Deep Dive: The Benefits And Challenges Of Real-Time Push Payments

Consumers, businesses and governments are seeing faster payments as a path to greater convenience and financial security, and this growing demand is spurring payments services providers (PSPs) to meet this need in a swift, secure manner.

That consideration includes assessing the potential benefits and risks that come with the two fundamental types of bank payments: push and pull transactions.

Push, or credit, transactions see payers instructing their banks to send money from their accounts to recipients’ accounts, whereas pull, or debit, transactions have recipients’ banks extract money from payers’ accounts. These methods have subtle distinctions as well as different advantages, risks and use cases.

This month’s Deep Dive explores how push payments speed transactions, as well as the benefits and potential challenges of their use in real-time payment systems.

When ‘Pull’ is Not Fast Enough

Common forms of pull payments include debit cards and paper checks. Payers provide PINs or signatures, which grant recipients permission to extract funds.

Pull payments are often used to support recurring purchases, such as subscriptions or utility bills. Consumers do not need to take manual action to complete these payments once transactions have been authorized, enabling providers to automatically withdraw funds from customers’ accounts.

Pull payments do carry risks for both merchants and payers, however. Account holders who provide authorization do not necessarily know when payees will withdraw the promised funds and may not remember to keep enough money in their accounts to cover the costs.

There is a long timeline during which payees may call upon the funds, with banks being legally required to cash checks within six months of issuance — many will permit doing so long after that time frame. Account holders who do not have enough funds available at the time of withdrawal will be hit with painful fees, and the payee will be left uncompensated until it finds another way to bill its customers.

Push payments do not carry the same risk and tend to be quicker. The payer is in control of the timing, meaning he or she will make sure to have sufficient funds on hand when sending payments. Their banks will decline the transactions should they miscalculate their available funds, sparing them from fees and informing suppliers about whether payments are genuinely forthcoming.

Suppliers know to avoid offering their services if transactions fail and receive money for their offerings if transactions go through. Slower payment methods, such as checks, can leave merchants in the dark for weeks. They must wait for checks to arrive in the mail, then wait an average of two days for them to clear — a process that can take up to 10 days, depending on the check’s value and other details.

Push payments also tend to be faster because payers send both payment and money, enabling quicker reconciliation.

Push payments are typically used for payroll direct deposits, mobile P2P services or wire transfers. Employers might push payroll funds from company accounts to staff bank accounts, for example, and some have started using push payments to facilitate instant earnings access. This allows them to send staff accrued daily wages to prepaid or debit cards after each shift, enabling employees to use their earnings right away.

Real-Time Payment Schemes

The global movement to develop and deploy real-time payment systems is gaining momentum, prompting financial players to consider push and pull payments to bring financial exchanges up to instant speeds.

Instant payment systems, such as TCH’s RTP and the U.K.’s Faster Payments Service (FPS), only enable push payments. Instant transactions require that money move immediately and irrevocably, and TCH states that supporting push payments only reduces fraud risks.

Pull payments require payees to provide sensitive financial details, such as bank account numbers, to recipients. Fraudsters who gain access to customers’ account details could use instant rails to quickly drain accounts.

Some observers argue that push payments are not without danger, however, and that FIs need to protect against attacks most commonly associated with these transactions. Payers can be tricked into sending money to incorrect addresses when fraudsters use fake email accounts to masquerade as home contractors, for example, and can convince payers to make push payments. Bad actors can also deceive payers by sending counterfeit invoices with their own account details in place of those belonging to the intended recipients.

Hackers have also attacked the ACH system, which is not instant, to create fake employee files and collect payroll payments. These attacks’ dangers are exacerbated when applied to real-time payment systems. Payment rails that deliver money instantly make it easier for fraudsters to rapidly collect and make off with funds before they are caught.

A recent report noted that funds can be sent to incorrect accounts for more innocuous reasons, such as payment system facilitators’ failures to update address directories. Funds can be misdirected if changes are not made quickly and frequently.

Countries must consider whether and where push and pull payments fit their needs as they continue to develop and roll out real-time payment systems. Many are favoring push payment models for their real-time systems, but they must not forget that these transactions carry risks they must vigilantly guard against.