A Look Underneath the Hood of Real-Time Payments

Real-time payments do exactly what the name implies. They refer to transactions that clear and settle (almost) instantaneously. This type of payment is characterised by settlement finality, instant confirmation, and immediately available funds. For businesses with transactions that span countries – or continents – this is invaluable in fostering smarter financial management.

But how does the tech behind this process work? And why is it worth the investment for financial institutions?

The Instant Payment Revolution

For the past few years, the payment industry has been in the midst of a revolutionary shift. While the advances in card payments have been hugely driven by digitization and mobile centricity, new technology and even some regulations are enabling the emergence of additional innovations. For example, improving and new payment rails are spurring organizations to modernize their payments infrastructure which is causing payment timelines to shrink from days to mere seconds. This is enhanced by open banking which enables greater monetization potential and added value to customers, thereby driving innovation and greater competition. A couple of great examples of the adoption of instant payments include FedNow in the US where the Federal Reserve launched its instant payment rail in July 2023 or Faster Payments, the gold standard for UK bank-to-bank transfers. 

In turn, other financial institutions have recognised the importance of providing the best instant payment experience to maintain their market share. The demand for such payments has shifted priorities for many financial institutions towards innovating the underlying data infrastructure that powers these lightning-fast transactions. 

If done correctly, the data infrastructure will seamlessly integrate with artificial intelligence (AI) and machine learning (ML) tools, enabling powerful features like fraud detection and prevention, as well as delivering personalized experiences and operational efficiency. And so, financial institutions must continue to step up their game to meet and exceed customer expectations in this new era of instant payments.

The Starting Point

As with most innovation, it all stems from the underlying infrastructure. To enable instant payments, adopting a developer data platform with a flexible document data model unlocks the ability of offering instant payments with unparalleled speed and efficiency. This flexibility facilitates the seamless integration with different innovative technologies like AI/ML platforms, allowing financial institutions to adapt to changes in the payment landscape without extensive modifications to the infrastructure.

Not only does this help payment platforms get to market faster, but it also reduces data fragmentation and unnecessary complexity. 

In fact, document data models in the JSON format, when combined with a multi-cloud database, make it easy to alter the structure, format, location, and storage of a financial institution’s data in response to changing information and requirements.

How This Works in the Real World

With a solid data foundation, the instant payment process can be broken down into a few steps. In this instance, imagine a parent sending their teenager money for cinema tickets.

To begin, the parent will initiate a payment instruction of £10 using their mobile device to send to their bank. This payment instruction will then be sent to a clearing function, such as the Faster Payments Service. By using data in the JSON format and a developer data platform that’s integrated with instant payment infrastructures like the Faster Payments Service, this saves the bank from having to worry about translating data structures from the bank to the clearing function. 

The data platform can also capture and enhance payment data throughout the transaction, ensuring the efficient processing and retrieval of information. The role of the data platform extends to the beneficiary bank too, where it provides secure storage and retrieval of payment details while efficiently handling high transaction volumes. 

When it's time to make the funds instantly available, the data platform can ensure a seamless experience by capturing and enriching data with crucial information such as classification, invoice, accounting, and risk scoring data. 

This is also where a flexible document model is useful. By being able to accommodate enriched data, transparency and accuracy are enhanced. In turn, that also means that throughout the transaction, there is rapid and secure communication among the beneficiary bank, clearing function, and originator bank, which in turn ensures all transactions are ACID-compliant. 

Notifications, clearance confirmations, and updates flow seamlessly, enriching the payment data and enabling a smooth payment lifecycle.

The Benefits 

The benefits of this are not just in allowing friends to quickly settle tabs between each other. For financial institutions and businesses, this is crucial in improving cash flow, enhanced visibility into payments, simplified operations, strengthened business relationships, and increased innovation. 

Moreover, instant payments can offer valuable insights into spending patterns, helping businesses to enhance their financial management practices. By streamlining workflows and improving liquidity, businesses can save money and focus on essential operational aspects. Instant payments can also help build strong relationships with vendors and clients by eliminating uncertainties and delays, thereby promoting trust and facilitating smoother collaboration and innovation. Overall, real-time payments can pave the way for disruptive innovation, leading to the development of novel business models and applications.