Sending and instantly receiving electronic funds isn’t a new concept for most consumers, primarily due to peer-to-peer transfer apps like Venmo and Zelle. But real-time payments have been slower to catch on in other sectors, despite The Clearing House’s 2017 launch of RTP®, a real-time payments network that allows financial institutions to make transfers between participating entities immediately available. This summer, however, real-time payments are set to further revolutionize commerce with the Federal Reserve’s public debut of its FedNow system. Already in beta testing, FedNow was created to provide instant and accessible payments to individuals and businesses alike.
FedNow’s impact on increasing accessibility to real-time payments can’t be understated, with total real-time transaction volume expected to hit $8.9 billion by 2026, quadrupling 2022’s approximately $1.8 billion. Companies in business-to-business industries can capitalize on this trend by pivoting now to become early adopters and position themselves as market leaders — further insulating their organizations against outside economic pressures, such as rising interest rates and inflation. That being said, business leaders still need to be aware of the potential risks and roadblocks of implementing real-time payments into their service models.
The key differences between FedNow and other real-time payments
It may seem insignificant on the surface, but it’s important to understand the inherent differences between FedNow and other real-time payments. FedNow is a new, instant payment system the Federal Reserve is developing, while real-time payments encompass a broader concept of instant fund transfers between parties.
Although FedNow and real-time payments both aim to provide instantaneous and secure transactions, The Clearing House’s RTP system is already operational, with numerous banks and financial institutions participating. RTP offers real-time payment capabilities through a private network, providing immediate fund transfers between participating banks. It has gained traction in the market and is already facilitating real-time transactions. But first to market doesn’t always equate to best in market.
In contrast to other real-time payments, FedNow will be operated by the central bank. With a mission to have a reliable infrastructure and nationwide accessibility, FedNow’s introduction is expected to accelerate the adoption of real-time payments, providing a standardized and interoperable solution for individuals, businesses and financial institutions.
Keep in mind that, even though both systems share the objective of enabling instant payments, the key difference lies in their ownership and reach: RTP is a private network operated by The Clearing House, and FedNow is central bank owned and designed to provide broader accessibility to real-time payments.
The benefits of all real-time payments for B2B commerce
In B2B commerce, real-time payments are poised to overhaul operations by streamlining transactions, reducing administrative burdens, and accelerating cash flow. Instead of preparing paper checks and waiting days for them to clear, businesses can instantaneously pay invoices or receive payments. This can help companies counteract pressures from the rising costs of labor and raw materials by having more funds available to make purchases and thereby avoid high-interest loans.
With traditional payment methods, B2B transactions often involve lengthy processing times, resulting in delayed payments and hindered cash flow. Real-time payments enable immediate fund transfers, eliminating the need for extended waiting. This increased speed and efficiency enhances cash management, improves liquidity, and strengthens relationships between buyers and suppliers.
In short, B2B commerce soon will be marked by seamless, instantaneous transactions — driving productivity and financial success.
Potential pitfalls of real-time payments for businesses
While real-time payments offer numerous benefits, there are a few drawbacks to consider — one being the potential for increased fraud and security risks.
The immediacy of real-time transactions can make it challenging to detect and prevent fraudulent activities, requiring robust security measures and constant vigilance. Additionally, the infrastructure required to support real-time payments can be complex and costly to implement, especially for smaller businesses. Such infrastructure includes secure networks with full PSCI compliance that both businesses and their customers can rely on for safe transfers.
Likewise, the transition from traditional payment systems to real-time payments may require significant technological upgrades and staff training. There also may be interoperability challenges between different payment platforms, hindering seamless integration and widespread adoption.
Real-time payments emphasize the speed and efficiency of fund transfers. In complementary fashion, embedded payments focus on integrating payment capabilities into existing platforms and use real-time payment systems to facilitate immediate transactions.
Looking ahead to the future of real-time payments
Real-time payments present a transformative opportunity for businesses to grow and future-proof their operations in an increasingly digital and fast-paced economy.
Embracing real-time payments demonstrates a commitment to innovation and keeps B2B brands ahead of the curve; it positions organizations as forward-thinking partners adaptable to evolving customer demands and changing market conditions.
But this window of early adoption is likely to close quickly. In the not-too-distant future, real-time payments will be table stakes for just about every business, even those in B2B industries.
John Badovinac is vice president, B2B Channel, at Fortis, a payments services provider. He has over 25 years of experience across payments services, including B2B, merchant acquiring, integrated payments, value-added resellers, and point-of-sale systems.Favorite