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The rise of instant payments: Opportunities and challenges for FinTechs

Learn all about instant payments: how they work, their advantages and limitations, and how FinTechs are tackling challenges like security and cross-border transfers.


The rise of instant payments: Opportunities and challenges for FinTechs

Learn all about instant payments: how they work, their advantages and limitations, and how FinTechs are tackling challenges like security and cross-border transfers.

Lavinia Aparaschivei
| Linkedin
| Content Manager

In Brief

Welcome to the third article in our Fintech Frontiers series, where we’ll be taking a deep dive into instant payments and the opportunities and challenges that it poses for FinTechs.

The Fast and the Fiscally Furious

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You’re splitting the bill at a restaurant with your BFF. They’ve paid for everything using their card and you want to pay them your share, but you don’t have any cash and heading out to find an ATM will take forever. But what if you could pay them in seconds, straight from your smartphone? 

That’s the power of instant payments. Traditional bank transfer can take several business days to complete. Instant payments, on the other hand, can transfer funds between accounts in a matter of seconds. 

Or imagine getting an instant refund once you return something. Being a retailer and receiving instant payment for a purchase. Having your landlord say you’re late on rent and being able to pay knowing they’ll receive it immediately. 

Such instant payments are great for users, small businesses, and bill payers alike. They offer a range of benefits, including improved convenience, faster settlements, reduced administrative burden, and enhanced financial visibility. By leveraging instant payment solutions, individuals and businesses can streamline their financial transactions, optimize cash flow management, and enhance their overall user experience. 

And while they’ve been around for years (in various forms), things are changing fast. 

Juniper research in 2023 made this clear: “…the number of instant payment transactions will exceed 376 billion globally by 2027; increasing from 97 billion in 2022, a 289% growth”. 

Combine this with the many recent international schemes and regulations that have been developed around instant payments, including Japan’s ‘Real-time Gross Settlement System’ (since 2001!), Australia’s ‘New Payments Platform’, the United States’ ‘The Clearing House Real-Time Payments’ network, and India’s real-time payment system ‘Open Network for Instant Payments in India’, and it’s clear that many countries and regions are developing their own systems or collaborating for cross-border interoperability. All with the goal of developing a more efficient and seamless global network of instant transfers. 

This global movement towards instant payments is also evident in Europe. 

The new Instant Payments Regulation (IPR) mandates that all Payment Service Providers (PSPs) in the EU must offer instant payment solutions 24/7/365 regardless of any specific scheme or currency and within their own country and any other EU member state. Transfers must happen within 10 seconds. 

This significantly boosts the (Single Euro Payments Area) SEPA Instant Payments (SCT Inst) technical scheme that launched in 2017 to facilitate instant credit transfers for all countries using the euro. 

The IPR is actually very important. As of April 2024, EU PSPs have only nine months to comply for receiving instant payments and 18 months for sending them. That’s not much time. 

But what’s it all about? Who looks to benefit? What are the challenges and opportunities? What role does (and will) technology play? 

And what do you need to consider when creating your own instant payment solutions (or when integrating one into your existing payment system)? 

A quick intro into instant payments

Whether you want to call them instant payments or real-time payments, faster payments, or even immediate payments, their goal is simple. Provide credit transfers within seconds, at any time of the day, on any day. With less steps and without traditional business hour limitations. 

Think of you and your friend paying for lunch. Here’s a simplified breakdown: 

  • Initiate: You open your payment app and enter your friend’s information (phone number, account information, etc.). 
  • Authorize: The app sends a request to your bank, verifying you have the funds. 
  • Clearing system: Your bank communicates with a central clearing system (such as  SEPA Instant Payments). 
  • Funds transfer: The clearing system immediately transfers the money from your bank account to your friend’s bank account. 
  • Confirmation: Both you and your friend receive notifications confirming the successful transfer. 

These transactions are informal and offer big benefits for consumers: convenience and speed. 

