Smaller community banks and credit unions have an opportunity to differentiate and compete in payments. Unfortunately, many smaller FIs haven’t formulated a succinct strategy. It’s a good time to do it — there are technologies and tools out there to help them service their customers better.
Tede Forman is Jack Henry’s head of consumer and commercial payments. He’s seen upfront the evolution in payments — from bill pay to real time payments — and its impact on bank offerings. He joins me on the podcast to talk about the choices and new opportunities in faster payment options. We talk about advances in bill pay technology and how it’s become table stakes for FIs. We also talk about how smaller banks and credit unions are finding ways to punch above their weight through technology partnerships and collaborations.
Tede Forman is my guest today on the Tearsheet Podcast.
Moving from banking into technology
Being on the banking side, you’re really looking through a different lens. I worked for some very large banks. The thing that I really enjoyed about the transition to Jack Henry was looking at this through the lens of software that can help the community bank and credit union space. Working for a really large regional, as an example, kind of put a different spin and view on products and services and what the focus is. At Jack Henry, we’re more for supporting the smaller communities where we are giving tools, technology and solutions to the smaller community banks and credit unions, so they can continue to stay relevant. It’s a pretty cool shift and I really enjoy it.
We started looking at faster payments, probably, I want to say, six or seven years ago at Jack Henry. We were really looking at the industry, where things were going, especially when you start thinking about some of the fintechs and non traditional banking payment players now that are coming into play and what solutions and products we can start developing and looking at and building to help the community banks stay relevant. Venmo, a p2p solution, is an example, that somewhat disintermediates the money out of the banking system. We were looking at opportunities to build faster payment rails to facilitate a wide array of use cases. A quick use case to think about is a number of years ago, banks had the market share for bill payment, as an example. With the shift more towards biller direct sites for immediate confirmation of payment and the ability to fund the bill with a credit card. So if you start thinking about those faster payment rails, they will start connecting the complimentary products like bill pay, ACH origination, remote deposit, capture — those types of things to allow the consumer to have choice on facilitating a faster payment, as well as, in the digital age, with everything now becoming mobile and moving faster, payments logically kind of fall into that space as well.
Enabling RTP and the last mile
One of the things that we’ve done at Jack Henry is build PayCenter, which is a faster payment hub. We service community banks and credit unions. So I think what we’ve built will enable all of our customers with a turnkey solution that allows the community banks to connect into these RTP networks and rails to facilitate payments. If you look at us as a payment processor for community banks, we’re enabling them to be able to get there quick, with all of the onboarding, all of the data contribution, all of the certification with the networks and things like that. Whereas, if a community or a regional bank chose to go that direction themselves, more than likely, there would be a lot of technical heavy lifting, the roadmap to get certified is probably two years out. So I think solutions like what we have built will enable that last mile of those smaller credit unions and banks to get onboard quicker, versus if they were choosing to go it alone.
Now, the regionals and the large tier one banks, they’ve built that technology stack that, more than likely, can connect into those faster payment rails.
Converting clients into PayCenter users
It’s a rollout. To your point, when we built PayCenter. It encompasses connecting into Zelle, RTP and eventually, FedNow. We probably have just shy of 200 Zelle contracts and just shy of 150 RTP contracts. So, as we continue to mature the process, we’re out getting our financial institutions, both banks and credit unions, to sign up for the service. It’s a new service that they would have to sign up for with us.
Hurdles to RTP adoption
We’re seeing more and more demand. I think a lot of it has to do with the fact that community financial institutions really need to have a payment strategy. And we’re finding out that some of them don’t yet have a payment strategy, and it might be geographical related. But, we’re trying to also help them understand their market and the market demand in their area for Zelle, for example. Some of the use cases that we’re really starting to see, that’s driving a lot of interest, especially on the RTP side, is the local Uber and GrubHub drivers. When they cash out of their corporate accounts, RTP actually receives that funding. And if those GrubHub or Uber drivers bank with local community banks, it’s actually pushing some deposits back into the community bank space. So there’s a strong interest and desire to make sure that those community banks are connected to those real time payment rails.
You’ll see additional use cases as well. I think some of it is awareness and education. Some of it’s probably regional, as far as competition. And then some of it also is around making community banks and credit unions develop payment strategies that should include faster payments.
