Unlock Your Potential: How Instant Payments Can Power Innovation
- What are Account-to-Account (A2A) Payments?
- What are ACH Payments?
- What are Instant Payments?
- What are Real-Time Payments?
- What is FedNow?
- What is a Instant Payments API?
- What are the Benefits of Instant Payments?
- How Do Instant Payments Power Innovation?
- What are Instant Payments Use Cases?
- What Should My Business Consider Before Adopting Instant Payments?
- The Future of Instant Payments
The future of payments innovation is steadily headed toward cashless interactions that happen almost instantly. According to an analysis by PwC and Strategy, cashless payment volumes are set to increase by more than 80% globally from 2020 to 2025. This means that by 2030, the number of cashless payments will double or even triple the current level across regions.
In addition, consumer preferences for seamless payment experiences increasingly favor mobile payments conducted through digital wallet transactions. This shift toward instant electronic payments opens up a wide range of possibilities for businesses and consumers, extending the scope of preferred payment methods available across industries.
Despite the uptick in digital payments and the dissatisfaction with card processing fees, many companies continue to accept only the “Big Three” payment types—cash, card, and check.
Fortunately, transferring funds is becoming much easier and safer for business and consumer payments thanks to account-to-account (A2A) payment processing platforms.
What are Account-to-Account (A2A) Payments?
A2A payments are pay-by-bank transfers involving the movement of funds between bank accounts at financial institutions. ACH transfers, real-time payments, and FedNow are three types of A2A transactions (also known as pay by bank).
What are ACH Payments?
Under the ACH (Automated Clearing House) umbrella, bank-to-bank transfers are processed reliably via the ACH Network. With a typical ACH transaction, funds can take 1-5 days before they are available to the recipient after a transfer is initiated. For those who need faster speeds, Same Day ACH allows a credit to or debit from a bank account to settle within the same business day.
In the second quarter of 2024, the ACH Network handled 8.3 billion ACH payments valued at $21.6 trillion, with 292.3 million of those Same Day payments valued at $803.3 billion.
What are Instant Payments?
Instant payments refer to electronic fund transfers that occur in real time, typically within seconds. This contrasts with traditional payment methods, such as checks or ACH transfers, which can take several days to clear.
Two primary instant payment systems in the United States are:
- RTP® (The Clearing House Real-Time Payments network): Operated by The Clearing House, RTP has been a pioneer in the instant payments space.
- FedNow® Service: Launched by the Federal Reserve, FedNow offers an instant payment service accessible to a wider range of financial institutions.
Both systems enable faster, more efficient transactions, benefiting individuals and businesses alike by allowing them to send and receive funds within seconds, 24/7, and 365 days a year.
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What are Real-Time Payments?
The Clearing House introduced the RTP network in 2017 to bring instant payments to the United States, and RTP continues to grow in popularity. In fact, the RTP network broke instant payments records in the second quarter of 2024, processing 82 million transactions valued at $55 billion.
What is FedNow?
The FedNow Service is an instant payment service developed by the Federal Reserve. It allows financial institutions to offer instant payment services to their customers. Since its launch in July 2023, more than 900 banks and credit unions have signed up for FedNow.
What is an Instant Payments API?
APIs are the language that connects today's account-to-account payments. They reduce technical and operational costs, enabling business owners to focus on their core product or service. Through a payments API, innovators can access the global financial system using an intuitive interface and minimal lines of code to communicate instructions.
Juniper Research currently estimates total banking-as-a-service platform revenue is valued at $36.4 billion in 2024. This market is expected to grow 158% by 2028 to reach $94 billion in revenue. Payments APIs help to facilitate this growth, bridging gaps to provide businesses with payment processing options and efficiency they wouldn't have access to otherwise.
Through APIs, businesses can tap into the RTP network and FedNow Service to enable instant payments that provide more integrated consumer experiences.
Payments APIs also help facilitate a better overall experience, making business payment processing more efficient and flexible without each business building the infrastructure from scratch. As a result, businesses can reduce the time it takes to launch a product or service and realize revenue more quickly. Now that customers demand near-immediate gratification, payments APIs allow companies to adopt a fast and global approach.
In addition to market agility, payment APIs are future-proofing tools. Every business that wants to grow and continue transacting in the digital world needs to provide fast and secure payment processing. APIs help businesses stay current with the payment landscape as it changes and maximize the interoperability of the global financial system.
What are the Benefits of Instant Payments?
Unlike standard ACH payments, which typically take 1-5 business days to process, instant payments offer immediate (within seconds) access to funds. This increased speed, combined with the ability to process payments anytime, provides numerous benefits for both consumers and businesses.
Benefits of RTP and FedNow include:
- Fast Settlement: Users' transactions move at the same fast-paced speed they're used to from other tech rather than facing multi-day delays.
- Improved Cash Flow: Businesses can improve their cash flow by more easily collecting payments from customers and suppliers, which can be especially helpful for businesses that operate in industries where timely payments are critical, such as e-commerce or the gig economy.
- Improved Liquidity Management: Instant payments give businesses a more accurate view of their cash flow so they can make better decisions about how to allocate their resources.
- Enhanced Customer Experience: Instant payments can be a more convenient and efficient way to make payments. For example, users can instantly pay for goods or services online or send money to friends or family members.
