Many community banks may hold off on offering real-time payment transfers until 2023 or 2024, when the Federal Reserve launches a new platform enabling instant payments.
But Cape Cod Five Cents Savings Bank is among a small cohort of community banks deciding not to wait for the Fed. Instead, Massachusetts-based Cape Cod Five has taken the plunge on a partnership some of its peers might find unusual: working with the country's largest banks and latching onto their existing platform to bring real-time payments to customers.
"If we don't have the ability to satisfy their needs, they may very well go elsewhere," said Christopher Richards, the company's chief banking services officer.
Cape Cod Five is working with The Clearing House, which is owned by some of the country's largest institutions, to hook up to the group's instant payments platform, called the RTP network. The RTP network began in November 2017, and it lets participating banks move payments between their customers immediately, rather than subjecting bank-to-bank transfers to the delays that characterize the current U.S. payments landscape.
Other community banks and credit unions are skeptical of partnering with The Clearing House and would prefer waiting for the Fed, which announced Aug. 5 it would launch its FedNow system in 2023 or 2024.
"There is a growing demand for this service, [and] there's no doubt that it will be the future, but I believe our customers are willing to wait," said Greg Raymo, chairman, president and CEO of Minnesota-based First State Bank Southwest.
Raymo and other community bankers cheered the Fed's announcement, saying a publicly run alternative is necessary to compete with the large banks' RTP network. FedNow proponents say the central bank is well-positioned to provide widespread real-time payments capabilities given its extensive relationships with smaller banks and credit unions across the country.
"I don't think real-time payments really takes off unless it has 100% of all the banks," said Cary Whaley, first vice president of payments and technology policy at the Independent Community Bankers of America.
The Fed is encouraging smaller firms to delay real-time payments until FedNow launches instead of joining the already-up-and-running RTP network, said George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute.
"There is no question that it's going to slow [progress] down a lot," Selgin said.
Critics of FedNow argue that the lack of progress will ultimately cost customers, who at times get hit with overdraft fees or turn to payday lenders when payments are delayed.
Fed officials were not unanimously in favor of FedNow. Vice Chairman for Supervision Randal Quarles cast a dissenting vote, saying the Fed should not "move into this area and crowd out innovation when viable private-sector alternatives are available."
But in a speech announcing the FedNow launch, Fed Governor Lael Brainard doubted that a single private-sector provider would be able to reach the more than 10,000 banks and credit unions scattered across the U.S. The Fed's move will "allow faster payments to reach banks of all sizes and their customers across the country, which is especially important for rural communities," she said.
The Clearing House said achieving national reach with its RTP network has been part of its mission from the beginning. Steve Ledford, senior vice president at The Clearing House and RTP network product executive, said the company is working with banking technology firms to help banks link up to the RTP network.
"Is there a lot of work to achieve national coverage? Absolutely. But it's work that we've been doing, and we have a plan," Ledford said.
The RTP network consists of 16 banks, each with more than $70 billion in assets. Consequently, the RTP network accounts for more than 50% of U.S. transaction amount totals.
The Clearing House said it is working with a number of banks that are looking to join the RTP network in the near future, though it declined to share how many are on that list.
Some smaller banks, like Cape Cod Five, have already publicly announced they are working on joining the RTP network. Officials at Berkshire Bank and Avidia Bank said they are also running full steam ahead with their plans to do so.
So too is Colorado-based FirstBank, which is bigger than those three firms, possessing about $19 billion in assets. CEO Jim Reuter said the RTP network "was and still is" the only product available on the market today.
Since FirstBank competes with the largest U.S. institutions in the Denver area, the company was not "going to sit and wait, whether it be for the Fed or someone else, to come to market," Reuter said.
Whaley, of ICBA, said community banks across the country have several ongoing technology projects they are working on that may end up taking priority over real-time payments, such as cybersecurity enhancement and automation of certain branch operations.
Smaller banks also may be working on linking up with new consumer-facing apps, such as Zelle. As those apps gain popularity, customers' demand for faster payments infrastructure may pick up, he added.
Asked about community banks that say they will wait for the FedNow service to launch, The Clearing House's Ledford said his firm will not "let that dissuade us from doing everything we can to get every single one of the community banks and credit unions on the network."
"We're in the market right now," he said. "[Community banks and credit unions] can start delivering real-time payment services to their customers … on a network that we already have in the market."
At Cape Cod Five, Richards said executives decided to start working on linking up with the RTP network because it "wasn't clear if the Fed was going to be moving forward" with its own real-time payments platform.
Now that it is, there is uncertainty whether and how quickly the FedNow offering will be compatible with the RTP network. A lack of compatibility between the two may lead to banks joining both networks rather than picking one, Richards said.
"You want to bet on the right horse, but I think ultimately, you're going to have to bet on both horses," Richards said.