They can do it with their existing accounts and devices. The technical details are hidden away. They don’t need to know about the combination of elements that make it possible, including APIs, cloud infrastructures, and clearing systems. They open the app, enter some data, and they’re done. And it doesn’t matter what the transaction is: whether they’re making a payment, getting a refund, or filing an insurance claim. It was quick, easy, and created a positive user experience. 

And that’s good news for a huge range of industries. 

It’s time to fast track the user experience

As instant payments become more the standard than the exception, every industry will (to varying degrees) be using them. That they will boost the UX is a clear benefit for anyone looking to improve customer satisfaction and build loyalty.

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The FinTech advantage - making payments in a snap!

This will create huge opportunities for FinTechs to provide new and innovative payment services. As EY noted, ”…the true value of Instant Payments is only realized when completed by value-added services also known as “overlays”, such as request to pay, instant cross-border payments and fraud and liquidity management tools.” 

Ultimately, providing such solutions would raise bottom lines and “also the transactional volumes” on payment rails (the underlying systems and infrastructures that enable the secure movement of money from a payer to a payee). 

Thankfully, the introduction of the IPR will help FinTechs operating in the EU. While traditional banks have had an advantage due to established infrastructures, the IPR forces all PSPs to offer instant payments, which allows FinTechs to compete on features and the (very important) UX. 

Additionally, the focus on speed and accessibility will open doors for FinTechs to develop innovative services around instant payments, such as real-time expense management or integrating micropayments into loyalty programs or bill payments. 

The FinTech challenge - the need for speed

Yeah, you guessed it, there are a few.  

Today, there are limited cross-border payments, limited fraud protection, limited credit availability, and (yes) limited dispute resolution mechanisms in case of, for example, payment disruptions. Of these, ultimately, it is concerns over security – whether fraud, unauthorized transactions, data breaches, device security, payment interceptions, malware, and identify theft – that will require the most due-diligence for consumers and businesses to fully embrace instant payments. 

Addressing these security concerns requires a multi-layered approach, incorporating robust authentication mechanisms, encryption techniques, secure communication protocols, regular security updates, user education, compliance with regulatory requirements, and ongoing payment testing. Additionally, fostering a culture of vigilance and awareness among consumers and businesses is essential to effectively combat emerging threats. 

What’s more, instant payments aren’t universally accepted, are often QR code-based, and require users to have a stable Internet connection. Then there’s the legacy infrastructure to consider. Integrating with legacy banking systems can be costly and time-consuming. Standardization is also a challenge, and differences in regional schemes can make wider implementation far more complex. 

In addition, consumer awareness of instant payments needs to be raised, and security concerns addressed, or adoption may be too low. 

Let’s see how FinTechs can tackle these challenges:

  • Cross-border payments 

Discussed at Money20/20, this is an area of big concern (and potential). FinTechs can work with banks and regulators to create ways to make cross-border instant payments. This could involve using blockchain technology or working with FinTechs in other regions. 

  • Security concerns 

FinTechs can create systems that use AI and machine learning to analyze transactions in real time and identify suspicious patterns via pattern recognition, anomaly detection, real-time monitoring, and predictive analytics. 

Biometric authentication (fingerprint, facial recognition) for instant payments can also add extra security. 

Overall, they must protect sensitive data and prevent unauthorized transactions. Secure systems are hard to build and maintain, especially for smaller FinTechs with few resources. 

  • Limited credit availability 

FinTechs can use account aggregation services to let users link their accounts and make instant payments from various sources. 

New credit scoring models can also help more people get instant credit, especially those who don’t have bank accounts. 

  • Dispute resolution 

FinTechs can create AI-powered dispute resolution tools to handle common issues, saving time. 

Blockchain technology can also provide an audit trail, making it easier to resolve disputes. 

  • Beyond QR codes 

Fintechs can create open APIs that let users pay instantly from different apps and platforms. Users can then pay in more ways than just with QR codes. 

Technologies like Near Field Communication or tokenization (a security measure that replaces sensitive payment card data with unique tokens that represent the card data) can also let users make instant payments even when they don’t have internet access. 

