What Is an Instant Payment?

By definition, an instant payment enables the payment originator and the recipient to message and settle a transaction in real-time (within seconds) in their respective accounts. This enables the recipient to use the funds immediately.

Instant payments are also final; there is no settlement delay between the payment message and final settlement, nor can the payment be reversed by the sender.

In addition, payments can be sent, received, and settled 24 hours a day, seven days a week.

It’s also important to understand what an instant payment is not. Applications like Venmo® or Zelle® enable individuals to send payment messages. Such applications have mainly used the ACH or debit payment rails to settle transactions. Although the messaging of the payment transaction is instant in these cases, the settlement of the funds is not as fast as instant.

The instant payment rail — FedNowSM and RTP® — is an entirely new payment rail that settles the transaction between financial institutions as fast as messaging occurs. Applications such as Venmo, Zelle, treasury management systems, and payment applications will plug into the instant payment rails similar to plugging into Fedwire, ACH, and debit payment rails.

What Are the Options?

At this time, there are two instant payment networks that bankers should consider when planning for instant payments.

FedNow Contrasted with Real Time Payments (RTP)

The FedNow Service, the offering from the Federal Reserve Bank, is scheduled to go live late in the second quarter or early third quarter of 2023. It is accessed and managed in much the same way in which banks access the Fedwire and FedACH systems. Your customers could use your payment platforms to initiate payment messages that flow through this network to the receiver while settling the transaction between the sender/receiver financial institution’s fed accounts or correspondent accounts.

The RTP network, offered via The Clearing House (a consortium of the largest U.S. banks), is live today. It has gained good adoption by large banks and some community banks, but many community banks are waiting for the FedNow Service. The question of whether the RTP and FedNow networks will communicate with each other has not yet been settled. For this reason, you might want to consider adopting both, depending on how your customers’ needs develop.

The RTP network operates similarly to the FedNow Service in that messages are sent between sender and receiver while settlement instructions are passed through the network.

The settlement takes place in a jointly owned account at the New York FRB between participating financial institutions.

Who Should You Talk To?

Given the requirements of instant payments, you will need to discuss the FedNow Service and RTP network with various service providers to learn where they are in the process of allowing you to join instant payment networks. The first two priorities are 1) your core system for sending and receiving messages and 2) your settlement agent for settling the payments.

Your core provider
Instant payment networks need to confirm availability at your customers’ account levels as part of their process, among other items. In most cases, this means your core provider must be involved on a real-time 24/7 basis.

Questions for your core provider include:

• What options and functionality will they offer to process messages/transactions?
• Are they ready now?
• What is the timing, from start to finish, on rolling this product out to your customer base?
• What agreements are needed to begin the process? (Allow time for reviewing agreements with your legal team.)
• What are they offering as a fraud/risk solution for faster payments? Provide potential use cases that may prove beneficial for your customer base. For instance, A2A, P2P, B2B, B2C, C2B, G2C, C2G, and so on.

Your correspondent or FRB
Settlement of payment activity is what a correspondent like BBW can do for you on either network. Much as you have done for wires, ACH, cash letters, and other services, you can set up your instant payment settlement to settle in your BBW account. If you choose to send payments, we can provide liquidity 24/7/365 to ensure your customer payments continue to flow.

Your payment application providers
Apart from your core system and settlement agent (correspondent), you may have various payment applications your customers are using. These make up another set of providers you might need to spend time with, depending on your infrastructure. Here is one that comes to mind:

Mobile banking (applications used for end users)

• • What have they done to prepare connections to the faster payment networks? Talk through the potential use cases needed for your customer base.

Other vendors to reach out to include your online banking and P2P providers.