Community and regional banks need to remain competitive in the rapidly evolving payments market by offering secure, real-time payments.
We live in a "give it right now, need it yesterday" age. We can browse the web and watch videos on our smartphones and we can order items from Amazon that sometimes arrive on the same day, but banks have often struggled with meeting the demands of the digital age. Offering real-time payments to their customers is one way to meet the needs and expectations of customers in an increasingly "on demand" world.
Although Americans still rely on cash, credit cards, and paper checks to pay bills and for goods and services, people have increasingly adopted electronic payment methods offered by fintechs, such as Venmo and PayPal, for seemingly instant payments, or have migrated to retailer-specific payment options, such as the Starbucks card and mobile app for convenience or rewards perks. Meanwhile, Apple Pay and Google Pay are gaining acceptance, which puts a layer or two (or three) between the payments relationship banks have historically shared with their customers.
With all of these changes in the ways customers prefer to make payments, where does that leave banks? And for small businesses and bank customers who are looking for ways to make real-time payments that fit their lifestyle, what are their newer options?
Let's first focus on why businesses and consumers are searching for ways to make real-time payments. Tech savvy small businesses, their customers, and suppliers need a faster and more robust way to pay bills, manage their cash flow, and protect themselves from hackers. Although we won't be in a totally cashless society in the foreseeable future, financial institutions of all sizes are working to allow customers to send payments the way they want to send them—this includes not only the method (cash, check, electronic), but also the timing (next day, same day, or real time).
Small business gains with real-time payments
Real-time payments for goods and services and for payroll is not just for cutting-edge internet retailers. Small businesses see the benefits of instant payments as well. If your client runs a small business—say, a cozy gastro pub, plumbing company, or family restaurant—the owners often have to pay suppliers with either cash, a paper check, or credit card. Often these payments have to be made at the time of delivery from the owner after he or she counts in the inventory and signs for the goods. If you are a restaurant owner and the payment is for cases of beer or wine, you cannot leave this to the teenage server or host.
With real-time payments, small business owners can avoid handing over a stack of cash or cutting a check by clicking on an icon on their smartphone or tablet. Through a trusted financial institution, the money is transferred in real-time with immediate verification to the sender that good funds have been transferred into the receiver's account. Traditional payment methods can take multiple business days to confirm and clear. Explaining the delays that may be associated with a traditional payment isn't an easy conversation for a small business owner to have with a suppliers on the Friday of a three-day weekend.
Real-time payments, if integrated with a small business' accounting software or vendor management solution, also reduce the costly back-office tracking of invoices and reconciliation process. For instance on the RTP® network offered by The Clearing House, invoices and communication between the biller and receiver can be sent along with the transaction, which essentially creates the foundation for a real-time cash management system for small businesses. Real-time payments can add a real-time, up-to-the-minute view of a small business' cash flow and immediately update back office tracking systems.
Employers are also looking for greater efficiencies and flexibility in the payroll process. All employers face emergency payroll situations where a payment doesn't go through for some reason and the employee needs to be paid immediately on pay day. Today, many small businesses will cut a check that the employee would need to take to the bank, or issue a same-day ACH payment, if possible. But what happens if the employee only realizes on a holiday or a weekend that their payroll deposit didn't go through? Most often, they would have to wait until the next business day to receive payment, which isn't ideal from the employee or employer's perspective.
Likewise, some employers, such as gig economy companies or businesses in extremely tight labor markets, are looking to provide daily payroll as an incentive or to retain employees. And lastly, some states require employees to be paid in full immediately on the day they are terminated.
Real-time payments can also boost a small business owner's reputation. If they are known as a slow payer—one that takes days for the payments to come through—the word will spread in a strong economy and they may find themselves having a hard time hiring contract workers or vendors/suppliers for the next event or project.
Consumers benefit from RTP
The success of PayPal and its "mobile first" subsidiary Venmo have blazed a path for Peer to Peer payments. CNBC reports that the P2P app—which spawned the phrase "Venmo me"—processed $62 billion in payments in 2018 and is poised to reach $100 billion by the close of 2019. Other P2P apps like Google Pay and Apple Pay are seeing growth as well.
This means there are real opportunities for community and regional banks to step in and provide secure real-time P2P services to customers.
The RTP landscape
The real-time payments landscape may appear to be crowded with well-known and established fintechs, impressive apps, and fresh-faced upstarts, but banks still have time to act.
