What are faster payments: How do they work?
Patience may be a virtue. But when you’re trying to send and receive money, who wants to wait? Thanks to a state-of-the-art method called faster payments, it might not be a question worth asking anymore.
Learn more about faster payments to see how this emerging way to transfer money could help you pay—and get paid—faster.
What you’ll learn:
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A faster payment, also referred to as a real-time payment or an instant payment, is a near-instant electronic transfer of funds from one bank account to another.
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The U.S. has two faster payments networks: Real-Time Payments from The Clearing House and FedNow operated by the Federal Reserve.
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Faster payments generally settle within seconds. Alternative methods, such as automated clearing house (ACH) and wire transfers, can take hours or days.
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Services such as Venmo and Zelle® provide quick ways to send money, but they’re not technically faster payments networks.
What is a faster payment?
The Federal Reserve says faster payments are available “within seconds at any time of the day, on any day of the year” where the funds are settled and can be used almost instantly. That may sound simple—and similar to other payment options. But according to the Fed, near-instant timing and some technical aspects make faster payments different.
Faster payment timing
When money is transferred from one financial institution to another, payments can be settled immediately or deferred. The difference may go unnoticed if you’re the person receiving the funds. And deferred settlement may only take minutes. But in general, faster payments have to be settled between banks before the money is made available to the customer receiving the payment.
By avoiding the deferred period, faster payments help banks avoid taking on risk. If a transfer isn’t fully settled, the receiving bank takes on risk by making the funds available early. That’s because it basically becomes a short-term loan.
Faster payment process
For a transfer to be considered a faster payment, it also has to operate on an open-loop system. In an open system, people and businesses are able to send money to others even if they don’t have an account at the same bank.
A closed-loop system is the opposite. To help explain, think about Cash App or Venmo: If you want to use one of those services to send money to a friend, your friend would also have to have a Cash App or Venmo account. You can learn more about Venmo and other types of transfers in the FAQ near the bottom.
What are the faster payments networks
The first two faster payments networks in the U.S. are:
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FedNow, which is operated by the Federal Reserve
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Real-Time Payments, RTP for short, which is operated by The Clearing House
Faster payments networks connect banks and financial institutions to help process and enable faster payments. But there aren’t apps or services individuals can sign up for to use it.
The Federal Reserve compares its FedNow service to a high-speed highway. You might think of bank accounts as the vehicles in this metaphor. That means it’s up to individual banks and financial institutions to construct on-ramps so customers can use the highway.
How do faster payments work?
Faster payments start much like any other payment method: with a person or who wants to send money to a person or business. The Fed breaks it down into five stages. If you’ve ever transferred money, the five stages might look familiar. Remember, the difference between payments has a lot to do with speed—hence the name.
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Initiation: The sender signs in to their account to start the process, providing some basic information, including what account to send from, how much money to send and whom to send it to.
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Authorization: The sender’s bank confirms the sender has enough money to cover the transfer. Using a faster payments network, FedNow or RTP, the sending bank sends the payment information to the receiving bank. Once authorized, the sender can’t change the transfer.
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Transmission: The receiving bank validates the payment and the receiver’s account for fraud and other criteria.
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Acceptance: Using the faster payments network, the receiving bank accepts the transfer and puts the money into the receiver’s account.
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Receipt: With funds settled, the sender and the receiver are notified that the transfer is complete.
Faster payments FAQ
Learn even more by expanding the boxes below to see the answers to some frequently asked questions about faster payments.
Who uses faster payments?
Faster payment transfers are an emerging technology. So it’s up to financial institutions to provide the service to their customers. As faster payments are adopted, their speed and versatility could be useful in many ways. As the Fed notes, faster payments could eventually be an option whether you’re buying groceries, sending money to split a dinner bill or paying taxes. There are also uses for businesses and government agencies.
How are faster payments different from ACH and traditional wire transfers?
Round-the-clock availability and the speed in which payments are settled are two big differences between ACH and wire transfers.
The amount that can be sent as part of a single transaction may also differ. ACH or traditional wires may have higher limits, but the difference may go unnoticed for smaller personal transactions.
What’s the difference between Venmo and faster payments?
Venmo is a digital payment service that operates on a closed loop. That means payments are sent and received on an app or online within Venmo’s ecosystem.
Remember, the Fed says faster payments options operate on an open loop. Transfers within Venmo’s app may seem quick—and any deferments may go unnoticed. But to use the money outside Venmo’s ecosystem, it still typically has to be transferred outside the closed loop.
What’s the difference between Zelle® and faster payments?
Services like Zelle® don’t actually settle funds between the banks. When you send money from your Capital One account using Zelle®, Capital One debits your account and instructs the receiving bank to credit the receiver’s account.
Key takeaways: Faster payments
Faster payments are a new way to transfer money almost instantly. It’s still being adopted in the U.S. as a way to complement existing payment methods and create new uses.
No matter the payment method, it’s always important to be careful with your money and personal information. Learn more about what you can do to protect yourself when sending money as well as how Capital One helps protect your identity and accounts.
