System Interoperability and Real-Time Data: The Keys to the Success of US Real-Time Payment Initiatives

*Article by Jason Kolbenheyer, Chief Product Officer, originally published in  International Banker on June 7, 2024.

Imagine if funds could be settled almost instantly, cash flows could be managed with unprecedented precision, and finance departments could make and take payments in a seamless, frictionless fashion.

Real-time payments (RTP) promise to make that vision a reality in the United States.

However, the linchpin to achieving the full benefits of RTP initiatives lies in ensuring interoperability between the myriad systems in the payment ecosystem and making data available in real-time. This article shows why and how fintech (financial technology) payment solutions can make it possible.

Real-time payment models

Several RTP models are currently being developed and implemented in the United States.

1. The Clearing House Real-Time Payments (TCH RTP). First available in 2017, TCH RTP was the first new core payment infrastructure launched in the US in more than 40 years. Unlike traditional payment methods, such as Automated Clearing House (ACH), TCH RTP transactions can be processed any time of the day, every day of the year. Recipients have immediate access to funds and can use built-in messaging capabilities to request payments.
2. The Federal Reserve’s FedNow.Launched in 2023, FedNow is a real-time payment and settlement service designed to complement other payment systems, including TCH RTP. With an eye towards broad adoption, FedNow was built to support a range of transaction volumes and use cases and make it easier for financial institutions to join and participate.
3. Visa Direct and Mastercard Send.Leveraging their existing card networks, Visa and Mastercard offer near-instantaneous fund transfers to debit cards. Both solutions integrate with various financial institutions and tech platforms and support a range of use cases.

These real-time payment models and others like them that are in various stages of development represent a major shift towards more efficient, faster and more accessible payment systems in the United States.

Obstacles to real-time payments

Despite the clear benefits of faster, more efficient transactions, the widespread adoption of real-time payments in the US faces several significant challenges that banks and businesses must overcome.

• Regulatory uncertainty. The regulatory landscape for RTP is still evolving. Unclear or changing regulations may make banks and businesses hesitant to adopt new systems.

• Compliance requirements. The speed of RTP transactions raises the stakes for banks and businesses to ensure compliance with Know Your Customer (KYC) and other regulations.

• Dispute resolution. The instant nature of payments makes developing effective mechanisms for resolving RTP disputes a challenge for banks and businesses.

• Fraud risk. The immediacy and irrevocability of RTP transactions make them prime targets for fraud and cyberattacks. Banks and businesses must invest in robust security protections.

• Lack of awareness. Since many businesses may be unaware of RTP or skeptical about its benefits, building trust and awareness is essential for achieving widespread adoption. Some businesses may be reluctant to switch from traditional payment methods, such as checks.

• Unclear business case. Banks and businesses must be convinced that faster settlement and the other benefits of RTP outweigh the costs and risks involved in adopting the technology.

However, the biggest barrier to RTP adoption in the United States may be the lack of system interoperability, which makes it difficult to initiate and receive payments and seamlessly exchange data in real-time.

The importance of RTP system interoperability

RTP’s success rests in large part on ensuring system interoperability and real-time data exchange.

• Transactions across RTP systems. Interoperability ensures that different RTP systems can communicate and process transactions with each other, allowing users of one system to send and receive payments to and from users of another system. Transacting with a wider network of businesses enhances the functionality of RTP systems. Similarly, interoperability ensures that financial institutions can participate in the RTP ecosystem without being restricted to a single network. This makes it easier for small banks and credit unions to offer RTP.

• Economies of scale. Interoperable systems can share infrastructure and operational costs, reducing the overall expenses of maintaining multiple isolated RTP networks and making RTP more affordable for the banks and businesses that use the interoperable systems.

• Streamlined integration. In an environment with interoperable RTP systems, banks and businesses need to integrate with only one or a few interoperable systems instead of multiple proprietary ones, simplifying the integration process and reducing implementation costs.

• Consistent user experience. With interoperability, users enjoy consistent experiences regardless of which RTP system they use, potentially driving higher user-adoption rates.

• Enhanced security. Interoperable systems can adopt and enforce common security standards and protocols, leading to a more secure payment ecosystem. What’s more, banks and businesses can collaborate on fraud detection and prevention across interoperable systems, improving their abilities to detect and respond to fraudulent activities quickly.

• Improved compliance. Interoperable systems can implement standardized compliance measures for regulations, such as anti-money laundering (AML) and KYC requirements, making it easier for banks and businesses to comply with regulatory mandates.

Interoperability fosters a competitive environment in which RTP providers can innovate and improve their services without being locked into proprietary systems.

Efforts to ensure interoperability between TCH RTP and FedNow are creating a more cohesive RTP ecosystem. Banks that connect to either system can facilitate real-time transactions with participants on the other network, expanding the reach and utility of both services. And Visa Direct and Mastercard Send are designed to work seamlessly with multiple banks and financial institutions, ensuring that users can send and receive real-time payments regardless of their specific providers.

Payment fintechs can also play a big role in ensuring RTP system interoperability.

How do fintechs ensure RTP system interoperability?

Payment solutions that are integrated with ERPs (enterprise resource planning software solutions) and financial institutions can act as bridges between different RTP systems, facilitating real-time payments regardless of the underlying RTP system.

For starters, integrating payment solutions with ERPs and banks enforces standardized processes and data formats across different systems. This consistency is crucial for RTP systems, which rely on uniform data to process payments instantly. By using payment solutions that support the formats required by RTP networks, businesses can ensure that transactions are processed without delays.

Additionally, data integrity is maintained across all platforms when payment solutions are integrated with ERPs and banks. This ensures that payment instructions, beneficiary details and transaction references are accurate and up to date, reducing the risks of errors and disputes. Data accuracy is crucial to effective RTP systems, as they require precise data to execute real-time transactions.

Seamless integration also facilitates better reconciliation and reporting capabilities. The best payment solutions provide real-time visibility into transaction statuses and automatically reconcile transactions in an ERP, helping businesses generate accurate financial reports, which are essential for maintaining transparency and compliance with regulatory requirements.

Integrating payment solutions with ERPs and banks enhances security by providing robust authentication and authorization protocols. The best payment solutions have built-in controls, such as user-access permissions, automated separation of duties, systematic workflows, logging of all actions taken on an invoice and advanced data encryption. RTP systems benefit from these enhanced security measures, as they help protect sensitive financial data and prevent unauthorized access.

Achieving real-time payment interoperability

Real-time payments offer tremendous promise for banks and businesses, but the broad adoption and effective functioning of real-time payments in the United States will require system interoperability and seamless data exchange. Using a fintech payment solution that integrates with ERPs and banks addresses the biggest barriers to RTP adoption by ensuring a seamless and consistent user experience across different payment systems and facilitating efficient, standardized and secure processes.