Smaller FIs At The Real-Time Payments Crossroads

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Interest in real-time payments continues to climb among financial institutions (FIs) as more options enter the ecosystem. Between the acceleration of ACH, the upcoming launch of the Federal Reserve’s FedNow service and other payment innovations focusing on speed, smaller FIs now have new opportunities to wield real-time payment services as a competitive edge against larger banks.

Collaborating with Banking-as-a-Service and other third-party FinTech providers can bring an added level of efficiency for smaller FIs in their journeys to upgrade their systems and support real-time payment rails and services.

But that’s only part of the battle.

“There are mechanisms in place to move money instantly and seamlessly, sure,” said Doug Brown, senior vice president and general manager for NCR Digital Banking at NCR Corp. “But there’s more to it.”

In a recent conversation with Karen Webster, Brown discussed what banks need to know about positioning their real-time payment services competitively for their business and consumer customers as the landscape continues to evolve.

Readying For Adoption

For smaller and mid-tier banks, it’s not enough to loop into one of the newer real-time payment rails and begin offering the solution to customers. On the back end, said Brown, financial institutions need to update their workflows overall for a real-time environment. On the front end, these FIs also need to work out the best way to onboard and price these services.

So far, though, these banks appear willing to make that transformational change for the sake of remaining competitive.

“What you’re seeing is a reactionary, competitive pressure,” he explained. “There is less debate about what price point it needs to be, versus ‘I just need to have it, and I’ll figure out the economics after.’ Because there won’t be any economics to figure out if they lose a significant chunk of the portfolio.”

As banks prioritize the launch of real-time payment services, they’ll also have to figure out how best to market them for their business and consumer customers. As Brown explained, this means identifying which potential use cases add the most value depending on the end-user.

For consumers, the obvious use case is for instant peer-to-peer (P2P) transactions. But Brown noted that there is a significant interest in the B2B payments arena among corporates that aren’t only looking to accelerate how they pay and get paid on invoices but also to obtain a real-time view of their cash positions that slower payment methods can’t provide.

Bracing For Hurdles

In addition to offering real-time payments, FIs must also provide the customer with choices when it comes to payment methods. Yet the landscape is an increasingly crowded one — and, especially for consumers, there is growing confusion over what real-time payments mean and why they would be valuable.

As Brown noted, this creates the need for a delicate balance between offering competitive options without overwhelming the end-user with too many confusing choices. For the FI itself, he added, it’s also about seamlessly fitting many of those choices into back-office infrastructure and workflows, and being able to identify which rails will be best suited for a customer’s particular use case.

This will be an essential strategy in overcoming some of the barriers to adoption of real-time payment services.

A lack of education among individual consumers has fostered skepticism among some bank customers as to why real-time payments are even necessary, particularly as headlines reveal some bizarre errors. For instance, a Bank of America customer who found an extra $2.45 billion in his account, reports revealed last week. Cases like these can drive home concerns about mistakenly initiating a real-time payment without any opportunity to claw back the funds.

“There are concerns and horror stories, and people have experienced mistakes,” said Brown. “That’s another set of hurdles that have to be ironed out because we don’t know how many mistakes you can make in a real-time scenario until real-time payments get more broadly adopted.”

Encouraging An Evolution

Understanding error rates and how to ease that friction for payers is just one of the many unknowns of real-time payments. That’s because the ecosystem is still in its evolutionary phase, noted Brown.

Other areas that will benefit from growing adoption include the ability for FIs — smaller banks, in particular — to understand how to competitively price and market their services, as well as how best to educate end users on the value of real-time payment services.

Today, banks’ internal processes aren’t entirely up to speed when it comes to adjusting to a real-time paradigm for themselves and their customers. The customers themselves, too, aren’t yet fully cognizant of when or why they should use real-time services. But progress is being made, with corporates and government entities emerging as critical drivers of interest and adoption. Brown pointed to use cases like healthcare disbursements or rebate payments — which are seeing an uptick as a result of eCommerce volume increases — as two growing areas of interest for real-time payment technologies.

The value proposition is different for everybody, and as customers grow more aware of their opportunities, banks will continue to make progress in the back-office in readying for a real-time ecosystem.

“We’re in a rapid evolution phase, is how I would describe it right now,” said Brown.

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