In the Blink of an Eye

Real-time mobile payments are the future. As the Fed develops a faster payment system in the U.S., how can community banks be a part of it?

By Collin Canright

Consumers are going mobile, and payments are starting to follow. Even though Americans make most of their payments to other people in cash, more and more consumer payments, including those made from person to person (P2P), are completed on mobile devices, whether it’s with a mobile wallet such as Apple Pay or Samsung Pay, or a P2P app such as PayPal’s Venmo, which uses ACH transfers to move money between people regardless of their bank.

Some 27 percent of smartphone users have sent or received P2P payments, according to an August 2016 report by First Annapolis, a financial services consulting firm in Annapolis, Md. And the firm’s March 2015 survey showed about 20 percent of smartphone owners had engaged in at least some P2P mobile activity.

The P2P movement isn’t a flash in the pan, and it’s certainly not a trend community banks can afford to ignore. According to a recent survey by VocaLink, a builder and operator of payment systems, 52 percent of millennials use mobile payments, and 70 percent of respondents said they would be more likely to use a new mobile payment service if their bank offered it.

Much of this is down to perceived security. The VocaLink survey of more than 5,000 millennials across the U.S. found that respondents viewed their own bank as the most secure option for making mobile payments. And some 25 percent reported they have stopped making mobile payments on their smartphones due to security concerns—meaning trusted community banks have everything to play for.

“When someone is shopping for a bank, they may see a bank without P2P capabilities as irrelevant,” says Tina Giorgio, president and CEO, ICBA Bancard, Inc., and TCM Bank, N.A. “P2P is becoming such a mainstream service that you will stand out if you don’t have it.”

“By coming in with a cheap way to make P2P payments work, we don’t need a lot of scale.”
—Michael Bilski,
North American Banking Company

Bumps in the road
For many community banks, that’s easier said than done. The U.S. lags behind dozens of other countries in providing a payments infrastructure that allows secure, real-time settlement. Central banks in other countries, such as the United Kingdom, have used government mandates to ignite payment system improvement. And many developing nations, faced with insufficient existing infrastructure, have leapfrogged brick-and-mortar branches and embraced mobile payment systems, such as M-Pesa in Kenya.

In the U.S., P2P apps give the perception of speed—even if the money takes several days to actually reach the recipient’s account—and make some payments easier for people who don’t carry much cash. “That’s what consumers really want,” says Margaret Weichert, principal and Americas head of payments at consultancy EY Advisory. “They want to get a payment off their plate, and how quickly the funds actually move is not the primary importance for most demographic segments.” But speed is still an issue, one the Federal Reserve is working to address with its Faster Payments Task Force.

The economic landscape in the United States, with its multiple providers, sheer number of financial institutions and multiple regulatory jurisdictions, means mobile payments aren’t as fast, secure or inclusive as they could be, despite various offerings from FinTech firms and megabank consortiums like clearXchange, recently renamed Zelle. So in April 2015, the Faster Payments Task Force began to identify and assess approaches to modernizing the entire U.S. payments infrastructure.

It called for proposals to develop real-time payments solutions, to be assessed against 36 criteria in six categories: ubiquity, or the ability for payments to be made regardless of bank; efficiency; safety and security; speed; legal; and governance.

The task force received 19 proposals, one of which was a joint effort by ICBA and the $400 million-asset North American Banking Company in Roseville, Minn.

Michael Bilski, the bank’s CEO, says the proposal aims to make it easy and cost-effective for community banks to participate in a new U.S. faster-payments system when that system is built. It includes a smartphone app, AllPayments, built by North American Banking Company, that provides direct access to the U.S. payments system from any mobile device through the ACH network.

A companion Payments Directory, which has not yet been built, would allow users to exchange money with any other person in the U.S., regardless of their financial institution.

Cary Whaley, ICBA vice president, payments and technology policy, says, “The ICBA Payments and Operations committee wanted to provide a payments offering that was easy, did not require layers of technology from multiple vendors, and would be used by all customers regardless of their financial institution. This is a banker-driven initiative. We wanted to ensure that any small financial institution could have a low-cost on-ramp to faster payments.”

Everyone can play
North American Banking Company plans to offer the AllPayments app, which is currently only available to its customers, as a white-label service that other community banks can offer. How the app will be offered and priced are still under consideration.

From an adoption perspective, Bilski wants to see banks buy into the white-label program as a way to gain scale, rather than each bank having to fund a P2P service through transaction volume. “By coming in with a cheap way to make P2P payments work, we don’t need a lot of scale,” he says.

That keeps customers using the bank for payments, rather than nonbank providers, Bilski says. “We can get on with the business of taking deposits and lending.”

What’s next for the ICBA proposal?

The Federal Reserve’s Faster Payments Task Force currently is reviewing 19 proposals that passed an initial assessment, including the ICBA’s AllPayments app proposal. Initial recommendations are expected in March, with a final report to be published later in 2017.

It’s likely that the task force will select multiple proposals and solutions for faster payments in the U.S., according to task force members presenting at the Federal Reserve Bank of Chicago Payments Symposium, held in October 2016. “We will have more than one faster payment solution as we get to launch,” says task force steering committee member Roy DeCicco. “The U.S. market likes that.”

“The more connectivity points there are, the faster these new capabilities and technologies will reach the end consumer and create critical mass,” says Margaret Weichert, principal and Americas head of payments at consultancy EY Advisory. “If we don’t have community banks as part of the overall solution, you may not get critical mass.”

Collin Canright is a financial technology writer based in Chicago.