How do Instant Payouts work?
Instant Payouts offer the ability to pay a freelance contractor, gig worker, or marketplace vendor immediately after receiving the product or service.
Instant Payout options
- Push to debit card
- Virtual credit cards
- Real-time Payments (RTP)
- Same-day ACH
- Remote check printing
1. Push to Debit Card
The major credit card companies Visa and MasterCard offer push to debit card payment options. Consider you are an independent home remodeling contractor who uses an online service platform that connects you to residential property owners who want work done on their houses. The platform handled the marketing to get the homeowner's attention for you and take payments directly from them for the services rendered.
2. Virtual Credit Cards
This instant payout option creates a digital or virtual credit card (VCC) with a 16-digit credit card number, CVV security code, and expiration date. The recipient can use this for any online purchases or to fund an e-wallet just as they would a physical credit card.
3. Real-time Payments (RTP)
RTO is another option for immediate funds payout. Major banks (approximately 60% of US bank accounts) essentially communicate and move money in near real-time. If a gig workers bank is not n-network the default fallback payment is Same-day ACH.
4. Same-day ACH
Most ACH payments take 2-4 days to process. Same-day ACH uses the ACH rail but also requires the bank to fund the recipient’s account. This is only possible if the transactions and batches are received by 11 AM. Any ACH files received after that time will not be processed until the next day. In order to use this instant payout option, you will need to pre-fund an escrow account to cover the transactions.
5. Remote Check Printing
The final Instant Payouts option is to email an electronic check to the payee or print a physical one and mail it directly to them. In the first case, the person will print the image from their email and deposit it in their bank.
What do Instant Payouts Cost?
We will use the example of a transportation gig worker, eg Uber. Conventionally the worker would aggregate hours worked for the week and receive an ACH deposit to their bank account on Friday or Monday am.
These gig workers are paying for gas to drive riders to the airport eg. As we all know the cost to fill up your car has become very expensive. Using Instant Payouts the drive could elect to be paid every day or even twice per day.
If they choose the ACH option there is typically no cost to them to receive the monies owed. If they elect an Instant Payout, the fees generally range from a couple of $ to a percentage of the payout. So if they were owed $100 bit elected an Instant Payout to a debit card they would see a $98 deposit (for example).
Mitigating Financial Risk
The process of using an Instant Payment solution partner involves pre-funding an escrow-like bank account. This helps mitigate risk as the money for the payments you make to the recipients is already available in the system.
Imagine if you sent a payment to another person with an expectation of being paid back in the future. If you could not retrieve the funds, it would have an extremely deleterious effect on your business. Any financial loss can cause a ripple effect of negativity that affects every other part of your operations.
Pre-funding mitigates financial risk. Other solutions include lines of credit or payment terms extended to high-reputation companies, but not everyone has those options.