Understanding the Various Payments Systems Series: Blog 3
Today, there are more ways than ever for consumers and businesses to transact payments quickly, specifically, with the Venmo, Zelle, same-day ACH and most recently, The Clearing House’s real-time payments system. Although these different methods may seem the same or are perceived as “instant” payment methods, they are not.
With so many options, it can be very confusing, which is why we have broken down what each is, their specific use cases, and which type is better.
Recently, we discussed same-day ACH and the implications it has for businesses and consumers. NACHA introduced it for credits in 2016 and for debits in 2017 in an effort to support same-day processing of ACH payments. There have recently been new rules and regulations surrounding same-day ACH, such as increasing the processing window and increasing the transaction dollar limit. Effectively, transactions like payroll and other business-to-business (B2B) payments are well suited for same-day ACH, especially given the higher dollar limit and businesses’ operating hours.
Real Time Payments
Another payment method is real-time payments (RTP), recently introduced by The Clearing House. Unlike same-day ACH, real-time payments are cleared within seconds and can be made 24/7. This payment method is effective for P2P payments between two unrelated parties, for instance, someone selling an item on eBay. It can also be beneficial in business-to-consumer uses, for example, when an insurance company pays claims or a freelance worker hopes to receive payment immediately after a day’s work.
Finally, there are third-party payment apps, which are quickly emerging through providers like Zelle and Venmo to facilitate mobile payments. This method is extremely convenient for P2P payments, because they use an identifier, such as a phone number or email address, so that consumers do not have to disclose their bank account information in order to be paid. While these are useful and easy to use, they do not get settled in real-time. Apps like Venmo offer real-time capabilities, but charge a fee in order to process.
So, which method is better?
The truth is, there isn’t one method better than others. It depends on the use cases, which may vary. For some institutions and its account holders, same-day ACH may be best suited so that funds are transferred by the end of the day. In other cases, RTP may be the better option, particularly for businesses that may pay for products from a supplier that will withhold those products until they receive payment.
This means that financial institutions must not only understand their account holders’ needs, but understand each faster payments option and identify the use cases most beneficial for each payment type. Additionally, it is crucial to understand how each payment type impacts processes like account opening, establishing permissions and fraud prevention control.
As demand rises for faster availability of funds and the ability to send or receive payments anytime day or night, great strides have been made to bring many new payment methods to market.
From same-day ACH, to real-time payments, to payment apps like Venmo or Zelle, there is no one method that works better. Rather, institutions must understand the key differences between them, decipher which use cases are best served by each, and understand how each impacts payment delivery. In doing so, financial institutions will be able to determine the best methods to bring added value to the overall payments experience for account holders.