The Evolution of Real-Time Payments (RTP)

The Evolution of Real Time Payments (RTP), it’s time Local went Global with new Cross-Border processes??

The Global Payments Market:

The global payments market has been experiencing significant growth, reaching $2.2 trillion in revenues in 2022, an all-time high with an 11% increase from the previous year.

B2B transactions made up 97% of the ~$156 trillion in cross-border payment flows in 2023, took 2-5 days to settle at an average cost of 6.2%. In Brazil and India, Real Time Payments (RTP) has decreased settlement times to seconds and costs by 50-90%.

When one considers that domestic payments cost anywhere between 30bp and 300bp depending on the payment rails used (ACH or card), and international payments costs (excluding foreign exchange fees) range from 65bp to 450bp, there is a significant profit pool to be disrupted ??

Real Time Payments (RTP):

Real-time payments are account-to-account (A2A) financial transactions that are initiated, cleared, and settled usually within seconds. These transactions run on RTP networks designed by central and commercial banks to offer faster and cheaper payment solutions, bypassing traditional payment infrastructure like cash, checks, ACH, wire transfers, and cards.

Benefits of Real-Time Payments:

?? Lower Costs — Reduction or elimination of interchange fees.

?? Increased Security — Enhanced security through bi-directional communication, multi-factor authentication, and device binding.

?? Reduced Fraud Risk — Conformance to ISO20022 standards enables data-rich transactions, reducing fraud.

?? Greater Financial Visibility — Better visibility into financial positions, reducing overdraft risks.

?? Improved Cash Flow Management — Faster refunds and disbursements.

?? Value-Added Services — Opportunities for QR payments, split payments, and request-to-pay options.

How Real-Time Payments (RTP) Work in a Cross-Border Transaction (i.e. U.S. -> Brazil) ??

1. Company A initiates a payment, sending a message to its Financial Institution via its banking app or online banking platform.
2. The sender’s FI submits a payment message to the FedNow service (ISO20022 messaging format).
3. FedNow validates the message, verifying it meets the required format specifications.
4. FedNow sends the payment message to the PIX network.
5. PIX validates the message, verifying it meets the required format specifications.
6. PIX sends the contents of the message to the receiver's FI to seek confirmation that it intends to accept the message.
7. The receiver's FI sends a positive response to PIX, confirming that it intends to accept the payment.
8. PIX sends the same correspondence to FedNow.
9. FedNow and PIX will debit and credit the designated master accounts of the sender’s and receiver’s FI.
10. Outside of the FedNow/PIX services the receiver’s FI credits the receiver’s account and sender’s FI debits the sender’s account.

Players in the Real Time Payments Landscape:

Banks and Central Banks:

• Central Banks: They are instrumental in setting up and regulating RTP networks. For instance, the U.S. Federal Reserve has launched FedNow, and the European Central Bank (ECB) operates the 塔吉特百货 Instant Payment Settlement (TIPS) system.

Infrastructure Providers

• ACI Worldwide : Provides the necessary back-end technology for connecting banks to RTP networks and facilitating transactions.
• FIS : Offers RTP solutions that help financial institutions connect to RTP networks and manage real-time transactions.
• Fiserv : A key player in providing RTP infrastructure, enabling banks and financial institutions to participate in RTP networks.
• Jack Henry : Focuses on connecting smaller and mid-sized financial institutions to RTP networks.

RTP Networks

• TCH’s RTP Network (U.S.): One of the key RTP networks in the U.S., facilitating real-time payments for various banks.
• Zelle (U.S.): A widely used P2P real-time payment application owned by a consortium of major U.S. banks.
• UPI (India): India’s Unified Payments Interface, a major RTP network that has revolutionized payments in India.
• PIX (Brazil): Brazil’s instant payment system, driving RTP adoption in the country.

Primary Services

• Payment Processing: Companies like Square and Stripe offer RTP-enabled payment processing solutions, integrating with various RTP networks to provide instant payment capabilities.
• Remittance Services: Traditional remittance services may be disrupted by RTP, but companies like Remitly and Wise are adapting by integrating RTP solutions.

Overlay Services

• Fraud Detection and AML: Companies such as Sardine , Onfido , and Unit21 offer advanced fraud detection and AML solutions to ensure the security of RTP transactions.
• Treasury Management: Solutions like Modern Treasury’s unified payments platform connect to RTP networks and provide comprehensive treasury management services - Treasure Financial
• Payments Orchestration: Gr4vy , Primer , Spreedly offers payments orchestration solutions that integrate with RTP networks to streamline payment processes for businesses.

Future Opportunities and Trends

• Cross-Border RTP Integration: As more countries adopt RTP networks and interoperability standards like ISO20022 become widespread, cross-border RTP transactions will become more seamless and widespread.
• Growth of Overlay Services: Companies providing value-added services like AR/AP automation, treasury management, and enhanced fraud detection will see increased demand as RTP adoption grows.
• Open Banking APIs: Firms like Tink , TrueLayer , and Yapily will continue to play a crucial role in broadening RTP adoption by facilitating data sharing and integrating with RTP networks.
• Embedded Finance Applications: As RTP networks enable immediate settlement, companies offering embedded finance solutions, such as Vartana and Two , will benefit from more efficient and cost-effective payment processes.

Real-time payments are set to revolutionize both domestic and cross-border transactions. By providing faster, cheaper, and more secure payment options, RTP networks offer significant advantages over traditional payment methods ??

Source: Activant Capital

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?? Connecting the dots in payments... & Marcel van Oost