How can faster payments benefit me?
Consumers and businesses are moving toward technologically advanced payment practices that better align with their ever-evolving wants and needs. The COVID-19 pandemic and associated economic downturn have resulted in a rapid increase in faster payments use1 and a growing demand for a certain type of faster payments called instant payments. This article explains how individuals, businesses, and financial institutions might benefit from adopting faster payments, including instant payments, for a variety of transactions.
Why the interest in faster payments?
Faster payments have a number of characteristics that make them attractive in the digital economy. For one, they leverage technology within mobile apps or online financial/bill payment service websites that allows end users to make payments without physical interaction — a plus during a pandemic. These payments typically take only seconds to complete. Some also have the extra convenience that money can be sent without knowing the recipient’s account details. (See this infographic for an explanation of the steps in the process.) Finally, faster payments make the funds available to the recipient almost immediately, a good option for managing cash flow and making time-sensitive payments.
Consumers can benefit from the flexibility that faster payments offer, such as the ability to complete last-minute or emergency payments. With this capability, consumers can avoid late fees, the risk of account overdrafts, and damage to their credit scores. Additionally, gig-economy workers, like rideshare drivers, may be able to get paid immediately for work they perform that day. Having immediate access to funds means, among other things, a person is less likely to have to rely on short-term and often costly financing like payday loans.
Here are some other examples of scenarios for which faster payments are particularly useful:
- A homeowner could pay a mortgage on its due date, confident the payment met the deadline.
- A folk art collector could buy art at a flea market without swiping a card or touching a pay pad.
- Diners who share a meal could instantly reimburse the person who paid the tab for their portion of the bill before they even leave the table.
- A digital wallet user could quickly move funds stored in her digital wallet to her account at a financial institution and vice versa.
Businesses can benefit from improved real-time money management and cash flow by using faster payments. Companies are also less likely to deal with a payment reversal due to insufficient funds, because faster payments typically involve a “credit push” (that is, they require the payer to have sufficient funds in their account before the payer can make the payment), and they are final (that is, the payee is assured of receiving the funds).
Here are some examples of the scenarios for which faster payments are particularly useful:
- Small merchants who accept faster payments can receive the funds from these sales immediately, increasing cash on hand and potentially reducing the need for costly loans.
- A building contractor can more quickly obtain needed materials by instantly paying suppliers that require payment in advance of shipment.
- A utility company can send customers a request for payment, and receive the funds immediately once the customer authorizes the payment. Because the responding payment can be linked to the original request, account reconciliation can be automated. Aside from significant savings from reduced manual processing, this improves customer experience, enabling faster posting of the payment.
By offering faster payments, financial institutions can stay competitive by better serving their individual and business customers, who increasingly want advanced digital banking services. Offering an integrated faster payment option gives customers a more comprehensive set of services and might help attract new customers. Financial institutions also may be able to shift customers away from check and cash payment offerings, which tend to be manual, time-consuming, and expensive to support.
There are many opportunities for financial institutions to create value for their customers by supporting an array of instant or other faster payment capabilities. These can drive revenue and customer retention, as well as reduce costs.
1“Demand for real-time payments rises amid Covid-19 pressure”, Mobile Payments Today, April 2020