Instant payments: Going real time, all the time

Instant payments in today’s market

Instant payments are central to the evolving payment landscape, with many markets adopting them to boost economic efficiency. However, their adoption in the complex US financial ecosystem has been slow due to unclear use case prioritization, significant technology modernization costs, and fraud concerns. Despite slow uptake of instant payments, US financial institutions (FIs) may see a decline in ACH and Same Day ACH volumes. Our report analyzes global adoption enablers drawing insights from the United Kingdom, Australia, India, and Brazil; assesses the impact of instant payments on ACH volumes; and reviews the necessary capabilities for instant payments to potentially replace ACH.

Key takeaways from across the globe

Impact of instant payments on ACH systems: Global trends show slowing growth—or even a decline—in usage of the local ACH equivalent. Adoption of instant payments is slower in markets with mature card infrastructure such as the United Kingdom and Australia. However, in countries such as India and Brazil, a shift from cash to instant payments and widespread merchant adoption is evident. Additionally, both regulators and FIs are interested in modernizing the payment infrastructure.

Enabling instant payments adoption: An analysis of geographies that are leading the adoption of instant payments reveals three differentiating market factors:

1. Regulatory push (for example, Brazil’s central bank has mandated participation in Pix, its instant payments network, for larger FIs)
2. Government incentivization (for example, India has an incentive scheme to cover network cost for low-value consumer-to-business instant payment transactions)
3. Lack of card infrastructure (for example, emerging markets are leapfrogging from cash to instant payments, without going through the plastic card adoption phase)

Each geography has unique nuances such as access to the banking system, complexity of the overall financial system, and demographic affinity toward electronic payment methods. However, the insights drawn, based on the evolution of their respective payment ecosystems, provide indications on the potential evolutionary pathway for the US payments market.

Instant payments as an ACH alternative in the US market

Impact of instant payments adoption on ACH in the United States: Instant payments adoption in the United States has been slower than expected . Both The Clearing House (TCH) RTP^® and the Federal Reserve’s FedNow^® have seen increased participation and transaction volumes recently, boosted by the momentum created by the launch of FedNow^® by the Federal Reserve in July 2023. At the same time, ACH and Same Day ACH transactions continue to grow, due to the continued growth of electronic payments, desire for cash removal, and the early stages of instant payments maturity.

Instant payments as an alternative to ACH: Despite the limitations, ACH still offers distinguishing features and capabilities that make it attractive for certain use cases. To become a viable alternative to ACH, instant payments must increase their availability and limits, while providing compelling use cases to overcome the stickiness for ACH developed over the years. To replace ACH, instant payments must have:

Instant payments are here to stay

Based on the available data, we anticipate that ACH will coexist with instant payments in the US market for the foreseeable future. Choice of payment systems is likely to be dependent on the use case. Even if instant payments match its features and reliability, ACH will continue to be the preferred payment method for bulk transactions, use cases where transaction cost rather than immediate settlement is a priority, or transactions involve smaller FIs not on the same (or any) instant payments network.

As a result, FIs will need to be prepared to adopt a multirail payments strategy to maintain their market share amid the growing competition. Usage of ACH and instant payments will be determined by specific use cases. Orchestrating such a complex effort in a dynamic landscape is extremely challenging. However, the financial institutions will have to plan for it, to continue to stay relevant.

Endnotes

¹ John Stewart, “FedNow’s rising adoption buoys its biggest rival, as well,” Digital Transactions, December 15, 2023.
² Peter Conti-Brown and David A. Wishnick, Private markets, public options, and the payment system, Brookings Institution, April 17, 2020.
³ The Clearing House (TCH), “New to RTP? Start with receive only,” May 20, 2019.
⁴ The Federal Reserve, “FedNow^® Service: Additional questions and answers,” last updated May 3, 2024.
⁵ TCH, “Requirements for Request for Payment customers,” May 10, 2017.
⁶ TCH, “RTP^® network expands Request for Payment (RfP) availability,” press release, August 2, 2023; Aliya Sumar, “11 things you wanted to ask about the FedNow Service,” Alacriti, July 31, 2023; Federal Reserve Bank Services, “FedNow^® Service Participants and Service Providers,” last updated July 22, 2024.
⁷ Charles Damen, “What does the industry really think about variable recurring payments (VRPs)?,” press release, Credit Today, accessed July 30, 2024.
⁸ Sarah Speights, “Interoperability between RTP and FedNow,” Modern Treasury, November 16, 2022.
⁹ Loretta J. Mester, “An update on the Federal Reserve’s instant payments service: FedNow^®,” presentation for the Summer Institute 2023: Macro, Money, and Financial Frictions, National Bureau of Economic Research (Cambridge, MA), July 12, 2023.
¹⁰ Yizhu Wang, “More efforts needed to make FedNow, RTP interoperable, Clearing House CEO says,” S&P Global, July 20, 2023.
¹¹ Danielle Antosz, “Real-time payments vs ACH: Which should your business use?,” Plaid, accessed July 30, 2024.
¹² Rocio Wu, “There are gaps in the US real-time payment system. Who will fill them?,” Forbes, April 20, 2023.
¹³ PYMNTS, “UK wants to turn faster payments into four-day payments,” March 12, 2024.
¹⁴ The Pew Charitable Trusts, Can regulators foster financial innovation and preserve consumer protections?, September 10, 2020; TJ Horan, “Real-time payments fraud: Are new regulations and liability shifts coming?,” FICO Blog, September 5, 2023.
¹⁵ Zachary Aron et al., Accelerating adoption of instant payments for US regional financial institutions, Deloitte, 2023.
¹⁶ Sara Seguin, “Real-time payments: RTP vs. FedNow,” Alloy, April 17, 2023.
¹⁷ TCH, “TCH to raise RTP^® network transaction limit to $1 million,” press release, April 6, 2022.
¹⁸ Federal Reserve Bank Services, “Federal Reserve announces FedNow^SM service pricing approach, credit transfer limit,” press release, January 27, 2022.
¹⁹ PYMNTS and TCH, Real-time payments: How speed is changing the mix of business payments, 2022.
²⁰ PYMNTS, Real-Time Payments Tracker^®, July 2022.
²¹ TCH, “RTP^®: Frequently asked questions,” accessed July 30, 2024.
²² Federal Reserve Bank Services, “Federal Reserve announces FedNow^SM service pricing approach, credit transfer limit”; TCH, “RTP: Simple, transparent, uniform pricing for all financial institutions,” accessed July 30, 2024.
²³ Peter Lucas, “The ACH’s star still burns bright,” Digital Transactions, February 1, 2024.
²⁴ Ibid.
²⁵ Ibid.
²⁶ Ibid.
²⁷ Adriana Nunez, “Q&A: The real-time payments trends TCH’s product and strategy head is watching,” EMARKETER, October 11, 2022.
²⁸ Aron et al., Accelerating adoption of instant payments for US regional financial institutions.
²⁹ Ann H. Spiotto, Credit, debit, or ACH: Consequences and liabilities, American Bankers Association, September 2001; DataVisor, Digital Fraud Wiki, accessed July 30, 2024.
³⁰ Michele Bullock, “Modernising Australia’s payments system,” speech for the Australian Payments Network Summit (Sydney, Australia), December 12, 2023.
³¹ FedNow^® Service, “FedNow^® Service announces ‘zero-dollar request for payment’ market practice,” June 15, 2023.
³² Bullock, “Modernising Australia’s payments system.”