Many community bankers are excited for the Federal Reserve's announced real-time payments system, even if it will take years to get up and running.
The Fed announced FedNow its real-time, round-the-clock payments system on Aug. 5. In launching FedNow, the central bank said it believed the existing private-sector system handled by the country's large banks would not likely connect to the thousands of small banking institutions in the U.S. to create a truly nationwide system, even over the long term.
Currently, the only options for instant money transfer are the system run by The Clearing House Payments Company LLC, a banking association and payments company owned by the largest U.S. commercial banks, and the Fed's Fedwire Funds Service, which is only for large transactions. That means community banks have to choose between partnering with their competitors or not being able to offer the same services as their larger peers.
Some community bankers view the Fed's involvement as an absolute necessity.
"The Fed being in the payments system ... is critical to community banking," said Christopher Murphy, Chairman and CEO of South Bend, Ind.-based 1st Source Bank, in an interview.
Smaller banks do not want to give customer and account information to their competitors, said Aaron Kness, President and CEO of Fairfield, Iowa-based Iowa State Bank and Trust Co. of Fairfield Iowa. "We trust the Fed," he said. "It's just kind of a natural fit."
In addition to worries about sharing customer information, fees and access to The Clearing House system are out of the hands of smaller banks.
"Community banks can't rely on a handful of the largest banks in the nation to be in control of fees and access to something as critical as the payments system," said Mark Field.
The Fed's service will not be available until 2023 or 2024. Most community bankers are willing to wait, but Kness warned that the pace of financial technology advancement could make the industry very different in the time it takes for the Fed to implement the new system.
Some community banks are using other stopgap measures in the meantime. The Fed's wire system works for larger transactions, and some have signed up for Zelle or other app-based money transfer systems that are not real-time. "We've embraced [Zelle], but it's expensive and we've found it also very difficult to implement and operate," said Murphy.
Mark Field, chairman and president of Liberty, Ill.-based Liberty Bank, said his bank has an in-app money transfer service, but it is not getting much use from customers. "Only the early adopters have ever asked about it," he said. He said the Fed's announcement is likely to create more interest. "We plan on educating our customers on the benefits of waiting for the Fed's solution," he said.
Gregory Raymo, Chairman, President and CEO of Worthington, Minn.-based First State Bank Southwest, said his bank also has not seen much immediate demand for a real-time payments option. "I believe our customers are willing to wait," he said.
Still, a faster payments option could be more important to some bank clients, Iowa's Kness acknowledged.
"We could fall behind and we could lose customers" by waiting, he said. "If there's a way for [the Fed] to accelerate that time frame, that would be great."