Over the last few years, instant payments – also referred to as real-time payments, faster payments or immediate payments – have increasingly come into focus for authorities and financial institutions alike.

As transformation continues to accelerate in the financial sector, the need for instant payments has grown tremendously. Yet what is the infrastructure enabling real-time payments? And how far are various markets in providing real-time payment rails?

This article explores the fundamentals of instant payments and their impact on the financial sector.

How do instant payments work?

Real-time payments take place in five steps:

1. Initiation: The real-time payment starts when the payer initiates the payment. This can be either peer-to-peer transactions or merchant payments. Payments can be initiated on online banking platforms, via mobile apps or at physical locations.
2. Authorisation: The payer’s identity is verified by the issuing bank. Once the payer is authenticated, the bank ensures that they have sufficient funds for the transaction. Once both are confirmed, the transaction is authorised.
3. Processing: Once the transaction is authorised, the issuing bank sends the payment instruction through the real-time payments (RTP) system. RTPs differentiate themselves from traditional payment systems by not relying on batching – transactions are processed individually and continuously, enabling the system to process payments in real-time.
4. Confirmation: Once the payment is processed, both the payer and payee will be notified about the transaction.
5. Settlement: Like the processing time, transactions are settled immediately rather than at the end of the day. The transferred money will be immediately available in the payee’s account.

What are the benefits of real-time payments?

Real-time payments offer several benefits:

• Increased transparency over incoming and outgoing payments;
• Improved liquidity as less money is locked in processing and outstanding bills can be settled more quickly;
• Popular for peer-to-peer payments like paying a friend for a dinner via mobile app;
• Accelerated refund and disbursement processes;
• Improved business performance and enhanced operational efficiencies;
• Reduced operational costs due to lower or no credit card interchange fees;
• Payments modernisation to facilitate real-time payments can serve as the path to wider financial inclusion in local markets.

How regulation and messaging standards are addressing the limitations of instant payments

Instant payments are irreversible because funds are made immediately available in the payee’s bank account, which means that increased fraud and cybercrime are the main challenges of RTPs. The ability to facilitate instant payments also requires a significant investment in technology and infrastructure to facilitate and are subject to different regulations in different regions.

Yet along with standardisation such as ISO 20022, instant payments can be facilitated securely. According to the US Federal Reserve, “ISO 20022 messages are vital to instant payments and play an important role in the overall modernisation of payment processes. They provide a structured and data-rich common language that is readily exchanged among corporates and banking systems. ISO20022 messages also provide the opportunity for enhanced analytics, which can help organizations offer valuable new levels of payment services to their customers.”

Which markets are leading instant payments adoption?

In the EU, all euro real-time payments are based on SEPA’s Instant Credit Transfer scheme (SCT Inst), which launched in November 2017. By June 2023, 15.4% of all SEPA Credit Transfer transactions were instant.

In the UK, the Faster Payments scheme was introduced in 2008 which today facilitates real-time payments of up to £1 million. In 2022, 42% of all payments made by businesses were made using Faster Payments and other remote banking.

The US operates with two different instant payments rail. The Federal Reserve’s FedNow, which was launched in July 2023, as well as the Clearing House’s RTP, which launched in November 2017. Yet despite evident customer demand, according to Deloitte only 18%–20% of the US regional financial institutions participate in either the RTP or FedNow programs. Regional banks remain hesitant in adopting real-time payments, due to challenges with technology modernisation and mitigation of fraud risk.

In Canada, the introduction of real-time payment rails continues to be delayed. The new instant-payment system, Real-Time Rail (RTR), was supposed to launch in summer 2023 but Payments Canada announced a second review of its proposed system, pushing the delivery deadline for the troubled project further into the future.

India’s United Payments Interface (UPI) network is an exemplary case study of payments transformation. Regulatory policies combined with industry-led technological innovations have transformed the country from an overwhelmingly cash-based economy to a digital payments leader. According to estimates from the Indian government, the country accounts for almost 40% of global real-time digital payments.

Another runaway success is Brazil’s instant payments platform, Pix. Only three years after its launch, Pix accounted for more transactions than credit and debit cards combined. Data from the central bank shows that Pix accounted for 35% of all transactions in Q1 of 2023.

Demand for instant payment networks globally is evident, and emerging innovations like Request to Pay, combined with consistent regulatory standards and common data-sharing standards like ISO 20022, will open the door to increased security and functionality of global instant payment rails.