Parsing the Proliferation of Payments

ACH. Check. Credit card. Debit card. Wire. And now FedNow and RTP. With the introduction of instant and real-time payments, two new payment rails came on the scene, expanding community banks’ payment options. Further intensifying banks’ payment choices, products like Zelle and digital wallets layer on top of these rails. 

“It’s almost like drinking from a fire hose,” says Tede Forman, president, payment solutions at Jack Henry. “There’s so much coming at people right now. Financial institutions need to keep the customers’ needs and expectations front and center.”

Matt Wilcox, president of digital payments and data aggregation at Fiserv, concurs, pointing out that by narrowing in on the needs of their customer base, community banks can avoid being besieged by choices. 

The sheer number of different use cases for payments options can be overwhelming, he says. His advice for community banks? “They should just think about what are the most important [use cases] to their customers.”

Customer-based decisioning

When it comes to the payments a bank should offer, experts agree it’s about customer demand. 

Whether a community bank focuses on speed of payment, overall user experience, easy implementation or a combination thereof depends on the customers they serve and their varying requirements and needs.  

As Lance Noggle, senior vice president, operations and senior regulatory counsel at ICBA, explains, a bank serving Chicago may have a very different customer base from one in rural Montana. Banks should determine payments priorities based on how they can best support their customers now and into the future. 

“I think community banks need to look at existing customer needs,” Noggle says. “If you’re really focused on providing consumer banking, looking at Zelle might be important. If you have a lot of small business banking, you might be thinking about one of the instant payments networks, as small business clients might be able to take advantage of money moving around instantly.”

Lifeblood of the customer

In today’s landscape, increased competition from nonbank entities elevates the role of payments as mission-critical offerings.

“Payments are the lifeblood of the customer,” says Kelly Burdette, senior vice president, digital and products, at $2.6 billion-asset Bank Independent in Sheffield, Ala. He cites the philosophy of the bank’s owner and chairman of the board: “If we lose the payment, then we’ve lost the customer.”

Community bankers need to look no further than PayPal’s volume—6.3 billion payment transactions in the third quarter of 2023, up 11% year-over-year—to see the continued pressure on their payments business. In short, the competitive landscape needs to factor into payments decisioning as well. 

Fortunately, the proliferation of new payments offerings creates potential for customer products and services. Consider, for instance, FedNow and the opportunities it may bring (see sidebar on next page) and the possible lost opportunity costs associated with not engaging. 

“If you think about FedNow, we may not be that far away from government-issued payments—think tax refunds,” Wilcox says. “The government might want to use FedNow to [send] out, and if a bank is not enabled to at least receive [FedNow payments], its consumers might be waiting a few more days for their refund than maybe they would at the bank down the street.”

Planning for implementation

Yet, introducing new payments solutions comes with its own set of operational considerations. 

In many cases, enabling a new solution entails a required upgrade of existing infrastructure. Legacy system modernization goes hand in hand with implementing instant or real-time payments, for example. 

“There are a lot of various different systems in place,” Noggle says. “It’s never planned out like it would be if you started from scratch.” 

Whether they’re working with the core provider for all implementation or engaging with fintechs to support payments solutions, community banks need to start off with a payments strategy in mind that includes partner planning, so that they can methodically work through the execution.

“Priorities for payment initiatives really need to be [a part of] that payments strategy,” Forman says. “Then, FIs can create action plans that execute on that strategy.”

Making the call on payments

So, when it comes to payments, when’s enough enough? 

“I don’t think there’s such a thing as too much,” Noggle says. “Some of these rails are so you can provide as much service to your customers as possible. It might not be necessary to do everything if you’re really focused in a particular area, but having them creates opportunity.”

What’s offered and to whom all goes back to having a firm strategy in place. 

“The types and varieties of payments offerings should be determined basically as a component of a payments strategy; that’s the foundation,” reiterates Forman. “While FIs shouldn’t feel compelled to offer every new solution on the market, they should monitor the evolving payment opportunities to determine which ones could increase profitability.”

Payments also serve as a relationship driver. Because they are ever-present in daily life, they serve as a constant connection to the customer. Every day, customers send and receive payments, relying on their banks to facilitate them efficiently, safely and securely. As relationship bankers, community banks recognize the need to maintain that important connection and remain central to payments as they scale. 

“Banks are considered the trusted source for delivering financial services,” Bank Independent’s Burdette says. “We have to continue to earn that right, and to do that, we’ve got to meet the expectations of our customers, and we have to be forward thinking. It doesn’t mean you have to be first out of the gate, but you have to be ready.”

Bank Independent’s FedNow experience

As a FedNow early adopter, Bank Independent in Sheffield, Ala., has been in receive-only mode, moving toward send functionality.

“It’s that crawl-walk-run model for us,” says Kelly Burdette, senior vice president, digital and products. “We really wanted to start slow, and we felt that going receive really helped us to build out operational readiness and effectiveness to prepare for the continued growth of this.”

He likens instant payments to an interstate system, with on-ramps and off-ramps. Receive is like an off ramp—open to traffic. Send, however, needs some controls around the on-ramp to ensure a safe and secure flow of payments traffic.

“We still have to build the on-ramps, and we as an industry, we’re building that,” Burdette says. “As we think about those on-ramps, from a community bank perspective and as an industry, we still have to control the access to that ramp.”

Since going live with instant payments, Bank Independent has seen transaction volume climb. First, it started receiving payroll transactions facilitated by a large payroll provider. But it also has a property management company as a client that’s now receiving instant payments, giving property management owners and their agents access to funds quicker.

“Because we can receive those funds and give instant availability to those funds, we’re making a business difference,” Burdette says. “We’re providing a value-add to these business customers.”