Instant payment methods are taking off everywhere: they’ve made their way through South America, India, and Europe, and are now spreading in the US with the rollout of FedNow. Instant payment solutions offer a lot of benefits, but also a major downside: fraud risks increase with instant payment.
How does instant payment work? What are the different types of instant payment methods? How to use them securely? Keep reading to find out!
What is an instant payment?
Instant payment, a definition
Instant payment is a payment method that happens in near real-time. Funds are sent directly from one bank account to another that belongs to the same instant payment network — called the rail network.
Once it is sent, the money is credited to the payee’s account within ten seconds. That makes instant payment transfers a very fast — and irrevocable — payment method.
It’s used both in B2B and B2C settings across the world. India and Brazil are huge markets for instant payment, and so is Europe. It’s also becoming stronger in the US, especially with the arrival of FedNow in July 2023.
What is the difference between a traditional credit transfer and instant payment?
The main difference between legacy credit transfers and instant payment methods is the time payment takes to arrive in the receiver’s bank account.
Traditional bank transfers take longer to be received by the beneficiary. Legacy payment systems need to be cleared by interbank and settlement mechanisms. That usually happens in 24H batches, which means funds transfers are received one business day after they’ve been sent.
On the other hand, instant payment happens, well, instantaneously. There is no need for interbank verification, which makes the process quicker. It also means instant payment can happen 24H a day, 7 days a week, 365 days a year.
What are examples of instant payments?
Instant payments fall into different categories, mainly based on where you’re operating from. Financial institutions locally set up different payment rails, which obey the same set of rules.
You have different payment rails across the world: for example in the UK, the EU, or even within the US. Let’s take a closer look at them:
Faster Payments UK
The Faster Payments System (FPS) exists since 2008 in the UK. It was created to offer an instant method of payment for phone bills. Before this new payment method, it used to take 3 days for funds to be cleared, but it now happens within seconds.
The service is widespread throughout the country: every financial institution, from banks to building societies and fintech companies can emit and receive payments instantly.
SEPA Instant transfers
Also known as SCT Inst., SEPA instant transfers are enabled between banks that support this scheme in the European Union and beyond.
As long as the transfer happens in the eurozone, international payments are available. Regardless of its destination, the transfer happens in 10 seconds as well and is limited to 15.000€.
According to the latest data published in November 2022, the scheme now includes 2,313 payment service providers from 29 European countries.
Real-Time Payment Network (RTP)
In the US, The Clearing House rolled out its own instant payment method in 2017.
However, instant transfers haven’t picked up yet, and automated clearing house (ACH, which takes 1-3 business days) are still leading bank-to-bank payments by far.
That’s forecasted to change with the arrival of FedNow, initiated by the Federal Reserve.
What are the benefits of instant payments?
Instant payments offer a lot of benefits for companies. Two main ones stand out:
- Better cash flow
- Improved customer experience
Better cash flow
Because transfers are cleared instantaneously, companies have access to their funds right away. Instant methods of payment also lead to lower payment rejection rates.
They do not need to make an authorization but can take payments directly. The funds are cleared before any services or goods are delivered, which considerably helps with late or defaulted customer payments.
Improved customer experience
For customers, instant payment methods mean being able to order and pay for goods and services independently of business hours. On the other side, merchants can accept payments at any time. That translates into quicker shipping and delivery times, improving shoppers’ experience.
With traditional bank transfers, companies need to carefully balance their expenses with their revenues over time. They also need to mitigate the risks of payments bouncing back. These challenges disappear with instant payment methods.
What is the future of instant payments?
It is bright! We live in a world of immediacy, where everything is happening faster now than ever before. B2B payments are no exception, and instant payment could quickly become everyone’s preferred payment method.
In Europe, the EU Commission is drafting legislation that could mandate banks to offer instant payments. They’re also proposing removing the transaction fees some banks currently charge for this service (per transaction and/or subscription). This legislation would unify the EU’s rules on instant payments so more people and business could unlock their benefits.
In the US, FedNow, the Federal Reserve’s instant payment method, is being rolled out from July 20th, 2023. Many experts think it will force adoption, alongside the RTP Network. 41 banks and 15 payment providers nationwide are ready to offer these alternative payment methods to their customers.
The market is certainly ripe for instant payment. Apps like Venmo and Zelle already include some instant form of payment. Small businesses could decide to completely forego card payments and platforms like Stripe or PayPal for an instant payment solution.
They could prove to be fierce competition to credit card payments and the Visa and Mastercard networks. Instead of having to pay by Visa or Mastercard credit and debit cards (which come with their own convenience fee), consumers and businesses could use instant payments instead. They’d also save on a card reader.
Instant payments have the potential to revolutionize online payments, especially since they also support recurring payments (like direct debit) and mobile payments. Tax payment, payroll, bill payment, and remittance could also be done in seconds. Instant payment solutions make great alternative payments to cash payments or paper checks.
All in all, instant payment is a convenient way to pay and doesn’t require credit card information to be divulged — making it a secure payment method.
Adoption will heavily depend on the transaction fee charged by those platforms as well as the payment service providers. One thing is sure: instant payment methods are the payment methods of the future. But they do not come without risks.
Why does instant payment increase the risk of fraud?
While instant payment means instant cash, it also means instant fraud. In 2021, about $440 million worth of fraudulent transactions were detected on the Zelle network.
Because payments happen so fast, it gives potential victims of fraud a shorter time to react. That makes instant payment methods even more irrevocable than traditional wire transfers.
Mattel almost lost $3 million to CEO fraud in China, but the bank employees who oversaw the transfer raised the alarm and managed to save the day. In the case of instant payments, where there is no need for banks to clear transfers, that doesn’t happen.
What happened to Mattel isn’t an isolated incident. Corporate fraud is present more than ever. In 2022, 56% of US companies were targeted by at least 1 fraud attempt.
Your organization is always at risk of:
Hackers are creating more elaborate schemes, most of them based on social engineering and wire transfer scams.
It’s bad enough when transfers take 24H to be cleared, but when it’s 10 seconds, you need to be a 100% sure that you’re paying the right person or company, as there is no coming back.
Instant payment methods call for an increased need for fraud protection. If your organization adopts real-time payment, it also needs to set up proactive fraud mitigation strategies.
What proactive fraud mitigation strategies can make instant payment methods safer?
Efficient fraud deterrence strategies to stop instant payment fraud include:
- Frequent employee trainings
- Segregation of duties
- Cybersecurity measures
- Anti-fraud software like Trustpair
Trustpair helps you eradicate the risk of financial fraud by offering various layers of fraud prevention and detection. One of the ways we do this is by doing 3-way matching of your third party.
Before any funds are transferred, our solution runs automated checks to ensure:
- The account number is correct,
- Ownership of the bank account is correct,
- There is a match between both.
This way, you always know you’re sending money to the right beneficiary. Learn more about ways to protect your company from payment fraud in our latest fraud report.
- Instant payment methods allow funds to be transferred bank-to-bank in 10 seconds. It improves the business’s cash flow and offers a better customer experience.
- With instant payment on the rise, it is quintessential to have adequate safety measures against financial fraud. Trustpair helps you prevent and detect fraud before it happens.