Cost and Integration Concerns Keep Smaller Banks From Adopting Real-Time Payments

The benefits of real-time payments may be readily apparent to financial institutions (FIs) — as they can serve their clients with new use cases, including pay by bank and immediate payroll deposits. They can foster strong relationships with commercial customers with speedier and more transparent cross-border payments.

And yet there’s a gulf between the FIs that sign on to real-time rails, and those that do not. The gap is noticeable when it comes to size. In the Real-Time Payments Tracker® series report titled “Catching the Rails: The Real-Time Payments Opportunity for Small FIs,” we found that larger FIs have been throwing their time and resources into connecting to real-time rails, while smaller banks are lagging — even when it comes to setting clients up with real-time receiving capabilities.

Real-time payments, as would be expected, are catching attention. They have yet to gain the embrace that has been seen across, say, Europe, but in time, faster payments will become table stakes for FIs intent on keeping individual and commercial clients loyal.

The Clearing House’s RTP network, which has been in place for several years, recently crossed the 1 billion daily payments mark, having raised its transaction limit to $10 million. Separately, the Federal Reserve launched the FedNow® Service, which has gathered several hundred banks onto its own platform.

As to the divide that exists between financial institutions, consider the fact that large FIs are six times more likely than their smaller brethren to deploy real-time payments. That skews the 7 in 10 banks that have connected to real-time payment rails, as the FIs with $10 billion or more in assets have the resources on hand to make a real go of real-time payments. Nearly three-quarters (74%) of FIs with regional or national footprints allow individual consumers to send instant payments, versus just 44% of credit unions (CUs) or local banks.

The smaller and mid-tier banks are coming around to the need to offer real-time payments functions. We found that at the same time that 59% of smaller banks’ customers expect to increase their use of real-time payments through the year ahead, all banks plan to increase their investment in the space, but only 24% of them are planning “significant investments” in real-time payments.

Of the small financial institutions that don’t offer real-time payments, 30% say they do not have a pricing plan in place; 35% of them say that integration complexities are an impediment, while 23% of these banks cite costs of implementation as a concern. Money, so to speak, is becoming more expensive — and money must be raised to back new infrastructure initiatives tied to real-time payments. A full 80% of respondents report that inflation has had an extreme or a moderate impact on deposit costs, which steers money away from the ability to reinvest in the business. The rising costs of running a bank show up in data from the Federal Deposit Insurance Corporation (FDIC), as rising deposit costs have been significant. The FDIC recently said that the cost of funds had jumped to 2.85% in March 2024, up from 0.62% in December 2022.

Only 9% of surveyed banks currently facilitate the ability to send real-time payments via the FedNow Service, while 39% plan to offer it within the next year. However, more than half of community banks have no plans to offer FedNow sending capabilities in the next 12 months. The data show, too, that large FIs are three times more likely to be connected to the RTP network.

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