EVER SINCE THE FEDERAL RESERVE convened its Faster Payments Task Force in 2015, we’ve been hearing a louder and louder drumbeat about the need for faster or real-time payments. As I visit with community bankers about the issue, I get a variety of reactions. Many bankers aren’t engaged in the discussion at all. Others are still only thinking about the consumer side of real-time payments, and some community banks are ahead of the pack and working on their plans.
For those that aren’t thinking about it at all, there seems to be four common responses:
• My customers aren’t asking for it.
• My core-system provider isn’t ready or isn’t even talking to us about it.
• I’m waiting to see what the Federal Reserve comes up with.
• We’ll start working on it later when prices come down.
I have found in my career that customers don’t necessarily engage in these kinds of discussions with us as bankers. If our bank isn’t offering something that customers want, they just find a vendor that offers it. Sometimes that is a single service engagement by the customer, and sometimes it leads to the customer leaving our bank for another financial institution or financial service provider. Regarding the latter, unfortunately, by the time we know there was an issue with the customer, he or she is already gone.
Therefore, I always encourage community bankers to be more engaged and proactive in this payments discussion, even though it is hard to determine an immediate ROI on these kinds of investments. Often, attempting to project customer engagement is little more than speculation at best. Build it and they will come, to quote a line from Field of Dreams. This is not exactly the ROI analysis that your finance or executive team is expecting, but banks can measure the cost of losing a customer. In this case, what is the impact of losing customers because they don’t see your bank even talking about these kinds of innovations? Many customers just go down the path of further fragmenting their financial relationship with us as banks. They have their credit card with one entity, maybe use Venmo or another option for peer-to-peer (P2P) payments, go online for various investment options, and get direct credit from an auto manufacturer or other retailers for consumer purchases. We think they are our customers, but what relationship do we really have with them? Do we just have their demand deposit activity (DDA) and see that all of the activity in that DDA is really occurring through other parties, essentially just making us a “storage bin” for their money? It is worth asking if, at some point, customers simply close out their accounts with your institution and move to an entity that can collectively meet more of their needs? By then, it’s far too late to let them know you were thinking about adding these services. The end result is the total disintermediation of community banks by non-financial institution innovators.
THE VENDOR FACTOR
Another reason why bankers chose not to engage in the real-time payments discussion is because they don’t hear anything from their core vendors on the topic. Much has been written about the frustrations of community banks with their core vendors because they seem to be more concerned about locking community banks into long-term, complicated, and one-sided contracts that actually hinder innovation. In many cases, these contracts have expensive interface fees that penalize banks for even trying to modernize and develop new solutions for customers. I’d love to see core vendors more openly and directly talk to us as community bankers about what they can do for us by forming true innovation partnerships with their community bank clients to more proactively help us meet the changing needs of our customers. For community banks to successfully compete, our core system providers must be more proactive in these discussions, be better at communicating their plans, and deliver timely solutions to their clients.
The initial push and most of the current discussions around real time payments are primarily in the consumer space. Most of the existing P2P payments options may be convenient, but they aren’t simple or real time. In many cases, the current P2P payment options add expense and risk for community banks and aren’t ubiquitous (available to everyone). Zelle is the first real option for banks looking to offer P2P payments for consumers. Many community banks are talking to their core system vendor about Zelle and wish they could move faster to implement the solution. But again, they are at the mercy of their core vendors and are very concerned about the price of access.
So, that brings me to The Clearing House and its RTP (Real-Time Payments) initiative. I currently serve as chairman of The Clearing House RTP Advisory Committee. I accepted that role because I wanted to better understand the direction of RTP beyond the consumer space and make sure that community banks have a voice in the discussions. The Clearing House and its owners understand that we will never have a truly ubiquitous and interoperable real-time payments network in the United States unless financial institutions of all sizes are part of the system. We also must realize that customers who see the value in real-time payments on the consumer level also work and manage businesses. They will begin asking why their businesses can’t move money on a real-time basis as well. As a community bank, if we aren’t thinking about that now and making our plans to eventually facilitate real-time payments for our consumer and business customers, they will find partners who will.
The Federal Reserve deserves the credit for rousing the financial industry to action. That call to action is creating a lot of activity and many initiatives by several parties. The Fed has yet to announce its plans, but hopefully it will soon. Many community bankers are asking them to engage. The mantra is: “The Road to 2020.” Only time will tell whether that date is realistic. It is certainly aggressive. However, the bottom line is that the real-time payments train is on the track and it will reach its destination. Engage now and be part of the initiative. Your customers are depending on you.