As an alternative to fintech apps, Zelle, another P2P provider, is featured in banking apps for many financial institutions. While it may not be a household name, Zelle has proven to be even more popular compared to Venmo: In 2018, Zelle processed $122 billion in P2P payments, which is nearly double Venmo's $62 billion.
Other so-called "faster payments" solutions include card or "Push to Card" payments and same day ACH. Push payments allow customers to send money directly to merchants either on a one-time or recurring basis. Likewise, lenders can push payments to a borrower's debit or prepaid card. Push payment providers boast of shorter settlement times and lower costs. And major players are taking notice. Push to card payments represent a $10 trillion opportunity in the United States, according to Visa.
Banks, large and small, are taking notice of the faster payment trends and are signing on to the RTP network provided by TCH. More than 51% of U.S. accounts already are able to receive RTP payments, and the number continues to grow.
The US Federal Reserve is also stepping into the faster payments market with its proposed FedNow system. Currently projected to debut in 2022 or 2023, the program aims to offer real time payments via a government built and operated system. How a new Federal Reserve payments system will fare once it debuts remains to be seen. Currently the Federal Reserve hasn't released many specifics about FedNow, as it is still under development.
How a bank joins the real-time payments revolution
Small community and regional banks might feel that the real-time payments train has left the station. Hardly. There are plenty of business and technology resources to help community and regional players offer cutting-edge payment systems to their customers today.
In fact, companies located right here in Wisconsin are already helping banks looking to join the real-time payments revolution. Bankers' Bank of Wisconsin will play a key role in faster payments as a Funding Agent for community banks participating in the RTP network, and will participate as an early adopter of the technology. As a Funding Agent, Bankers' Banks will fund and manage positions in the RTP network joint account on behalf of its respondent community bank customers. This allows the bank to lower the requirements for participation and provide additional features and benefits around settlement and management of customers' RTP network participation. Bankers' Bank has chosen to work with CGI, a global end-to-end IT and business consulting services partner and leader in innovative payment programs and solutions, to develop a one-of-a-kind funding solution that manages the funding for settlement in the RTP network joint account for Bankers' Bank clients.
Another local company engaged in the changes is UFS, which provides technology and services exclusively to community banks. UFS, which was founded and is owned by twenty Midwest community banks, sees a unique role as a technology outfitter with a focus on guiding and empowering banks through payments change. By providing freedom and flexibility to innovate, along with access to technology solutions and payments networks, UFS can focus on improving the operational processes and integration that allows banks to execute on their real time payments strategy with confidence.
Why make the move? To maintain customer relationships, community banks need to remain competitive by offering services that meet customer needs such as real-time payments. Not doing so risks losing the deposits that are at the heart of community bank business models. As any small bank knows, customers don't mind having money in different financial institutions so long as they can readily access it and can easily pay bills or pay a friend or family member quickly. With TCH's RTP network, which is available to financial institutions of all sizes now, banks can remain competitive and ease implementation time and expense with little to no technical adoption on the part of the bank by leveraging third-party providers like Bankers' Bank of Wisconsin, UFS, and others. Smaller financial institutions may not have the deep pockets that larger financial institutions have when it comes to making technology investments, but they can and do work with established core banking platform providers, many of which are actively rolling out real-time payments capabilities on the RTP network for their customers.
And your bank is not the only financial institution mulling the move to real-time payments. According to the 2020 Real-Time Payments Report from Levvel, a technical execution services provider and consultancy, a large majority of financial institutions are prioritizing real-time payments over the next 12 to 18 months. Currently, 74% of FIs are now in progress with or considering the RTP network for at least one of their customer segments to meet growing demand and gain a competitive advantage. A majority—53%—are either planning or have completed a significant technology upgrade or a full digital transformation to offer real-time payments. Nearly three quarters—72%—say they will need to rely on third-party technology providers to help implement real-time payments. Further, 84% indicate they will use real-time payments to drive other technology changes.
Every journey starts with a single step
We are in the era of real-time payments and many banks are joining the real-time payments revolution.
"Financial institutions and their customers like the benefits of real-time payments. They like to see the data, information and the clarity around the transactions," said Sarah Grotta, Director of Debit and Alternative Products Advisory Service at Mercator Advisory Group, in a recent podcast entitled, "A 5-Step Plan for Adopting Real Time Payments."
She added that it's a "very interesting time for banks to be in real-time payments."
Mills is vice president of RTP Network Business Development at The Clearing House in Chicago, a banking association and payments company that is owned by the largest commercial banks and dates back to 1853.
