Real-time payments in 1,000 words
This is the third installment of the “X in 1,000 words” series. These are intended to introduce critical but mis- or under-understood topics—like interchange and payfacs—to fintech founders and operators. These aren’t exhaustive guides, but brief introductions I wish I had when I started in fintech. Questions and feedback are always welcome!
“Real-time payments” (RTP)1 is a simple term for a complex topic. The “what” is straightforward: RTP allow users to send and receive funds in seconds, any time of day and day of the year. How it works and why it’s a relatively recent phenomenon is another story.
There are 70+ real-time payment networks (RTPN) globally. Most launched in the last decade. Collectively they’ve reached impressive scale (266 billion transactions in 2023) and sustained impressive growth (42% y/y). This note explains how RTP work, what catalyzed their recent growth, and why some RTPN are more successful than others.
A brief intro to payment schemes and networks
To understand RTP, it helps to understand why most payments weren’t real-time. That requires a quick recap of payment schemes and networks— terms often used interchangeably but with subtle and important differences.
A payment scheme is a bundle of technology, rules, and regulations that moves money. Payment schemes have limited value in isolation. That’s because payments have network effects. The more buyers and sellers use a payment method, the more valuable it becomes. Payment schemes – which can be run by for-profit companies like Visa, government entities like central banks, or hybrids – often rely on third-party intermediaries like banks.
A payment network combines a payment scheme with the intermediaries (often banks and other financial institutions) required to onboard and support end users (i.e., buyers and sellers). Take card payments, for example. Visa operates a card payment scheme that supports the Visa network. Buyers and sellers rarely interact directly with Visa; instead, the bank interacts with the scheme on their behalf.
The important takeaway is that payments are more than tech, rules, and regulations (i.e., the scheme) that move money, but require intermediaries to connect end users to and through the scheme (i.e., the network).
Non-real-time payments: efficient but slow
Most payment networks started in the pre-digital era of the mid-20th century. Everything from the first card networks to the check system and equivalents were paper-based, human-powered, and manual.
Early payment networks used batch processing to remain efficient. Rather than processing payments individually, networks broke them into tasks, let the tasks accumulate at various steps, and moved them through the steps in batches.
Imagine a postal system. You drop a letter in a mailbox, which is picked up every few hours. At pickup, all mail goes to a central post office, accumulating until it’s sorted. Then, once daily, the mail truck delivers the sorted mail.
This is inefficient for individual letters. For example, in the diagram, the yellow envelope is dropped off shortly after the blue envelope. But it’s delivered much later— it doesn’t even make it onto the truck on the same day. However, this batch system is much more efficient for the average and majority of letters and makes the system’s cost manageable.
In payments, the processes needed to keep the system efficient, safe, and trustworthy coalesced roughly around the ones many would recognize today, in initiation, authorization, processing and clearing, and settlement:
Even after batch processing wasn’t technically necessary, the networks found it difficult to change because they had built so much of their businesses and processes around it (managing fraud and risk, staffing and customer support, liquidity, etc).
This led to some interesting historical quirks. For example, even into the 1990s, the Federal Reserve paid $35 million+ annually for a fleet of 47 airplanes to fly physical checks nationwide each night.
To recap, the 20th-century payment networks (card, ACH, wire, etc.) relied on intermediaries for scale and batch processing for efficiency at the expense of speed. Digital tech was necessary but not sufficient for RTP. Schemes moved as fast as the networks allowed, and the networks were often locked into the assumptions of batch processing.
Real-time payments: efficient and fast
RTP, then, are a scheme-plus-network purpose-built for real-time (i.e., parallel) processing rather than batch processing. Payments still follow the same broad auth, clearing, and settlement steps—enabled by the scheme and, critically, supported by the network.
Once new technology enabled it, several factors catalyzed real-time payment networks (RTPN). One is consumer demand. When consumers began to see their money 24/7 on the internet, they began demanding to be able to move it 24/7 too.
Governments were another big catalyst. Especially in less developed economies like Brazil and India, governments promoted RTPN to help citizens access financial services for the first time. RTPN and increasing digitization had the added benefit of making more transactions visible to and taxable by governments.
Today there are 70+ RTPN. Some countries have one; some have multiple. Some are decades old, but most launched in the last few years.
The global growth is impressive – 266 billion transactions and 42% y/y growth in 2023. However, 80% of real-time transactions occur in a handful of countries:
Two interesting points jump out from the chart. First, 4 of 6 networks are less than a decade old. Second and related, 5 of 6 networks were created by governments, which also mandated private financial institutions' adoption.
This explains why RTPN took so long to launch but saw rapid adoption once launched. The bottleneck wasn’t technology or demand but the coordination to jumpstart a network. In most cases, only a government mandate could provide such a catalyst. Regions with a market-driven approach or a government-sponsored but not mandated approach typically have lower adoption.
The government-mandated approach to RTPN is a double-edged sword: it allows rapid domestic adoption but focuses the networks domestically, unlike the more international focus of market-driven networks, such as in card payments. The next few years will see much interesting work stitching together domestic RTPN to support cross-border RTP.
A few last thoughts on the implications of RTPN:
First, tech wasn’t sufficient for RTPN, but many networks leverage their modern tech to enable powerful and/or novel features not found in traditional payment networks, such as Pix’s multiple portable aliases or RTP’s messaging. These open new areas for startups to innovate in.
Second, the market clearly prefers fast payments. So many non-real-time networks have launched real-time features to compete, like Visa’s push-to-card or SEPA Instant. Speed will go from a differentiator to a commodity—something consumers expect for low or no cost.
RTP is an exciting global phenomenon for consumers, fintechs, and financial institutions alike. It’s also an interesting lesson in how technology enables new behaviors, shifts consumer expectations, and forces areas like financial services to respond to those shifts.
If you have feedback or questions, or are building something interesting in RTP or fintech generally, I'd love to hear from you. I'm a former founder and now fintech VC. Learn more at mtb.xyz and reach me at mb @ matrix.vc
“Real-time payments” (lower case) refers to the broader category of payments where settlement is measured in seconds. “Real Time Payments” (capitalized, or RTP) is a specific implementation of this payment type in the US by The Clearing House. For simplicity, in this article, I’ll use RTP to refer to the broader concept of real-time payments rather than the specific US network known as RTP.