Are faster payments only for the biggest banks?
As the Federal Reserve guides the U.S. on its steady march toward a faster payments system, a thorny issue continues to plague some of the most prominent efforts: Could the smaller banks stay abreast of the technologies that larger banks are readily supporting and deploying?
The Clearing House launched its real-time payments service a year ago, touting it as the first new payments rail in the U.S. in more than 40 years. Smaller banks responded with a shrug.
With the TCH's 25 owner banks behind the design, and the guidelines of the Federal Reserve Faster Payments Task Force acting as the operator's manual, the system stood out as a major accomplishment to complement the bank-supported Zelle P2P network and Same-Day ACH as examples of how the U.S. was making faster payments a reality.
But executives at smaller banks are left to wonder exactly how their operations would enter into this new age.
"The small bank sentiment has been pretty palpable," said Sarah Grotta, director of debit and alternative product advisory services for Boston-based Mercator Advisory Group. "A bunch of big banks get together and say this is the solution and this is how it is going to run in the U.S. The small banks look at this and say they have seen this movie before."
Even though all banks would pay essentially the same fees on many of the initiatives, Grotta added, the community banks and credit unions are starting to suggest that the larger banks stand to profit the most and maybe only one solution doesn't create a competitive environment. "They are looking for other solutions," she said.
This very much echoes several of the credit unions' perceptions of Zelle, a bank-run network that also supports faster payments. "Zelle is a top five bank-owned network, and all the fees go to them," said Jay Tkachuk, vice president of digital services at Security Service Federal Credit Union, at SourceMedia's PayThink event in September. "We as a business get nothing except liability and security expense."
In noting earlier this year that The Clearing House's Real Time Payments service had only six banks signed up four months after its launch, Finastra executives the suggested creation of a payments hub to better connect banks to real time payments.
In the past eight months, Finastra has moved to offer real-time payments through that cloud-based hub — the Fusion Global PAYplus for small and mid-sized banks. The hub represents all of the experience in faster payments that Misys and D+H had worked on prior to combining to become financial tech provider Finastra a year ago.
The hub also serves as a gateway that can deliver The Clearing House's RTP and other services, including FedWire, ACH, Swift messaging, and various compliance tools when banks are ready to add them.
"Real-time payments is new in the U.S., but it is not new to us," said Mihail Duta, head of product management, U.S. payments, at Finastra. "We have been involved in various RTP schemes since 2008 in the U.K., then in Sweden, Singapore, Australia and others."
With its faster payments solution installed at 40 banks globally, Finastra plans to aggressively deploy the payments hub during the second quarter of 2019, starting in the U.S.
"This is no longer just a play for larger financial institutions," Duta said. "We have made this available for all features to banks of all sizes."
Still, the choice will generally come down to whether a bank wants to benefit from securing cloud-based services, essentially getting payments through software-as-a-service, or if it would prefer to deploy through a private cloud and an upgrade of on-premises infrastructure.
"The Fusion Global PAYplus really levels the playing field," Duta said. "If I am a customer, I am no longer stuck with just going to a larger financial institution to get all of my services; I can go to my local bank because they can provide the same thing."
The Federal Reserve has definitely sensed that smaller banks could be left behind, as Fed Gov. Lael Brainard warned last month that insufficient coordination on faster payments could result in some not participating.
She also pitched the notion that a real-time settlement service provided through the Fed's regional banks "could significantly improve the prospect that banks of all sizes will have equitable access." The Fed is asking for more input from banks on that proposal and other concerns until mid December.
Both The Clearing House and Finastra have had important seats at the Fed planning table, and both are confident their technology can work for banks of all sizes. What exactly their input would be to the Fed pitching it could handle the real-time settlement piece of the puzzle regionally remains to be seen.