment Processes 

• • Review and update payment processes and systems to handle instant payments efficiently. This may involve working with your ERP providers to support reconciliation needs. 

4. Compliance and Security 

• • Ensure internal controls are built around accepting and processing instant payments. Establish procedures for obtaining payment instructions before sending out payments. 

Connect with a Treasury Management Consultant on how you can get started, or to answer any questions. For additional information, visit our Instant Payments page.

ABOUT THE AUTHOR

Tony Domanico

AVP Product Solutions Manager | Johnson Financial Group

Tony Domanico serves as the AVP Product Solutions Manager. He has extensive banking experience, ranging from treasury management to business applications. Tony began his banking career at Johnson Financial Group in 2017.