In Q3 2022, NEACH sat down with several major third-party providers to gain insights into what’s happening with payments. Tede Forman is President, Payment Solutions at Jack Henry™ shared thoughts on how payments are shifting and what to expect in the coming months. What follows is a summary of the dialogue.
NEACH: Financial institutions customer and member payments behaviors have shifted because of COVID. What are you seeing as the next big shift in payments that banks and credit unions need to be considering?
Forman: We’re seeing real-time payments become the next big shift in payments for banks and credit unions. It’s gaining traction and the send use cases are being more frequently adopted. Banks and credit unions now need to act to enable RTP® receive, or at least offer capabilities to receive funds in real time to their customers and members. Turning on RTP through our proprietary real-time payments hub is very easy and the process is quite simple to implement.
But the thing is, while the pandemic has accelerated many of the digital trends out there, the financial services industry was already undergoing a broader revolution. For years, banks and credit unions have been evolving their traditional roles as simple payment product providers into more sophisticated connection points for API-based payments and payments-as-service transactions. With our payments hub, financial institutions can really help their business account holders and FinTech partners embed payments directly into their customer-facing applications.
Payment-as- a-service integrators optimize the internal operations and improve the experience for the user by providing tools such as marketplaces or menus of API-enabled services. To the FI, the benefit is also reducing costs. So, it helps drive additional revenue, and dramatically increases the stickiness of commercial services. I think in the coming years, you’re really going to see payments- as-a-service continue to revolutionize payments by turning FIs into an open payment channel for providers.
NEACH: How has the growth in payments digitization (i.e., e- and m-commerce, digital wallet use, P2P digital payments, etc.) changed what FIs need from their providers? How are you responding to that shift? Are there solutions that all FIs should have as table stakes today?
Forman: I would say RTP is table stakes today. FIs really need RTP to service all of the digital channels.
We’ve also been talking about the proliferation of payments for a while now. If you look at a recent chart from Cornerstone Advisors, they’ve identified a dozen common ways consumers want to pay. If you think about the fragmentation of payments, between payment types and methods, it’s really noteworthy that over half of those are non-FI digital service companies such as PayPal, Square, and Apple Pay. For FIs to continue to be competitive in the payment arena, they really need to provide businesses with the tools to manage the collection of all these different payment channels.
NEACH: FedNowSM comes online in 2023. As a pilot participant, what can you share about preparations? When do you anticipate being ready to begin onboarding FIs?
Forman: We’ve been closely working with the Fed and have helped them with technical input and lessons learned from the successes we’ve had with both Zelle and RTP.
NEACH: To that point, what do you expect the FedNow onboarding experience to be like for FIs? How similar/different will it be from your RTP experience?
Forman: We see the FedNow rails as another plug in. And the way we built our payments hub was really by using smart routing and least-cost routing. So, if you think in terms of the FedNow rail, it’s just going to be another endpoint into our payments hub to allow smart routing or distribution to another endpoint. And if an FI wants their payments to be routed through the FedNow rails versus RTP rails, we would be able to configure them to go that way. We see smart routing and least cost-routing extending and continuing to accelerate real-time payments.
NEACH: What do you suggest FIs do now to start preparing for FedNow? Why?
Forman: Go live with RTP. You want to become familiar with real-time payment transactions, balancing, and reconciliation. And reconciliation is done real-time as well. So, whether it’s RTP or FedNow, you’re going to see operational practices that are going to have to change or evolve to support a real-time payment reconciliation. A lot of the time, a real-time payment (at least a credit push) is irrevocable, so what does that mean for the operational side of the business? Go live now with RTP, get familiar with the processes that you need to support a real-time payment, because backroom operations will probably change.
NEACH: Switching topics, cryptocurrency not only has had a lot of buzz of late, but it has also been gaining traction as a less fringe/more mainstream as a payment type. What role do you see banks and credit unions playing in the cryptocurrency space?
Forman: It’s all very speculative. Before the latest crypto bust, everyone thought crypto was immune to mainstream market strain, volatility, and inflation. We’ve seen just the opposite, and probably worse than traditional assets.
I think financial institutions will wait and see until the regulations and the rulemakers mature to a state where an FI can safely offer the service to the customer. We’re closely monitoring the space, and we’re ready to act and plug in once the risk tolerance is understood by our customers.
