FedNow & RTP: Understanding Instance Payments in the US | Dwolla

Instant payments elevate the customer experience by replacing traditional payment methods, like paper checks and manual ACH, with nearly immediate transactions. 

In this blog, we'll explore the fundamentals of instant payments and how they digitally transform consumer and business payments.

What are Real-Time Payments?

Real-Time Payments (RTP) are account-to-account transactions that clear and settle near instantaneously. RTP transactions are credit-only transfers, meaning they can be used to send funds but not debit or pull funds from someone else’s account. The transactions also support extensive remittance data that can be used to reconcile funds efficiently, and since the transactions settle within seconds, all transfers are final.

These real-time transfers are sent via The Clearing House’s RTP® network, which was launched in November 2017. The RTP network’s capabilities have grown in recent years and are now accessible to financial institutions (FIs) that hold close to 90% of U.S. demand deposit accounts. As RTP continues to gain adoption among U.S. FIs, businesses, and consumers, it's poised to become the industry leader for instant and secure money transfers.

What is FedNow?

The FedNow® Service is an instant payment system created by the Federal Reserve that enables banks and credit unions to offer their customers the ability to send and receive payments in near real-time, 24 hours a day, seven days a week, 365 days a year. FedNow launched in July 2023.

Various banks and credit unions of all sizes across the United States currently offer the FedNow Service. The FedNow Service website continuously updates its list of participating FIs.

What is a Request for Payment (RFP)?

Request for Payment (RFP) is an emerging feature within the world of instant payments that introduces a unique twist. Unlike traditional instant payments where the sender initiates the transfer, RFP empowers the recipient.

Imagine a scenario where a business sends an electronic invoice directly to your mobile banking app. Through RFP, you, the customer, can review the invoice details and instantly approve the payment within the app itself. This eliminates the need for manual bill entry and ensures more accuracy through real-time data exchange between FIs.

This shift towards "pull" transactions holds immense potential. Businesses can benefit from faster payments and improved cash flow. Simplified bill payments and early payment discounts make consumer experiences more convenient and potentially rewarding. Additionally, RFP opens doors for innovative payment models like subscription services with automatic recurring payments and instant micro-transactions.

However, widespread adoption requires overcoming obstacles. Limited functionality by FIs and the lack of industry-wide standardization pose challenges. The development of robust frameworks is necessary to mitigate potential fraud risks in "pull" transactions. It remains to be seen how quickly the industry will be able to overcome those obstacles and allow businesses and consumers to take advantage of RFP use cases.

Instant Payments Adoption in the United States

Instant payments in the United States are experiencing a surge in adoption. A U.S. Bank study revealed that over 40% of companies exceeding $100 million in revenue already leverage The Clearing House's RTP network for instant transactions. This positive trend is further bolstered by forecasts indicating that nearly 70% of businesses anticipate adopting instant payments through RTP or the FedNow Service within the next two years.

Consumer preference plays a significant role in driving this shift.  Research by PYMNTS Intelligence demonstrates that a staggering 72% of consumers opted for instant disbursements when offered.

A key piece of instant payments adoption, however, is FI adoption of the two instant payment rails. The RTP network currently has 550+ FIs participating, and the FedNow Service has 650+ FIs participating. For instant payments to reach true ubiquity in the United States, The Clearing House and the Federal Reserve will need to continue encouraging adoption among FIs and work toward interoperability between their two systems – something that doesn’t exist today.

Businesses are recognizing the potential of instant payments to enhance customer satisfaction and improve cash flow through faster transactions. While challenges still persist, the combined force of consumer preference and the inherent benefits of instant payments is creating a compelling scenario for continued growth in adoption within the US enterprise landscape.

How can enterprises use instant payments to gain a competitive edge

1. Faster Payments: Businesses can utilize instant payments to send and receive payments, allowing quicker access to funds, improved cash flow management, and faster fulfillment of orders. This can be particularly beneficial for:
   
   • Claim payouts: Traditional claim processing can take days or weeks, leaving policyholders waiting for crucial funds for repairs or replacements.
   • Instant payments allow insurers to disburse funds immediately, providing faster financial relief and improved customer satisfaction.
   • Gig economy payments: Independent contractors or freelancers can be compensated instantly upon completing tasks, improving their financial well-being.
     Merchant settlements: Businesses can receive payments for goods and services rendered from customers immediately, eliminating delays and facilitating faster access to revenue.
     
     
2. Streamlined Operations: The extensive remittance data accompanying each instant payment transaction helps businesses automate reconciliation processes and gain valuable insights into payment flows. This saves time and resources and allows for better financial management and decision-making.
3. Enhanced Customer Experience: Businesses offering instant payment options can provide customers with a faster, more convenient checkout experience, potentially increasing customer satisfaction and loyalty.
4. Increased Flexibility: The RTP Network and the FedNow Service operate 24/7/365, enabling businesses to conduct transactions outside traditional business hours and cater to customers in different time zones or with flexible schedules.
5. New Business Models: The speed and security of instant payments can facilitate the development of innovative business models, unlocking new revenue streams and opportunities.
6. Improved Buyer-Supplier Relationships: Instant payments can help build trust with suppliers, improve their cash flow and unlock discounts for buyers, fostering stronger partnerships and a smoother-running supply chain.

Dwolla’s single API gives enterprises access to the RTP network and the FedNow Service, enabling faster, more secure and streamlined A2A payments.

Ready to get started? Schedule a consultation with a payments expert.