Instant payment methods are gaining momentum across the globe, with widespread adoption in South America, India, and the European Union. Here in the UK, instant payments have been a reality since 2008, thanks to the Faster Payments System. While these solutions offer many benefits, they also present challenges – fraud risks increase with the speed of real-time payment transactions.
How do instant payments work? What types of instant credit transfers exist? And how can UK businesses use them securely?
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What is an instant payment?
Instant payment, a definition
Instant payment is a payment process that happens in near real-time. Funds are sent directly from one bank account to another that belongs to the same instant payment system- called the rail network.
Once the payment order is made, the money typically reaches the payee’s account within ten seconds. That makes it not just fast, but also irrevocable.
It’s used both in B2B and B2C environments. India and Brazil are huge markets for instant payment, and so is Europe. In the UK, instant payments have been well-established since 2008, thanks to the Faster Payments System, a widely adopted payment service for real-time bank transfers.
What is the difference between a traditional credit transfer and instant payment?
The biggest difference between instant payments and traditional credit transfers lies in speed.
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 is executed immediately. 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. Let’s take a closer look at them:
Faster Payments UK
The Faster Payments System (FPS) has powered instant payments in the UK since 2008. Initially launched to process phone bills faster, FPS now enables instant payments across banks, building societies, and payment service providers. Before this new payment method, it used to take 3 days for funds to be cleared, but it now happens within seconds.
In 2021, FPS processed 3.4 billion transactions – worth £2.6 trillion, proving its widespread adoption and reliability.
The service is widespread throughout the country: every financial institution, from banks to building societies and fintech companies can emit and receive instant payments.
SEPA Instant transfers
Also known as SCT Inst., the SEPA Instant Credit Transfer scheme enables real-time transfers between banks that support it in the European Union and beyond.
As long as the transfer happens in the eurozone, cross border payments are available. Regardless of its destination, the transfer happens in 10 seconds as well and is limited to 15.000€. This is governed by the SEPA regulation, which standardizes euro payments across member countries to ensure speed and transparency.
According to the latest data published in November 2022, the scheme now includes 2,313 payment service providers from 29 European countries. With its reach and speed, the SEPA Instant Credit Transfer scheme is becoming a critical infrastructure for cross-border euro payments.
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 a person’s shopping 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. Everything is happening faster than ever before. B2B payments are no exception. The UK’s instant payment system could quickly become the preferred method for payment transactions in both consumer and business contexts.
The Faster Payments Service has operated since 2008. It allows payment service users to send and receive instant payments between payment accounts at participating banks and payment service providers. The New Payments Architecture programme, led by Pay.UK and backed by the Bank of England as the central bank, will modernise the UK’s payment system.
There is no formal instant payments regulation yet. However, the Payment Systems Regulator is consulting on ways to ensure many banks offer faster, cheaper, and more secure transfers. This could deliver many benefits for consumers and companies. It would improve cash flow and reduce reliance on card networks.
The reforms also address key requirements around fraud prevention and verification of payment orders. They will strengthen sanctions screening obligations for entities subject to the UK’s AML and counter-terrorist financing framework. At the same time, payment service providers may reduce fees for instant transfers. Although the UK is outside the European Union, alignment with some SEPA regulation standards will support smoother cross-border payments with EU member states.
The market is ready. Open Banking already enables instant payments through mobile and online banking apps. Payment providers are creating instant payments offer features so customers can send funds in real time. Small businesses could replace non-instant credit transfers and card payments with instant credit transfers. This improves cash flow and reduces transaction costs.
Instant payments can transform business transactions. Payroll, supplier invoices, tax bills, and utilities could be executed immediately. They settle to the payee’s account within seconds and work every calendar day, not only on business days. Payers and payees get faster access to money, fewer delays, and stronger control over the payment process.
Why does instant payment increase the risk of fraud?
While instant payment means instant cash, it can also mean instant fraud. In 2023, UK banks lost £459.7 million to authorised push payment (APP) scams. Many of these occurred through the Faster Payments Service.
Because payments happen so fast, it gives potential victims of fraud a shorter time to react. That makes instant payment methods even more irrevocable, especially if the person or company isn’t verified in advance.
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, as you can read in our latest UK fraud study.
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 system 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.
At Trustpair, we help businesses reach fraud-free instant payments by detecting and preventing financial fraud. Contact an expert to learn more!
Key Takeaways:
- Instant payment methods allow funds to be transferred in real time. 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.
- As instant payment systems grows, businesses must balance speed with safety.
