The Real-time Payments Journey in North America: Challenges and Opportunities

Last year, we observed a surge in global real-time payment (RTP) transactions, driven by the COVID-19 pandemic and changes in customer behavior. A recent Aite Group report highlighted the global importance of instant (real-time) payments that have had an impressive impact on the financial industry, with implementations spreading quickly around the world. In North America, 2021 might be the breakthrough year when financial institutions will migrate to RTP networks in record numbers. 

Faster transactions hold a great promise to both financial institutions and merchants, including faster availability of funds, increased efficiency, and lower payment costs. At the same time, when it takes a split-second to complete a transaction, it’s hard to keep up with fraud and false positives, while ensuring the security of each payment.

Dealing with payment modernization and fraud prevention at the same time might bring new challenges to financial institutions and merchants that they can solve with the help of FinTech companies and modern real-time payment systems. 

Real-time Payments Development in North America

Real-time payments are instant, irrevocable transactions that are initiated and settled in seconds, any time and any day, facilitated by a real-time payments rail. 

In the United States, the most prominent example of a real-time payments network is The Clearing House’s RTP network. The Federal Reserve is also launching a real-time network FedNow in 2023 with more than 110 organizations participating in their Pilot Program.

In January 2021, Erika Baumann, a senior analyst at Aite Group, estimated that 51% of the nation’s direct-deposit accounts were linked to RTP.

In Canada, the Real-Time Rail (RTR) is expected to go live in 2022 following the initial launch this year of Lynx, Payments Canada’s new high-value payments system. Payments Canada has a legislative mandate to establish and operate national systems for the clearing and settlement of payments.

Over the last year, payments modernization in the USA led to the increased adoption of P2P (peer-to-peer or person-to-person) payment apps by consumers, according to Mercator Advisory Group findings. While PayPal is by far the leading service (used by 54% of consumers), others, like Venmo (14%) and Zelle (13%) are gaining momentum.

Due to their integration with The Clearing House’s RTP network, P2P payment apps can transfer money instantaneously to a consumer’s bank account using the app. 

Payments Modernization Benefits

Both merchants and financial institutions in North America can tap into the benefits of the new payment ecosystem. Instant payments offer a convenient way to make a purchase with QR codes and wallets, making funds available immediately for the receiving party, compared to the lag with traditional banking e-transfers.

Merchants can provide faster refunds to their customers, load funds onto gift cards, and make payments immediately when they are due. (Okay, maybe not everyone will be happy with that last one.)

Instant payments will facilitate payroll, especially when it comes to contractors and part-time employees, saving time for businesses and improving efficiency.   

In Canada, upgrading to the new Lynx platform in 2022 will allow the addition of a new wire payments message format that is consistent with global standards. This can ease cross-border large-value payments and improve transparency about the context of the payment, as noted by Sue Whitney, VP/payments strategy and relationships, Central 1, in a February interview with CU Management.

For businesses, real-time payments growth is an opportunity to reduce the workload of accounts receivable and accounts payable departments, minimizing their time for tracking invoices and conducting manual approvals for payments.

The evolution of digital payments will also prepare the infrastructure for open banking developments that are going mainstream in North America.

Roadblocks on the Route

As a result of real-time payments growth, the financial landscape is becoming more competitive, especially in the e-commerce space. In the battle for customers, merchants and financial institutions may leverage instant payments as a way to offer their clients more attractive services.

Last year, we saw a spike in fraud incidents associated with real-time payments as fraudsters took the opportunity to target new channels. Globally, we also noted an increase in card-related fraud cases, identity theft and digital wallet account hacks.

A study from analytics firm FICO found that almost four out of five Asia-Pacific banks (78 percent) believed the introduction of RTP platforms such as P2P (peer-to-peer) transfers and mobile payments had resulted in increased payment fraud losses. Financial institutions in North America have an opportunity to learn from the experience of other countries, where RTP implementations have already gone mainstream.

“Transactions are happening in seconds and are irrevocable. Banks, payment providers, and merchants need to ensure that their fraud prevention teams and solutions are keeping up with the high velocity of financial crime, as fraudsters will quickly start to exploit any weaknesses,” explains Bijan Sanii, President, CEO & Co-founder of INETCO. “As we see more and more integrations with third-party apps, the risk of payment fraud increases. Utilizing stagnant data, in an era where real-time and digital payments are gaining rapid momentum, is no longer sufficient. The way out is to have unlimited access to all your real-time transaction data with machine learning risk assessment, where actions can be assigned in milliseconds.”

To make the most of real-time payment developments, merchants and financial institutions will have to ensure that their core systems and infrastructure can meet the needs for speed and security. As the real-time payments journey continues, expect it to be a multi-year adventure, rather than a short trip. It presents new opportunities to increase market share by delighting customers with new, value-added services and the best possible payment experience.

To ensure the safety of your real-time payments, check out our solution INETCO Insight for real-time transaction monitoring and fraud detection.