Categories: Faster Payments

Why Community Banks Can’t Afford To ‘Wait and See’ About Faster Payment Innovations

Are community banks missing the chance to climb aboard the faster payments train?

In late July, the Federal Reserve Faster Payments Task Force released its much-anticipated report on how to strengthen and operate the U.S. faster payments system. The report included several recommendations for banks, FinTechs and other financial services players — guidelines to establish an industry-driven framework for governing the system and encourage further research and investment in emerging financial technologies.

However, if recent developments in the financial services industry are any indication, innovation waits for no institution, company, agency or, for that matter, Fed report. Many players in the financial services market were already launching innovative solutions without knowing which guidelines the Fed would recommend for the U.S. faster payment system.

With various banks and FinTechs producing innovative solutions — like mobile banking and P2P tools aimed at improving the speed of payments — the pressure is on for community banks to keep up. A recent report by financial services provider FIS found that while community banks have been successful in many areas of digital-first solutions, these institutions are still “slow to adapt” to shifting consumer needs.

Getting community banks to adapt to the changes brought on by the availability of faster payments is a priority of the Independent Community Bankers of America (ICBA), the trade organization representing approximately 5,800 community banks of various sizes nationwide. In a recent conversation with PYMNTS, Tina Giorgio president and CEO of ICBA Bancard, the payment services division of the ICBA, said community banks have an opportunity to win over new users by getting on board with faster payments and digital solutions. Giorgio also emphasized that innovation is not just an opportunity for community banks, but a necessity to staying competitive. Additionally, she noted, that innovation must address the needs of both baby boomer and millennial consumers alike, along with the needs of smaller businesses.

When ‘Wait And See’ Won’t Cut It Anymore

According to data published in FIS’s most recent Performance Against Consumer Expectations (PACE) report, community bank customers are more likely to skew older. The PACE report findings revealed that 57 percent of community banking customers are baby boomers over the age of 51, while older millennial and Gen X consumers account for just 37 percent of community banks’ customer base.

But, just because these institutions cater to a mostly older customer base does not mean they can afford to fall behind on innovation, Giorgio said. The PACE report also pointed out that older community bank customers are tech-savvy and are, in some cases, more likely to use online banking than younger bank customers.

In a recent blog post, Giorgio pointed out that baby boomers make an average of 9.1 interactions per month with their banks using digital channels, including through online and mobile banking. These findings should serve as a wake-up call to community banks that it is “absolutely necessary” to innovate to meet customer expectations, Giorgio explained to PYMNTS.

“It’s not just millennials using these services,” she said, noting that access to digital services is appealing to most age groups. “Taking a wait and see approach isn’t going to work anymore. [Community banks] have to be more proactive.”

Millennials Moving Into And Up In The Business World

As more and more millennials are flexing their entrepreneurial muscles, Giorgio said, it’s time for community banks to take notice.

The millennial market, estimated at roughly 83 million, presents an opportunity for community banks to expand their reach and influence. Almost half of millennials (49 percent) intend to start their own businesses within the next three years. According to ICBA findings, millennials have frustrations with Wall Street and bigger banks over issues like high fees and older banking mechanisms, making them more likely to turn to community banks for assistance when starting those businesses.

Since small businesses employ close to half of all U.S. employees, Giorgio said it is important for community banks to step up their efforts to address the needs of both small- and medium-sized businesses (SMBs) and their millennial owners.

“Speed and convenience certainly have become priorities for customers these days,” Giorgio said.

Faster Payment Options For SMBs

To help community banks address the needs of smaller businesses, ICBA Bancard recently partnered with cloud-based payment solutions provider linked2pay to offer community banks access to the company’s Bank Centric Payments platform for smaller merchants. With the platform in place, ICBA members can easily access ACH solutions, remote deposit capture and card payment transactions. By offering these services to community banks, Giorgio said, those banks are better prepared to begin helping smaller businesses gain quicker access to real-time payment solutions.

Giorgio shared a personal experience about hiring a contractor to add a new roof to her home. Once the work was complete, the contractor left a bill on her door. Giorgio said she mailed the contractor a check that did not clear for at least a week.

“That’s thousands of dollars that he’s paid out to employees and [for] materials that he hasn’t put back into his cash flow,” Giorgio said.

Having a solution like the linked2pay platform in place, she said, would have allowed the contractor to accept payment immediately using a card or Same Day ACH solutions. She also posited that the contractor could still have accepted the paper check and deposited it using remote capture from a smartphone or a tablet.

Going forward, Giorgio said, the linked2pay platform will add Same Day ACH debits once the feature becomes available in September, and is also working on a real-time payment solution.

“We are continuing to forge ahead and keep it relevant for community banks and their business customers,” Giorgio said.

‘Faster Payments Are Here To Stay’

With technology moving forward at rapid pace — and as the technology becomes more commonplace — community banks that have not yet adopted a faster payments solution risk being alienated by their customers, Giorgio said.

“Faster payments are no longer a thing of the future – faster payments are here to stay,” she noted.

For community banks, this means adopting faster payment solutions — and sooner rather than later. Looking ahead, Giorgio sees an opportunity for community banks to leverage faster payment solutions in the lending space. Enabling borrowers to apply for, get approved and quickly gain access to loan funds is most likely going to be offered through faster payment solutions, she said, and soon.

“The lending environment is changing so rapidly,” Giorgio said. “The faster payments piece isn’t necessarily there yet for funding in a lot of applications, but it’s the next logical extension of what’s going to be built there.”

Other areas where Giorgio sees potential for community banks to tap into faster payment solutions is in wealth management, such as stock and investment portfolios. Eventually, she said, artificial intelligence and data analytics will also be poised to play a larger role in community banks’ operations.

“The use cases are going to keep growing,” Giorgio said.

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About the Tracker

The PYMNTS Faster Payments Tracker™, powered by NACHA, is your go-to resource for staying up-to-date on a month-by-month basis. The Tracker highlights the contribution of different stakeholders, including institutions and technology coming together to make this happen.

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LATEST PYMNTS REPORT: MARCH 2020 B2B API TRACKER

B2B APIs aren’t just for large enterprises anymore — middle-market firms and SMBs now realize their potential for enabling low-cost access to real-time payments and account data. But those capabilities are only the tip of the API iceberg, says HSBC global head of liquidity and cash management Diane Reyes. In this month’s B2B API Tracker, Reyes explains how the next wave of banking APIs could fight payments fraud and proactively alert middle-market treasurers to investment opportunities.

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