Instant Payments Explained: What Banks and Credit Unions Need to Know About FedNow and RTP – Part 1

Instant payments are reshaping the way transactions are initiated, processed, and settled. As FedNow and RTP gain traction, faster payments are quickly becoming an industry standard. While the benefits—speed, efficiency, and transparency—are clear, many banks and credit unions remain cautious about adopting these new rails.

To help financial institutions navigate this shift, we spoke with Doug Hendricks, Senior Product Manager for Payments at Alogent, to answer key questions about instant payments: how they differ from traditional rails, what challenges and opportunities they present, and the steps institutions can take today to accelerate payments modernization.

1. “Instant payments” vs “Faster payments” – What’s the Difference?

Historically, instant payments and faster payments were used interchangeably, but there is a distinction. Faster payments is a broader term referring to initiatives that reduce payment times, like when electronic payment funds are made available to account holders quickly, but settlement still occurs later in batches. Instant payments describe transactions that post and settle in real time, meaning funds are available to the recipient and final settlement occurs instantly.

2. What’s the difference between the two U.S. instant payment rails: FedNow and RTP?

The U.S. instant payment ecosystem currently operates on two major networks: the FedNow® Service, operated by the Federal Reserve, and the RTP® network, owned and operated by The Clearing House. Both networks enable real-time settlement 24x7x365 and leverage the ISO 20022 messaging standard—a structured, data-rich common language that enhances transparency and analytics. Key differences exist in ownership, funding models, transaction limits, and liquidity management, with details continuing to evolve as both networks expand.

3. How are financial institutions across the U.S. adopting instant payments?

Many banks and credit unions are adopting in phases, beginning with receive-only capabilities. This low-risk, low-effort approach allows institutions to accept incoming instant payments and make funds immediately available to account holders without enabling send capabilities. This approach reduces initial operational and fraud risks while improving account holder satisfaction. Institutions don’t have to navigate this payment rail alone if they are hesitant to get started - partnering with fintech providers that specialize in payments modernization can accelerate digital transformation and support multi-rail strategies.

4. What are the primary use cases for instant payments in retail and commercial banking?

Use cases differ depending on whether the payment is initiated by a consumer or a business, but both share a common goal: enabling faster, more transparent movement of funds.

• Retail Banking Use Cases

  For consumers, the key drivers are flexibility and speed. Leading use cases include peer-to-peer (P2P) transfers and person-to-merchant (P2M) transactions, such as last-minute bill payments, retail purchases, and service payments. These capabilities enable account holders to move funds instantly – anytime, anywhere.

• Commercial Banking Use Cases

  For business owners, cash flow optimization is critical. Real-time business-to-business (B2B) transactions support immediate supplier and vendor payments, helping institutions better manage liquidity. Request for Payment (RfP) capabilities streamline receivables and reconciliation, reducing manual effort, processing delays, and human error.

5. What barriers are preventing financial institutions from connecting to faster payments’ networks?

Challenges differ by institution, but the most common include: 

• Legacy systems:

  This is often the biggest challenge, as real-time processing conflicts with batch-based environments. Upgrading or integrating with these existing payment processing solutions can be complex and costly. 

• Fraud and risk concerns:

  Instant payments are final and irrevocable, making it harder to detect and stop fraudulent activity since prevention must occur before or at initiation. Financial institutions must invest in real-time, preventative fraud solutions.

• Awareness and demand: 

  Some financial institutions have yet to see a strong demand from their account holders, but as expectations evolve (similar to the adoption of Zelle®), this demand will increase.

6. How will instant payments impact traditional payment rails like checks, ACH, or wire transfers?

Instant payments are not expected to replace traditional payment rails but are expected to complement them by offering financial institutions an additional option to enhance the banking experience. Different rails will continue to serve different needs of consumers and businesses. Batch payroll, for example, may still be best via ACH, high-value Fedwire transfers, or other legacy workflows. The opportunity for financial institutions lies in their ability to offer all payment methods to meet differing account holder preferences and use cases.

7. What competitive advantages do instant payments offer to financial institutions and their account holders?

Instant settlement is the true differentiator. Banks and credit unions gain a significant advantage by attracting and retaining account holders who expect immediate access to funds and 24x7x365 banking options. Another benefit is real-time liquidity management. With instant visibility into cash positions and faster settlement, institutions can forecast and manage finances more accurately, which is essential for decision-making and operational efficiency.

Stay tuned for Part 2 of our Instant Payments Q&A series, where we explore fraud risks, infrastructure needs, and what to look for when evaluating vendors.

Learn more: How Banks & Credit Unions can lead the Instant Payments Charge

Watch on-demand: RTP 101 with The Clearing House

Watch on-demand: FedNow: A Strategic Discussion with the Federal Reserve

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