Is instant payment an opportunity or a threat for businesses?

instant payment

Last modified on April 19th, 2024

Did you hear the news? The arrival of FedNow is forecasted to shake the electronic payment market across the US. Instant payment has already spread to Europe and other countries with success. While instant payment methods offer definite advantages, they don’t come without risks. The threat of payment fraud grows with instant payment. But, fear not: this article will tell you how to make the most of instant payment safely.

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What is an instant payment?

A quick definition.

Instant payment is a payment service that allows you to transfer funds almost in real time. The transfer of funds is made within 10 seconds from one bank account to another as long as they belong to the same interbank network.

It works 24/7/365 — which means you can receive funds and send money virtually anytime. It can be used for paying bills, remittances, or even tax payment. This means you can move your money from your savings account to your checking account in no time.

It works both from person to person and in corporate settings.

 

How does it work?

Instant payment works similarly to regular bank transfers, like ACH (Automated Clearing House). The difference is that there is no need for banks to manually clear the transfers: where ACH processing takes 1-3 business days, instant payment happens on the same day.

Funds actually go bank to bank and arrive in the beneficiary’s account in about ten seconds.

For instant payment to work, both the sender’s and the payee’s bank accounts must belong to the same rail network. Rail networks are payment systems set up by various financial institutions to work together.

 

What is the regulatory context of instant payment?

This payment method has been present around the world for many years. It arrived in the UK in 2008 and was adopted throughout the Eurozone in 2017, with the SEPA rail network.

2017 is also when The Clearing House (a conglomerate of US financial institutions) rolled out the Real-Time Payment Network (RTP) in the US. Instant ACH transfer has been around since then.

ACH transfer is still the leading electronic payment system in the US, but that’s forecasted to change with the deployment of FedNow, initiated by the Federal Reserve. Many think this will force the adoption of instant payment methods across the US, revolutionizing both B2C and B2B payments.

 

What are the advantages of instant payment?

There are many advantages to using instant payment, for individuals and businesses alike. The main one is availability. Instant payments are automatic, and can therefore be done at any time of day or night.

For corporations, it means an improved treasury. Adding instant payment to your accepted payment options means you’ll get paid faster and have more liquidity. It also means not having to chase down late invoices, and cutting down on chargebacks from credit card payments. Recurring billing is also supported, so subscription-based offers can easily be charged this way. This improved cash flow benefits your supplier relationship too, as it’s easier to pay them on time.

Instant payment also improves customer experience. Customers can pay online 24/7, 365 days a year, without needing to consider payment times. It’s a plus for late payers or those after early payment discounts.

With payment being held securely so quickly, it also cuts down shipping time. Payment is independent of business hours, which means a quicker fulfillment time — which serves both companies and customers.

Instant payments offer undeniable benefits to everyone. However, they also come with their own risks.

 

What are its threats?

Instant payment increases fraud risks

Bank transfer fraud is always a risk that comes with a money transfer. But when it comes to instant payments, the threat lies in its instantaneity.

That’s actually why scammers tend to use an element of urgency in their scheme. With CEO fraud for instance, they’ll impersonate the CEO (or another top-level member of management) and ask for an “urgent transfer” to be made to a specific bank account. If your employee falls for the trap, the money is long gone before anyone realizes what’s happened.

That can also happen with vendor fraud (and invoice fraud), where hackers impersonate your suppliers and send fake invoices with their account numbers. The sense of urgency isn’t a mandatory element of a scam (be cautious in all cases), but it’s one of the telltale signs of fraud.

Now, the situation is bad enough when we’re talking about “normal” wire transfer scams. But with instant payment, your window to realize what’s happened and react is even shorter.

When you send funds to a scammer through instant payment, they are gone within 10 seconds. Funds sent through instant payment are more irrecuperable than with wire transfers (and the chances were already pretty low with that). Urgency is not good for security. If you use instant payment with your third parties, you need even more protection against financial fraud.

Learn all there is to know about fraud risks in our latest fraud report! 

 

How can you fight these fraud risks?

To make the most of instant payment safely, you need to be proactive. It might be time to upgrade (or create) a risk management strategy to protect yourself from financial fraud.

Here’s what you can do concretely to prevent fraud with instant payment:

  • Internal processes. Determine if and when instant payments are accepted.

Setting up relevant and efficient security processes around your outgoing payments (in general but also specifically for instant payment services) will help you stay safe. Have a plan of action around external transfers like payroll, paying suppliers, and tax payments, so your employees know your – protocols — and follow them.

Even just double-checking bank account numbers with your master third-party file can make a huge difference in terms of overall safety. While internal processes can be time-consuming, they don’t have to be if you use software like Trustpair.

  • Segregation of duties. Carefully define the scope of action of your financial team members and spread out the responsibilities. For example, you can assign good reception, paying for an invoice with instant payment, and payment reconciliation to different employees. It serves the dual purpose of limiting internal and external fraud.
  • The 4-eye principle. For each sensitive operation, have 2 sets of eyes (ie two people) approve it. That simple method divides your risk of being a victim of financial fraud. Even if it’s not failproof, it’s less likely that two people fall for the same trap.
  • Use anti-fraud software. Platforms like Trustpair help secure your payment chain from end to end. We run automated checks in the background before any transfer is sent so you always know you’re sending funds to the right bank account and account holder. Contact an expert to learn more!

Trustpair secures all B2B payments by continuously auditing supplier data and controlling payments before they’re executed. With Trustpair, all fund transfers are secure. Contact an expert to learn more!

demo request trustpair b2b payment prevention plateform

Key Takeaways:

  • Instant payments allow funds to be transferred almost in real-time, which is beneficial to both businesses and customers in the US.
  • However, it also raises the risks of financial fraud, so it’s important to be proactive in your security. Trustpair helps you completely eradicate the risk of fraud.

FAQ

The RTP network and FedNow are both examples of instant payment systems in the US. In the UK, you can find Faster Payments, while SEPA instant transfers are used across Europe. 

Instant payments happen instantly, which means you cannot get your money back in case of fraud. It reduces your time to react if there is any problem.

Instant payments are almost immediate payments. As long as there are sufficient funds in your account, you’ll see the funds debited and credited in about 10 seconds.

Manage the risks related to corporate treasury.

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