With businesses and consumers moving further away from traditional cash or card payments and toward digital wallets and e-commerce, there is an increased need for more secure, efficient, and faster payment methods. According to a recent industry report, the market share for the global RTP industry was estimated at $16.56 billion in 2022 and is expected to grow at over 32 percent annually through 2031. Already increasing faster than expected, there was a 42 percent growth in global RTP transaction volumes in 2023.
This shift makes transactions quicker and more secure and allows increased financial inclusion and global trade opportunities. Understanding these changes is paramount for planning and deploying successful payment processing services and applications.
Evolution and innovations in payment processing
The past five years have seen an acceleration in the implementation of new payment processing technology. The industry’s most notable transition has been from traditional local server-based data storage to cloud solutions. As recently covered in MIT Technology Review, this digital transformation enhances efficiency and scalability for banks, financial service providers, vendors, and customers.
Cloud-based financial infrastructure is one of the technical advances that has made RTP processing a reality. One way this makes a difference is scalability; cloud-based architecture can withstand greater transaction volume without interruption than legacy systems. This also bolsters the customer experience since release updates will be more quickly deployed.
Another surprise technical advance in the payment processing field is blockchain technology. Blockchain is a decentralized digital ledger that records transactions across multiple computers in a way that ensures security and transparency. These networks support RTPs, appealing to individual users and companies seeking speed and transparency. While initially only used by cryptocurrencies, blockchain pilots are used in virtually all banks globally.
RTP processing: Features, benefits, and adoption
RTP processing offers several significant features and benefits. Immediate fund availability is paramount, allowing businesses and consumers to access their money without delay. This enhances cash flow management and reduces the risk of fraud, as transactions are settled instantly, leaving less time for fraudulent activities to occur.
One of the first applications to implement this in the United States was Venmo, which became broadly available in 2011. Venmo allows web and smartphone users to send money peer-to-peer without the need to write a check or exchange physical cash. PayPal acquired the app in 2013, and its popularity grew, to a notable 78 million users as of 2022.
Following the popularity in the fintech space, over 1,700 U.S. banks adopted RTP solutions through Zelle, which allows bank users to send money instantly to each other directly through their banking app or website. As of 2022, Zelle had over 61 million annual users, rivaling Venmo’s user base.
Globally, China, India, and Brazil are at the forefront of adopting real-time payments, with systems like UPI in India setting a new level of user experience for merchants and consumers. In the United States, FedNow, the first U.S. government-created and backed portal allowing banks to send and receive funds almost instantly, was launched on a limited basis in July 2023. These initiatives lower transaction costs and promote financial inclusion by providing accessible payment solutions to underserved populations.
Digital payments transform relationships
The technological evolution in payment processing has reshaped vendor-customer relationships, particularly in business-to-business (B2B) and business-to-consumer (B2C) transactions. In B2B transactions, businesses increasingly prioritize faster payment realization to improve cash flow and operational efficiency. If store owners can access their funds immediately, as opposed to one week or even 48 hours later, this may influence them to lower prices on specific items or more rapidly re-stock or ship items. Both outcomes benefit small businesses and their customers.
Digital payments have advanced from cash to physical credit and debit cards to digital cards or apps like CashApp. Using these instead of cash offers customers multiple benefits. The first is fraud detection and prevention, allowing a customer recourse in reporting undelivered or misrepresented services or goods. The second is the speed of delivery of the goods or completion of the services the customer seeks to obtain. A third benefit is that many cards and apps offer cash-back, discounts, or other loyalty rewards programs that aren’t available with cash-only transactions. Traditional payment methods continue to play a role but are gradually being supplemented by newer technologies that offer quicker and more efficient transaction processing.
Challenges and solutions
Despite the benefits, RTP processing faces several challenges.
- Revenue. One significant concern is the loss of revenue for traditional payment networks such as credit cards as businesses and customers turn to apps like PayPal, CashApp, and Venmo for faster transactions. To address this, companies are collaborating with regulators and adopting new standards such as ISO 20022, which can scale more transactions at greater speeds and allow for more robust data exchange.
- Fraud. Artificial intelligence (AI) and machine learning (ML)-powered data analytics are becoming increasingly crucial in fraud prevention and enhancing the efficiency of RTPs. By leveraging these technologies, organizations can detect and prevent fraudulent activities more effectively, ensuring the smooth operation of RTP systems.
- Integration. Integrating RTP systems with existing financial infrastructure can be difficult and expensive. Many legacy systems are not designed to handle the speed and volume of RTPs, leading to potential operational disruptions. To mitigate this, financial institutions are investing in upgrading their infrastructure and implementing API-based solutions that allow for seamless integration with modern payment platforms.
- Consumer cashback. Currently, implemented RTP does not enable consumers to receive incentives in the form of cashback/rewards for credit card transactions. New standards such as ISO 20022 and new processing designs will enable this in the future.
Economic impact
The economic impacts of RTP processing are profound. One example is cash displacement. According to a McKinsey report, cash usage declined by four percent in 2022. In Brazil, nearly 50 percent of the transactional revenue growth through 2027 is expected to come from instant payments.
Companies benefit from reduced costs and increased efficiency, while consumers enjoy the convenience and security of instant transactions. The growth of networks such as Venmo, Zelle, and India’s UPI show that widespread adoption of RTPs is inevitable and beneficial to the economy and users such as businesses and individuals. Venmo and Zelle have revolutionized peer-to-peer (P2P) transactions in the United States, making it easy for individuals to transfer money quickly. In India, UPI has enabled even small vendors to accept digital payments, significantly reducing transaction costs and decreasing black money transactions. Future trends indicate that the use of RTPs will continue to expand, supported by ongoing technological advancements and increasing global adoption. RTPs support the growth of businesses of all sizes and lead to the development of innovative use cases that redefine how consumers and organizations conduct transactions. Companies can prepare for these changes by staying updated on regulatory developments and investing in new technologies.
About the Author:
Niravkumar Pandya is an enterprising, process-driven, globally experienced, and visionary product leader. He has extensive expertise in strong technical, product management lifecycle, market analysis, business analysis, requirements, strategic roadmap development, and execution within an agile environment. Niravkumar holds a master’s degree in computer application. Connect with Niravkumar on LinkedIn.