- Increased Transparency: Transactions can be attached to detailed remittance data using the more complex data standard, which can help businesses track and reconcile payments more easily.
How Do Instant Payments Power Innovation?
In today's market, customers demand quick, effortless and smooth transactions, and failure to meet their expectations means lost business. Account-to-account payments and, more specifically, instant payments, have emerged as an incredible opportunity for companies to streamline the customer journey, boost customer satisfaction, and gain a competitive edge.
Each network offers its own advantages, from higher transaction limits to the irrevocability of funds. The RTP network and FedNow Service empower businesses to send and receive payments within seconds, giving payees almost immediate access to the funds.
With the help of payments APIs, more instant payments means more instant data about those payments. Addenda records, correlation IDs, and webhooks serve as a catalyst for innovation in payments.
- Addenda records provide additional context to a payment, which can be helpful for both payers and payees. They can help to ensure that the payment is processed correctly and that the funds are allocated in a timely manner. For example, an addenda record could be used to specify the purpose of a payment, the date of a transaction, or the recipient's contact information.
- Correlation IDs are designed as a beacon of truth throughout the payment lifecycle. This ID can be tailored to suit the businesses’ preferences and system requirements. It can be an invoice number, order confirmation, business ID, or a universally unique identifier (UUID) – whatever value will best help the business track it through the process and eventually reconcile it in their other systems. Businesses assign a correlation ID when they initiate a payment. Then, much like a courier service tracking number for parcels, the correlation ID serves as a unique identifier that allows for seamless and automatic tracing of a payment’s journey.
- Webhooks deliver real-time updates on payment events, enabling businesses to create dynamic and responsive applications. From instant notifications of payment approvals or failures to triggering automated actions based on specific payment statuses, webhooks empower businesses to optimize workflows and enhance customer experiences. Additionally, they help facilitate the development of new payment products and services, such as subscription management, recurring payments, and payment orchestration platforms.
With access to the right data, businesses can find deeper insights into their finances, identify transaction trends, spot and manage suspicious activity, and discover strategic growth opportunities. This more comprehensive data picture allows businesses to run their operations more efficiently and generate a more manageable cash flow.
What are Instant Payments Use Cases?
The best part about the potential of any innovative technology is putting it in the hands of innovators and seeing what they come up with. By now, the fear of the unknown has faded, and many business leaders are ready to dive into the world of instant payments.
These use cases from multiple industries demonstrate the potential with digital payments.
- Buy Now Pay Later (BNPL): Empower customers with on-demand purchasing power while disrupting traditional card networks using instant BNPL. For businesses, it boosts sales, improves cash flow, reduces risk, enhances customer experience, and attracts new customers.
- Insurance: Accelerate claims processing with instant insurance payouts directly to policyholders' bank accounts. Eliminating the delays associated with paper checks also enhances customer satisfaction.
- Supply Chain: Revolutionize supplier payments with instant disbursements. By bypassing the check deposit process, businesses can optimize cash flow and strengthen supplier relationships.
- Real Estate: Streamline real estate transactions with instant fund transfers. From earnest money deposits to closing day disbursements, instant payments create a seamless and efficient process.
- Healthcare Use Case: Modernize healthcare payments with instant claims reimbursement. Reduce administrative costs and improve patient experiences by eliminating the need for paper checks.
Whatever your payment processes need for your business to succeed, payment APIs can help.
What Should My Business Consider Before Adopting Instant Payments?
Businesses ready to adopt instant payments must remember that they need to overcome customers' long-standing hesitancy to provide their account information to businesses. Consumers' concerns about sharing their information in combination with banks' siloed processes have contributed to the dominance of other payment methods in the U.S. Businesses need consistent consumer data to offer better products, requiring more trust and account transparency from account holders.
Enter open banking.
Open banking gives data providers and technology companies access to the data once held only by financial institutions—with the user's permission. Consumers are more aware than ever of the possibilities and the value their data can unlock. With open banking, they can regain control over their data from banks and turn it into usable information.
Globally, open banking transactions are on the rise, with the number of open banking API calls projected to increase from 102 billion in 2023 to 580 billion in 2027. Estimates also predict the value of open banking transactions will grow from $57 billion to $330 billion during the same period, an increase of more than 500%. Increased access to data, however, naturally raises concerns regarding security and privacy. With instant payments, businesses must use threat sharing to help manage these concerns. Threat sharing is when data and payment service providers collaborate to check suspicious activity across multiple places at once. Sensitive data like IP addresses, email accounts or other identifiable information is checked within seconds across a variety of systems, with a verification decision made through automation and sophisticated threat modeling.
Open banking allows consumers to give their financial institutions and fintech service providers permission to share information. Advanced payment solution providers can provide support by using their information sources to enhance the detection and prevention of fraud.
The Future of Faster Payments
Businesses should consider investing in account-to-account payment technology today. As the payments industry evolves, consumers will become more discerning and demanding about how their data is used, how their payments are made, and the time it takes for a transaction to process. The businesses that provide fast and seamless payment processing options through payments APIs are the ones that will gain the upper hand in the marketplace.
Payments solutions like those offered by Dwolla are speeding up transactions to match our fast-paced digital world. Want to learn more about how your company can enable account-to-account and instant payment options? Let’s talk.
