Instant Payments Offerings Deliver Big Impact for Small Banks

Banks eyeing the demand for faster payments — from consumers and corporate clients alike — know they must offer real-time capabilities.

If they don’t, they risk losing those customers to financial institutions (FIs) that do.

The PYMNTS Intelligence report “Real-Time Readiness: Bridging Gaps in FIs’ Instant Payments Adoption,” a collaboration with The Clearing House, found that banks face several challenges as they strive to meet those real-time payments needs. Chief among the hurdles are technical considerations, which lead to concerns about cost.

The data from about 270 surveyed banking executives indicated that 8 in 10 banks that offer instant payments saw “a positive impact” on their customer retention. Among the use cases that were cited as being enthusiastically embraced by banks, 52% of FIs said customers sent money to pay monthly bills, 49% said individuals sent money to other individuals, and 41% said users paid down loans with instant payments.

As for FIs that are already on TCH’s RTP® network or the Federal Reserve’s FedNow® Service, 9 in 10 said they plan to innovate their offerings in the next three years. Among FIs that do not offer instant payments, 8 in 10 said they plan to add them in the next three years. Of that latter subset, there’s a sense of urgency, as many seek to get on board with instant payments functionalities within the next six to 12 months.

However, the movement onto real-time networks is primarily the domain of large FIs, which have better resources in terms of staffing and funds to be allocated to connectivity initiatives compared to small FIs.

Overall, 7 in 10 FIs are connected to instant payments capabilities. Large FIs, defined as banks with more than $10 billion in assets, are six times more likely to be connected to real-time rails than small FIs, those with assets of between $500 million to $2.5 billion. That puts small FIs under pressure to innovate and move ahead with their instant payment roadmaps. Only 11.5% of the smallest FIs are connected to both real-time platforms, compared to more than 57% of the largest FIs.

Drilling down a bit, nearly 35% of all FIs surveyed said the lack of connectivity came as they felt the “technical integration is too difficult,” and nearly 29% said integration costs are too high. That reflected a set of challenges across a widespread sampling of banks regardless of asset size. The headwinds were likely most keenly felt by the 48.6% of small FIs that were not connected to either RTP or FedNow.

Overall, 60% of FIs said large banks — those with regional or national footprints — benefit most from offering the ability to receive instant payments, while about 31% said the same about small FIs, a roster that included community banks and credit unions.

However, there may be a positive ripple effect as small FIs eye their peers that have connected to one or both real-time services. More than 63% said they experienced a very or extremely positive impact from offering instant payments — and customers were more likely to stay with them.

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