Skrum is WBA communications manager.
Bankers' Bank: Wisconsin Connections to Real-Time Payments
Bankers' Bank is becoming a Funding Agent for depository institutions looking to provide real-time payments capabilities to their customers. This will be through the RTP® network developed by The Clearing House (TCH).
As a Funding Agent, Bankers' Bank will fund and manage positions in the RTP network joint account on behalf of its respondent community bank customers. This allows them to manage the requirements for participation and provide more features and benefits around settlement and risk of customers' RTP network participation.
Bankers' Bank has chosen CGI, a global end-to-end IT and business consulting services partner, to develop a funding solution that manages the funding for settlement in the RTP network joint account for Bankers' Bank clients.
To ensure banks have the tools necessary to compete, Bankers' Bank is building a 24/7 liquidity management solution for RTP transactions. The tool will be incorporated into the suite of Cash Management solutions Bankers' Bank already provides. Overall, this will allow banks of all sizes to more easily participate, compete, and transact on the RTP network.
The RTP network provided by TCH is a system delivering 24/7 clearing and interbank settlement, including the real-time movement of money and enriched data between participating financial institutions. The RTP network currently reaches more than 50% of U.S. accounts for real-time payment receipt.
Bankers' Bank has gotten in on the ground floor of faster payments, from the evaluation stage with the Federal Reserve task forces, to today with The Clearing House's RTP Network® as a Funding Agent, and into the future with developing services like FedNow. Our focus is always on creating ways to make community banks competitive, offering the forward-looking solutions needed in tomorrow's payment landscape. By developing our Funding Agent solution for RTP, Bankers' Bank lowers barriers to entry for a bank looking to offer both incoming and outgoing faster payments. By using Bankers' Bank's existing cash management tools to access the RTP settlement Joint Account, our customer banks will be able to easily manage the funding of real-time transactions.
Implementing real-time payments represents the biggest change in transaction processing since Check 21, and is a once-in-a-generation opportunity to offer a completely new service. While none of the existing payment rails are going away anytime soon, there are use cases that faster payments are uniquely suited to which community banks will want to make available to their consumer and small business customers. And this is just the beginning. "Bankers' Bank is committed to combining all of the services of a correspondent bank with the flexibility and capabilities of a technology company. To serve our bank customers we are committed to be both," said Matt Sitkowski, EVP/chief financial officer at Bankers' Bank.
Bankers' Bank, "Always your partner, never your competitorTM," is a WBA Gold Associate Member.
UFS, LLC: Wisconsin Connections to Real-Time Payments
It is an exciting time for community banks as innovations in payments continue to accelerate, creating many new options for banks. With multiple and growing options over the next five years, there will be choices that align with each bank's strategy and local community's needs. Often, the fintech innovators focus on the customer experience over the process. If the bank owns the business or consumer's core checking relationship, they get control of the process, data, and settlement. Improvements in real-time payments will likely increase the importance of the deposit account, as the disparate application's separate balance functions are no longer needed. At the same time, the complexity of managing the growing list of payments networks, end user's options, and payments exceptions in real-time will increase.
UFS's role in this evolution is to be the technology outfitter and guide, in a way that provides tools, market information, risk management, and innovations in the back-room process so that community banks retain flexibility, and remain in control and confident during this evolution. As banks gear up to support the real-time settlement and reporting needs of their customers, the value of a local, community bank relationship will be enhanced.
A key function of UFS in the 24×7 real-time payments ecosystem is to ensure accurate balances and settlements in a way that minimizes fraud and risk. Risk management is and will continue to be a key role played by bankers as they create confidence for their customers.
In addition, Mike Venaccio, UFS Product and Architecture executive noted: "In the context of changes in the payments market, we see the value of deposit balances being superseded by the value of the data. Almost every non-bank entering the faster payments space is prioritizing data collection. UFS is engaged in ensuring both customer confidentiality and empowering banks to leverage the data in a way that prioritizes the relationships with businesses and consumers."
Mike Tenpas, UFS CEO clarified: "Ultimately as the technology outfitter for community banks, our job is to ensure flexibility and freedom in the options banks choose as the industry evolves, and wrap those options with process in a way that creates confidence for bankers to explore and listen to their customers for the ways that real-time payments will impact their financial lives."
UFS, LLC, a community created by bankers for bankers, is a WBA Silver Associate Member.
By, Amber Seitz