  • Legacy systems 

Building and maintaining the infrastructure to support instant payments can be complex and resource-intensive. FinTechs must make sure their infrastructure can handle lots of transactions, especially at busy times. FinTechs in the instant payments space must deal with a lot of demand and keep up. 

Cloud-based solutions can help integrate instant payments with legacy systems more efficiently, reducing costs and time.

  • Standardization 

FinTechs can advocate for standardized protocols and interoperable systems for instant payments across different regions.  

  • Consumer education 

Some consumers may be hesitant to adopt new payment methods due to unfamiliarity or concerns about security and privacy. FinTechs must educate customers about instant payments to build trust. Also, FinTechs may need to offer incentives to get consumers to switch from traditional to instant payments. 

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Let’s not forget the new Instant Payment Regulation (any regulation, to be honest). 

Meeting its technical and regulatory requirements will certainly be expensive and time-consuming. For smaller FinTechs, upgrading systems and ensuring compliance may strain their resources. And then there’s the competition from incumbents: Large banks with resources can adapt quickly and offer instant payments within the IPR’s deadline, making it harder for FinTechs to differentiate themselves on speed alone. 

The fintech opportunities - seizing the pay-tential

FinTechs can differentiate themselves in the instant payments space by offering value-added services and solutions that go beyond the basic transfer of funds. 

First, and arguably most important, is the ability to create a truly enhanced user experience by developing highly personalized features that cater to user preferences, such as budgeting tools, spending analytics, and the ability to set up automatic payments and recurring transfers. They can also help integrate instant payments with existing platforms through open APIs, allowing users to initiate payments directly with other applications (from online shopping to bill payments to money transfers between friends and family). 

Don’t skimp on the user experience! The more user-centric your solutions are, the more they’ll be used – no matter whether you’re developing advanced payment capabilities from micropayments to open banking services or integrating advanced fraud detection and/or multi-factor authentication. Along the way, you can even contribute to financial inclusion through alternative credit scoring models or microloans and instant financing options. 

And let’s not forget cross-border payments, where solutions can help ensure smooth payments around the world using blockchain technology. This would also lead to solutions that provide multi-currency support for instant payments. Instant payment solutions could be integrated with investment platforms for quick and easy deposits and withdrawals, and even instant payments for insurance premiums. 

The future might be about instant payments, but the true competitive advantage will be creating solutions that foster a more comprehensive and customer-centric instant payment experience. 

The future of instant payments is fast approaching

The world of instant payments is changing, thanks to new trends, tech advances, and regulations. FinTechs are a big part of this, using their creative ideas to find new ways to make money and meet consumer needs. Here’s what to expect in the coming years: 

  • Continued growth: Instant payments will keep rising as consumers and businesses demand faster, more convenient transactions. 
  • Tech integration: FinTechs are exploring blockchain, AI, and IoT to enhance instant payment efficiency and security. 
  • Security priority: FinTechs are doubling down on biometric authentication and encryption to prevent fraud and ensure trust. 
  • Regulatory compliance: Staying on top of regulations is crucial for FinTechs to navigate the evolving payment landscape. 
  • New markets, new uses: Instant payments are expanding beyond traditional banking, opening doors for FinTechs in e-commerce, remittances, and more. 

It’s going to be a time of innovation, growth, and market disruption so pack your bags, because… 

Instant payments are taking flight, but can you get on board quickly enough?

Instant payments are about to change the way we pay. Fast money is right! While there are still some challenges, FinTechs are in a great position to deal with them and make the most of instant transfers. By focusing on user experience, security, and new services, FinTechs can become the driving force behind a faster, more seamless future of payments. 

One thing, however, will be essential for success, and that’s payment testing. Knowing your solution truly works and provides the perfect UX throughout the customer journey is vital. Thankfully, we reveal everything in the next Fintech Frontiers article, where we cover the 10 most important questions about payment testing!  

And, if you haven’t seen them out already, make sure you read the other articles in our Fintech Frontiers series to see what else is impacting the FinTech and BFSI industries!


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