Instant Payments Have a Supply Problem, Not a Demand Problem

Immediacy will always prove to be a winning concept — particularly within payments.

Convenience, simplicity and security are three core pillars of today’s increasingly connected and digitized world.

“A lot of consumers and businesses think they have instant payments today,” Jim Colassano, senior vice president of RTP product development at The Clearing House (TCH), told PYMNTS for the series “What’s Next in Payments: Instant Payments: What Will Turbocharge Instant Payments Growth in 2024?” “The fact of the matter is that the digital experience is making people feel like they’ve got an instant payment experience and have had for years.”

“Even though a lot of companies have been able to create instantaneous digital experiences for their customers, the clearing and settlement of the payments have run over traditional rails and can sometimes take days for money to move, which is a kind of interesting dilemma, and it also creates risk within the payment structure,” Colassano added.

Instant payments, driven by a growing expectation for immediacy and enhanced user experiences, aim to bridge this gap by providing a seamless connection between digital transactions and the actual movement of funds.

“The demand is definitely there,” Colassano said. “And what we need to do is start providing the supply.”

Strategies for Widespread Adoption of Instant Payments

Security is a crucial consideration in the realm of instant payments. With the speed of transactions, new security measures are required to protect against fraud and cyber threats.

Colassano pointed to the importance of the finality of instant payments. Once a payment is made, it cannot be easily reversed, making fraud prevention essential.

“We like to refer to RTP payments or instant payments as the equivalent of electronic cash,” he said. “Once you hand somebody your $5 bill, good luck saying, ‘Oh, I didn’t mean to do that. Please give it back.’”

He noted that the traditional ways that payments fraud has been perpetrated, like account takeovers, are not the types of things that are occurring in the instant payment space.

“What we are now seeing is scams,” Colassano said.

To combat these evolving threats, banks and technology companies are introducing friction at the front end of the payment process, ensuring customers have the necessary information and time to make informed decisions.

Interoperability is another critical aspect of powering the broader adoption of instant payments. Currently, TCH and the Federal Reserve handle the clearing and settlement of funds between financial institutions in the United States. Although they do not yet interoperate, intelligent routing is used to connect transactions between the two networks, and efforts are underway to achieve full interoperability, Colassano said.

“The issue of creating instantaneous atomic settlement is a challenge that we haven’t yet cracked,” he said, noting that TCH has been operational for six years and 99.5% of the endpoints that are on the FedNow® Service are also reachable on the RTP® Network.

Global Collaboration in Instant Payments

Along with payment rail interoperability, establishing seamless and instant cross-border settlements for international transactions has been a longtime goal of the payments sector.

“Cross-border, instantaneous payments is the holy grail of payments,” Colassano said, noting that TCH has already undertaken a successful collaborative project, based on the ISO 20022 standard, that demonstrated the ability to clear and settle transactions between the RTP Network in the U.S. and Single Euro Payments Area (SEPA) in Europe in less than 30 seconds.

This achievement paves the way for enhanced global financial connectivity, with potential benefits for businesses and consumers alike.

“We proved that we could do it, and we are in the process right now of building out a pilot so that we can go into full production,” Colassano said. “It is something that’s easily replicable with any instant payment platform that’s on the ISO 20022 standard.”

The technology is there for instant payments, as are the core standards. What’s left — and what’s next — is to see how the adoption of instant payments will change the way that businesses and consumers operate and transact.

Colassano predicted that within the next five years, real-time payments will become as ubiquitous and available as wire transfers and ACH transactions. The benefits of instant payments, such as eliminating reconciliation issues and providing faster access to funds, make them an attractive option for individuals and businesses alike. As the technology continues to evolve and adoption increases, instant payments are set to revolutionize the way financial transactions are conducted.