Real-time Payments Strategy: Large vs. Small Financial Institutions

Introduction

The Clearing House’s (TCH) Real-Time Payments (RTP) adoption is on the rise. According to a recent study, 74 percent of both small and large institutions are considering RTP or have already begun implementing RTP in some form. Although a large majority are either implementing or considering implementing across all sizes of financial institutions (FIs), there are quite a few differences for real-time payments within small (credit unions, regional banks, and community banks) or large FIs. The main differences revolve around the focus, integration, and timeline.

Focus

Large FIs are investing in and developing their RTP implementations to meet the diverse needs of the majority of their clientele, from retail-based customers to large corporations. Whether it is a large corporation looking to pay suppliers more quickly and gain more control over cash management or a small business looking to prevent the need to float payroll on credit over the weekend.

Smaller FIs with more limited capital and resources have to be more strategic with where they start their RTP journey. Best practice for smaller FIs is to compare the use cases of RTP with their current client portfolio to identify areas of high impact from an RTP implementation.

If a small FI has a large number of corporate clients, or their corporate clientele provides a large majority of their revenue, they may see more of an immediate need to develop a real-time payments product for that customer segment. Based on a recent report, 82% of small FIs are live or are considering implementing RTP for the small business customer segment—not surprising considering a large number of small businesses use smaller FIs to manage their business accounts.

Integration

Smaller FIs approach launching real-time payments quite differently than larger FIs. For example, 84% of small FIs are planning to use a third-party service provider to connect to TCH, according to recent research findings. Smaller FIs will also need to gauge their internal resources for an effort like RTP and will likely need outside help for the implementation work.

Transformation efforts as a result of implementing RTP will also be more moderate than at larger institutions. Smaller FIs will need to inventory their current architecture and make strategic decisions on where transformation is needed most to support an RTP launch, impact agility of the organization overall, and prepare the institution for future transformation efforts, including digital transformation initiatives. Large FIs may use a third-party service provider for certain pieces of their RTP launch but will likely utilize internal systems for many needed components. Larger FIs may even connect directly to TCH, which will be a more costly implementation but will give them more agility with RTP as a product in the future.

As with the large FI customer segment focus, the larger amount of investment available allows the larger FIs to perform a more robust transformation as a result of implementing RTP. Like smaller FIs, large FIs will also need to inventory their architecture; however, the more robust transformation will allow them to make larger, sweeping changes to create agility and prepare for the future.

While only 17% of FIs in a recent survey expected a full digital transformation, 72% expected a moderate or significant infrastructure upgrade. Most institutions realize that there will be certain, required upgrades to support real-time payments and other faster payments as a product, as well as ancillary needs such as fraud and customer notifications.

Timeline

While a majority of banks and credit unions are considering RTP or are currently live, those considering RTP will have largely different timelines depending on the size of the FI. Smaller FIs generally have a longer timeline for implementation due to resources, business case development, and investments required to launch RTP.

Many small FIs have defined roadmaps, and RTP is being added to those roadmaps against competing priorities. It will depend on how prioritized RTP is compared to other initiatives as to when a launch is actually planned. Additionally, with the FedNow announcement of a competing service launching in 2023/2024, smaller FIs may choose to wait to see what the options are for each service before deciding a rail to use.

Large FIs, with the benefit of more abundant resources, are able to start planning and implementing RTP quickly in order to stay ahead of the financial services market. Also, these larger institutions are competing with other large institutions that have or are in the process of launching RTP. Due to this, they feel compelled to begin their RTP effort to maintain competitive parity with their competitors.

No matter the focus, integration plan, or timeline, it is obvious that real-time payments are already causing disruption in the financial industry. Banks or credit unions that had not planned and maybe were not even considering infrastructure upgrades or digital transformation are now prioritizing those areas in large part due to RTP. As more use cases develop, RTP is set to disrupt the industry even further.