[101] The instant payment method that every neobank wants to offer
Originally published October 25, 2021
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Back again w/ another fintech 101. And since it's Money 2020, let's talk money movement.
You run a fintech & your users want money in/out fast. You could use instant transfers. But what are these txns & how are they used? Read on in this Monday thread.
First a note on money movement - there's a TON of options to move money & it's not always clear which is fastest. Here's my high-level hierarchy but as @gil_akos notes, there's a lot more options in between. We'll focus on the fastest method for now.
Before we get into the types of instant transfers, let's talk about why they're instant. Even though these are basically deposit / withdrawals, these txns technically run on payment network rails (Visa Direct / MC Send) so they can be processed like a purchase - super fast 🤯
Thanks to this network ingenuity, you can skip the clearing houses (~3-5 days) and the bank systems (~1 day) and get funds as instantly as an auth/settle over a payment network (~<30 min), even on nights / weekends.
Now, Instant transfers do differ if it's money in vs. out.
Let's start with instant money transfer out - the OCT.
An OCT is an "Original Credit Transaction" which literally means your fintech is the "merchant" refunding (crediting) a txn, without an actual purchase. In practice, you "push" money from a user acct to a recipient acct.
This looks & feels like a withdrawal or transfer, but it's instant. You've probably heard of "instant payouts" (or poorly named "instant deposits" w/ CashApp which is also the same) - that's an OCT.
BUT you'll have to pay extra for speed & b/c there's more parties than ACH.
Fun fact #1: you pay a fixed fee to the acq. processor + bank (~$0.25). You pay a fixed IC fee to the issuing bank (~$0.10). You pay a small var. fee to the network (~10bps). So on a $100 txn, you'll pay ~$0.45. But fintechs usually charge 1.5% ($1.5) for this, for ~70% GM 🔥.
Fun fact #2: when you initiate this OCT, the receiving fintech actually gets revenue via interchange AND money is going into their acct. What's better than free money in? Free money with $0.10 per txn interchange!
Okay, let's move on to instant transfers in - the AFT.
An AFT is an "Account Funding Transaction". In purchase parlance, a user is "buying money" at your fintech "merchant" with money from an origin acct. In practice, you "pull" money into your user acct from an origin acct.
This looks & feels like a deposit, but also instant. You've probably heard of "debit card linking" or "instant funding" to fund your account - that's an AFT.
You also pay extra for speed, & since this is like a full purchase (vs only a credit like OCTs), you pay even more.
You still pay a fixed fee to the acq. processor + bank, but interchange + network fees are per txn AND variable and depend on whether the card is Durbin exempt or not. So it's hard to say what you pay w/o card mix but it's more than OCTs & not typically offset by fees. Why?
Ultimately your fintech is getting money in the acct and it's good for you to reduce friction. You're hoping your user spends that money at the very least and ideally they make you their primary fintech. And maybe you rely on that OCT fee if they do end up transferring out.
Fun fact #3: When you do an AFT for a user, the other fintech actually records purchase volume (even though it's more like a withdrawal / external transfer for them). Depending on how "non-primary" that other bank is, a lot of their PV could be AFT volume 👀
Fun fact #4: Relatedly, since AFTs are technically purchases, that other fintech is also making interchange on each txn. What makes money transfers out less painful? Free revenue on the way out! It's at a lower IC rate category (General Services / Money Transfers) but still.