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Wespay’s Instant Payments Brief is a series of short articles designed to help members understand the key concepts of the next generation of payment services.
Payments industry publications these days describe transactions as “faster” and “instant.” Is this just author preference, or are there agreed-upon definitions of these terms, and if so, what are the qualities that differentiate Faster and Instant Payments?
Faster Payments are typically characterized by clearing speed (i.e., how fast funds travel from the payer to the payee) and availability. The U.S. Faster Payments Council defines Faster Payments as “a payment in which the transmission of the payment message and the availability of final funds to the payee occur in real time or near-real time on a 24-hour and seven-day (24/7) basis as possible.”
This definition of Faster Payments considers the speed of the clearing message between payer and payee only, no matter the speed of the transfer of final funds between the payer’s and payee’s FIs. Faster Payments comprise a wide range of bank- centric services, where the payer and payee maintain deposit accounts with a regulated FI and the transfer funds from payer to payee occur in a matter of seconds or hours, such as Same Day ACH, Zelle, Visa Direct, Mastercard Send, RTP and FedNow (coming July 2023). And for each of these Faster Payments services, the speed of the interbank settlement can take from a matter of seconds to days.
Instant Payments are a subset of Faster Payments, where the speed of the settlement between the payer’s and payee’s FIs is just as fast as the clearing messages – they both must take no longer than a matter of seconds.
Instant Payments are classified not just by their near-real-time clearing speed, instant use of funds by the payee and always-on availability, but also by the speed of the transfer of final funds between the payer’s and payee’s FIs. Settlement for Instant Payment services occurs with the transmission of the payment message, in a matter of seconds.
While Zelle, Venmo, RTP, and FedNow transactions all clear in a matter of seconds and offer 24x7x365 availability, only RTP and FedNow transactions allow the payor and payee’s FIs to settle for the transaction in the same time frame as the payment itself, which also significantly reduces settlement risk for the payee’s FI.
Instant Payments also must be “Open Loop,” meaning that they don’t require the sender and receiver to have accounts with a central provider. Open Loop systems allow the payer to send a payment to a payee regardless of where they each bank. This allows transactions between a much larger pool of payers and payees compared to Closed Loop systems.
A Closed Loop payment system requires a sender and receiver to each establish an account with a central provider. These transactions can clear on a near-real time basis (i.e., Venmo, PayPal, Square Cash App, etc.), but participants are required to transfer funds from their Closed Loop account to their financial institution which can take hours or days.
From an end user’s perspective, many types of payments can be “faster” in that funds appear to move from the sender to the receiver in near real-time, but to be considered an Instant Payment, the payer and payee’s FIs need to be able to settle that payment on a real-time basis as well.
Today in the U.S., the only true Instant Payments services are The Clearing House’s RTP service, and the Federal Reserve’s FedNow service, which is expected to go live in July 2023.
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