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How the United States is Meeting the Increased Demand for Real-Time Services

As corporations and consumers ramp up their demands for increasingly secure and instantaneous transactions, the US is accelerating efforts to develop and deliver real-time payment services on both a global and domestic scale.

Set to launch in 2023, the US Federal Reserve Banks’ FedNowSM system is an instant payment platform that will significantly contribute to the ongoing modernization of the payments sector. By utilizing the FedNow system, financial institutions across the US will soon have the capacity to leverage instant payment technology 24/7/365, further accelerating the widespread digital transformation of traditional payment processes and the finance space more broadly.

The move comes after years of expanding real-time use cases in the peer-to-peer (P2P) and B2B sectors, bolstered largely by the success of US-based The Clearing House’s (TCH) Real-Time Payments (RTP) system. In late 2017, RTP became the first new US payment rail to be launched in almost 40 years, and has since been the go-to platform for federally-insured US depository institutions looking to utilize and benefit from instant payments innovation.

Based on ISO 20022 messaging, a critical open standard that can enable cross-platform communication between local, regional, and international financial institutions, RTP’s system currently facilitates secure transactions in a matter of two to three seconds. Beyond the obvious advantages of making and receiving instant payments, real-time systems offer businesses additional benefits such as improved liquidity management and the broader ability to promote creative market innovations that greatly enhance customer experience.

Existing real-time applications are only the tip of the iceberg, and the possibilities remain virtually limitless. Moreover, advancements in instant payment technologies have international implications, and will be critical to the modernization of cross-border transactions and the global payments industry as a whole. Data-rich ISO 20022 standards make it feasible for financial institutions on both sides of a transaction to exchange all the necessary remittance information that needs to accompany a payment, giving each party in the transaction the ability to continue carrying out the necessary regulatory compliance steps they may be required to take.

Consider the Immediate Cross-Border Payments (IXB) initiative. Developed by TCH in collaboration with EBA Clearing and SWIFT, the initiative is a first-of-its-kind solution to inefficiencies in cross-border transactions between the US and Europe. IXB’s technology has already proven its ability to settle a transaction in one system before synchronizing it in another across borders. By leveraging SWIFT’s infrastructure and ISO 20022 standards, the initiative has successfully converted real-time messages between international accounts.

The scope of the initiative continues to expand and has already benefited from the contribution of eleven banks, including Bank of America and Citi. Between continued developments from TCH and its collaborators, and the impending rollout of the FedNow system in 2023, the US is taking an increasingly active role in promoting payments modernization and real-time payment capabilities. As US companies start to gain the ability to settle transactions in real time with their international trading partners, they will also be able to unlock additional liquidity and be in a position to command more beneficial terms with international partners who may favor real time payments.

For businesses who operate exclusively within the US, take for example service companies and small/medium enterprises, the ability to count on funds earned from services rendered right away may prove to be a critical assist, specially in today’s economy where inflation seems rampant. For SMEs a dollar earned and received today is worth more than a dollar earned today and received five or ten days later. The same goes for workers who would benefit from receiving their day’s pay right away instead of at the end of the week or the end of the month. US financial institutions are seeing the kind of impact earned funds can have on workers and companies across the country and they see in a system like FedNow a big opportunity to provide new differentiated financial services like to same-day-pay for their corporate payroll clients who want to help their employees live better lives.

Of course, the US is not alone, and the international community has been notably unified in their efforts toward a successful digital transformation of the payments sector. To better understand each unique contribution from around the world, Volante produced a white paper examining critical developments in 10 distinct markets within the payments space, as well as what they imply for the next decade of innovation. To learn more, download the free white paper here.

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