Community banks join forces to speed up payments

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The massive scale of the e-commerce market is burdening community banks with its volume of payments. But there may be strength in numbers.

The Bankers' Bank is turning its correspondent banking model to faster payment processing, acting as a funding agent for depository institutions that want to use The Clearing House's real-time payments network (RTP).

Bankers' Bank hopes that by funding and managing positions in an RTP joint account, it can lower the bar for entry into RTP for smaller institutions. There are many real-world use cases, ranging from e-commerce to supply chain automation, that can help community banks combat threats to their relevance by supporting real-time payments at all times.

"Community banks would be left behind if they don't get access to the real-time payments rail," said Matt Sitkowski, executive vice president and chief financial officer of Bankers' Bank, a Madison, Wis., bank-owned correspondent bank. "We're assessing our community banks' ability to get onto the real-time payments rail, and the easiest way to do that is to place ourselves in the middle."

Bankers' Bank primarily serves community banks in Illinois, Wisconsin, Indiana and Iowa, with a network of more than 700 financial institutions. It doesn't serve consumers, so its primary goal in this collaboration is to bring community banks into the Real-Time Payments service.

"Community banks in most cases don't have the resources or the ability to spend on technology to connect to something like this," Sitkowski said. "We are uniquely qualified to do that. We manage transaction rails for checks, wire transfers and ACH."

There are distinct payment needs for community banks due to encroachment from outside rivals. Apple's moving closer to banking, as Apple Card threatens all banks through instant issuance. But Apple Card could particularly hurt community banks by combining fast issuance with real-time payments through the Federal Reserve's pending real-time rail.

Additionally, fintechs are closing in on small businesses, a market small banks have traditionally owned, partly by offering easier experiences for digital payments. There's also a growing need for digital B2B payments as small businesses slowly migrate away from checks.

"Since over 50% of commercial transactions are still settled by check, there's an opportunity to bring real-time payments to these businesses through community banks. We can work with the banks to manage lines of credit or whatever else they need," Sitkowski said.

For The Clearing House, the Bankers' Bank collaboration adds an addressable market of community banks at a time when it's trying to build a base of smaller banks for RTP. Small banks are starting to announce support for RTP after a slow start.

"A funding agent can really help a mid to smaller sized institution to manage its settlement position for real-time payments," said Sarah Grotta, director of debit and alternative products at Mercator Advisory Group, adding the small bank will prefund settlement based on a predicted volume and can have that managed by the agent-who will guarantee transactions are always funded based on the collective pool of funds from multiple banks and credit unions.

"This is particularly useful for an institution that isn't in the habit of running 24-hour, seven-day-a-week operations every day of the year," Grotta said. "If it exceeds their prefunded amount over a holiday, for example, it can be assured their transactions are covered and reconcile on the next business day."

RTP is also trying to build its base as the Federal Reserve develops FedNow, a government-backed option for real-time payments. FedNow is expected to take up to five years to develop, and RTP has continued to register financial institutions in the interim.

In interviews, Sitkowski and Lee Kyriacou, senior vice president of RTP at The Clearing House, didn't comment extensively on FedNow, though they did point out the long time frame.

"2023 or 2024 is an age away, and there's a lot of work to do before that," Kyriacou said. "Frankly the sooner we get real-time payments going the better it will be for the economy."

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