The different RTP rails
Out of the gate, Early Warning launched Zelle, and that was really a true real time person to person payment rail, that kept money in the financial institution space. So, that was consumer to consumer. And then you have RTP, real time payments, with basically three messages: one is receive, then you have a request for payment and send. I think you’ll start seeing on the RTP side complimentary products that can take advantage of those messages, creating use cases like real time bill payments, real time account to account transfers, Treasury disbursements, B2B disbursements in real time. There’s a huge opportunity to continue to capitalize and leverage the RTP network.
Then you’re gonna have FedNow coming in, and similar to to RTP, you’re going to basically have a third rail that you can originate or receive real time payments. Zelle is talking about getting into the business side — those are going to be additional use cases that I think you’re going to start seeing. And then how those integrate in the products is where I think the opportunity lies for the financial institution, as well as the consumer and small business.
There’s going to be a fourth rail, as well, that we’re going to connect in, and that’s going to be the card rails. If you think in terms of payment disbursements, least cost routing is an example — someone who wants to drop a payment to a card. PayCenter is a payment hub that facilitates movement across multiple rails, whether it’s eventually ACH, wire, faster payment rails, etc. It will be a payment hub that can distribute payments in multiple ways. I think the financial institution can take advantage of having multiple options how they want to disperse payments.
Buy now, pay later
We’re in the process of drilling into the buy now, pay later use case, and then how that would fit into our payment strategy, and where it would fit. I do think that we are seeing some of our community banks and their customers interested in the solution. So we’re looking into it.
Evolving bill pay
Bill Pay has been a great solution for financial institutions and customers. It’s so sticky. It’s such an important part of consumers’ everyday lives. When a customer logs into a bank or credit union’s internet banking site, and you’ve got bill pay, more than likely, they’ve got larger deposits. They potentially have other solutions. But I think what you’ve seen is some displacement on the bill pay side, and that it’s somewhat become a commodity. Three or four years ago, you probably paid three or four different technology vendors for your home solutions: you had a cell phone, internet, AND cable, and then you had a phone and a TV. More than likely now you just pay AT&T or whatever your local provider is, and he takes care of all your services. So there’s been industry consolidation, specifically, that’s impacted bill pay.
And then you’ve got the card on file stuff. So if you’ve got Netflix or Hulu, you just log your card on file. And so those are bill payments now that are no longer getting made at some point for some service. And then mobile on top of that, so, what we’re seeing on the bill pay side is, working to create organic growth. If somebody has a card on file somewhere, can you get them to come back to bank bill pay? Can you give options around the ability to wait to the last minute if you need to make your bill payment, and being able to make it versus the legacy ACH fire and forget? Right, you send it and it’s gone. Three days later, it got there, but you didn’t really get a confirmation. card, Can you offer the ability to leverage a credit card for reward points? So, we’re creating features and services that allow us to compete with the biller direct sites, as well as some of the industry consolidation and getting those customers to come back.
Creating a payment strategy
We do it with our customers. As part of our relationship management function that we’ve got with our clients, sometimes you say, well, what about Zelle? Well, what about RTP? So we’re not out just trying to get them to turn on features with us, we truly want to make sure that they’ve thought through and have an integrated payment strategy on what makes sense for them. We meet with them, set up JAD sessions. We’ll walk through their strategic journey. What’s their plan? Where do they want to be? And then how does faster payments fit into that strategy that they have? And then coupling or partnering solutions that we’ve got with how that marries into their payment strategy. As an example, it’s not one size fits al — it’s really what that community bank or credit union wants as far as services, functionality, use cases, and then who are they trying to compete, recruit, or maintain within their small community area?
Bitcoin and small banks
One of the things that we’ve done over the years is we have a payments advisory board, or a client advisory board, specifically on payments. We bring in different areas across the US, different asset sizes, credit unions, banks, and really talk strategically about where they see things going. Crypto or digital currency has been a topic that we’ve had over the last couple years. And it’s somewhat mixed — some of the larger demographic community areas, there seems to be more interest in what’s going on. We are starting to see more and more interest even at some of the smaller community bank segments. We are talking internally at Jack Henry, and working through what we feel would be our strategy for supporting digital currency of any kind.
To me, I see it as just another payment rail. You’ve got to have checks and balances and all those types of things on it, but it’s truly just another payment rail. And so how would we integrate in to that? It would be then available for our customers as needed. You could turn the feature on if you wanted it — you could turn it off if you didn’t.