A Global Phenom

Realtime Retail Payments (RTRP) systems are a global phenomenon. These systems exist or will soon in over 50 countries around the world. Some have been in operation for decades. The UK's Faster Payments system, operated by Mastercard's Vocalink unit, has been in operation for over ten years. Still others are still in the design stage.

These account-to-account systems (A2A) have gained in regulator popularity because:

• They are fast. The receiver has near instant availability
• They are push payment systems. Transactions don't take place unless the sender has enough money to fund the transaction. In other words, authorization takes place before the transaction
• User authentication is up to the financial institution
• These systems operate year round, 24x7
• They are inexpensive. Transaction pricing is fixed, regardless of the value of the payment itself
• They have rich data carrying capability
• Some include a new message type called Request for Payment, essentially a digital invoice message that prompts the payer to send money and smooths account reconciliation.

Still New to the US

Most Americans still have no idea there's a new national payment system in operation. Or that a similar one will begin operation in a few years. Wallets like Venmo and the Cash App abound. But an entirely new set of payment rails? That happens once in a generation.

Some of those Americans, on the other hand, may have experienced what a system like this can do. Zelle is a fast push payment system that moves money between banks accounts. But Zelle is more of a directory-enabled messaging layer. The money movement between banks relies on older payment rails like ACH and wires. New Age messaging and user experience; old fashioned settlement.

Key RTP Characteristics

Payments geeks, like Payments on Fire® listeners, know that the Real Time Payments Network takes a different approach. Operated by bank processor, The Clearing House, the RTP Network leaves management of the user experience and the use case up to the bank, the processor, or the provider serving a particular industry.

The RTP Network provides:

• The messaging between the sender and the receiver and each of their banks
• Nearly instant availability of the funds into the receiver's account (by network rule)
• 24/7/365 operation (ACH and wires take a break after working hours)
• Instant settlement between the sending and receiving financial institutions

In short: the RTP Network provides the plumbing and pipes. What it looks like and how it's used is up to another stakeholder.

Members of the network are financial institutions who either expose the RTP rails themselves or sponsor third party access so that those entities can make use of them. Nothing groundbreaking there.

An RTRP with RTGS

One of the impressive features of the RTP Network is that interbank settlement, the movement of funds between the sender and receiver banks, happens in realtime. The two banks settle their positions instantly. Settlement happens in realtime for every transaction. That's what a realtime gross settlement (RTGS) does.

Contrast that with a system like Zelle that provides instant messaging among the stakeholders but typically leaves the final movement of monies between banks to an overnight batch process via ACH. And this is net, not gross, settlement. The amount includes all of the day's transactions.

The RTP network achieves its RTGS capabilities using the following technique:

• RTP requires each member financial institution to pre-fund monies sufficient to handle its transactions. The money to operate the system has to be in place ahead of time. This eliminates settlement risk between the banks
• Each FI's monies are pooled in a single pooled account, owned in common by the RTP Network's member financial institutions. This pooled account is held at the the Federal Reserve
• The Clearing House maintains a ledger that tracks every transaction, that debits and credits FI pairs in realtime for each transaction
• Each Member FI is responsible for making sure it has enough funds to cover each of the transactions initiated by its accountholders. Each FI uses another open loop payment system, FedWire, to move monies into and out of its share of the pooled account as needed.

A Maturing System

That's a lot of background to help US contrast this system against the other four mostly digital systems in the U.S. (If you're not clear on that, join us for the best in payments education at a Glenbrook Payments Boot Camp®)

The RTP Network is in its fifth year of operation. In this Payments on Fire® episode, Steve Ledford updates us on:

• The growth in member financial institutions
• The growth in transaction volume
• The expanding set of use cases
• Who is using the RTP Network
• How COVID-19 accelerated usage in new use cases

So, take a listen.

Here's Steve talking about those new COVID-driven use cases.

For a snapshot of how the faster payments phenomenon is growing in the U.S. here is the 2020 Faster Payments Barometer.

Read the episode transcript

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