NEACH: Similarly, between executive orders and requests for comment, Central Bank Digital Currency (CBDC) has been gaining a lot of attention in the U.S. How do you see this impacting FIs offerings and plans now and in the future?
Forman: I think the CBDC is still a long way away. While the recent uptick in Fed activity indicates that the likelihood of a U.S. CBDC is growing, it’s important to know that the timeline for its delivery is still probably years away. The Fed’s commitment to centralized money is at odds with crypto decentralization and its fundamental nature, which limits how attractive CBDC may be to today’s digital currency holders.
The Fed has stated objectives that include privacy protection, but the government’s view is very different from virtually anonymous structures of cryptocurrencies. The Fed’s plan, from what I understand, is to deliver a CBDC through financial institutions, and approve non-FI providers, which really strongly undermines its goal of improving financial services to the un- and under-banked.
I think more importantly, if the Fed does roll out a successful CBDC, it will present a very real danger to the traditional banking system. Because a CBDC will be in the direct liability of the Federal Reserve, FIs will not be able to lend funds in a CBDC account. That means every dollar converted from a standard deposit to a CBDC account would reduce the amount of credit available. They’ll keep creating a credit crunch directly proportional to the population of CBDCs.
So, I think there's still a lot of work that has to be done to figure out how all of the puzzle pieces will fit together. Not that it won’t ever come, but I think there’s still a lot more work to do to make sure we don't jeopardize our existing banking system.
NEACH: With these new payment options coming to fruition, FIs are finding FinTech partnerships even more necessary. How do you support your banks and credit unions in engaging with FinTechs? What innovations should FIs expect from their core, and what innovations do you think your customers would be surprised by?
Forman: Jack Henry has always been very open, so we welcome FinTechs and partners. We have over 850 active FinTech partnerships today that we’ve brought into our open banking and open payment ecosystem We give our FIs the optionality. We’ve got APIs and toolkits that FinTechs and partners can use. Specifically, our Payments-as-a-Service platform is open, and really allows them to go in.
We know our FIs don’t use every single Jack Henry solution, and we’re committed to having an open ecosystem (specifically in open payments) to really help fuel the FinTechs and partners with their integration. Because at the end of the day, the FinTechs creating and bringing innovation to consumers of those community banks really helps them grow and compete with the big tier ones.
NEACH: What recent or forthcoming product rollouts do you have that FIs should be exploring?
Forman: With our open banking platform, we’re making it easier for financial institutions to take advantage of our network of 850+ fintech providers, as well as our technology. We’re providing banks and credit unions with relevant products and services to remain at the center of account holders’ financial lives, while improving their financial health. Jack Henry’s Payments-as-a-Service strategy is an extension of this commitment.
To support our strategy, we’re building a Payments-as-a-Service platform that leverages open, standardized APIs to enable frictionless, secure, proven payment capabilities. These capabilities can be embedded within a financial institution’s digital banking experience, or non-financial solutions through Banking-as-a-Service. Our Payment-as-a-Service platform provides financial institutions with the operational agility, flexibility, and efficiency needed to offer customizable, scalable differentiated financial services. Our company’s recent acquisition of Payrailz is an example of how we will enhance our strategy and platform, as we move toward a virtual payments hub that consolidates money-moving solutions and supports multiple payment channels and types.
NEACH: What else would you like to add?
Forman: I would still suggest that any institution that hasn’t yet should sign up for RTP.
The other piece I would suggest is if a financial institution doesn’t have a payment strategy, I think it’s very important to consider building one. To understand how important payments are to financial institutions, the majority of financial institutions get over 20 percent of their operating income from payments, which is why having a good payment strategy is important to stay relevant. If you think about the fragmentation in general, the average consumer does business with 30-40 different FinTech providers. If you bank with a community bank in your area and have a Starbucks card, you’re pre-paying a card that’s probably owned by a tier one bank, and you’re using that versus leveraging the community bank space. Little things like that add up. I think it’s critically important now that a financial institution has a payments strategy on how they plan on competing.
AUTHOR: Joe Casali, AAP, NCP
Executive Vice President
As the EVP of Payments Innovation for NEACH, Joe focuses on exploring innovative solutions and technologies that will help position members for success, both now and in the future. Connect with Joe to read more of his blogs, articles, and posts.