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Responsible Innovation Part 1: Can Community Banks Remain Competitive?
The Atlanta Fed's Retail Payments Risk Forum recently co-hosted a summit with the United Kingdom's Department for International Trade to discuss faster payments and their effects on community financial institutions (FIs). In a series of three posts, I will share summaries of the lessons and implications that payments industry stakeholders discussed at the summit. A major theme of these discussions was whether community FIs can remain competitive independent of how they access a faster payments network. This post tackles this theme.
|United States||United Kingdom|
|ACH (NACHA)||ACH (Bacs)|
|Real-Time Payments (The Clearing House)||Faster Payments (Faster Payments Scheme Ltd.)|
The Faster Payments Scheme, or FPS, opened in the United Kingdom in 2008. The summit was a good opportunity to hear first-hand from one community banker's experience with the still-new system. A panelist from the first retail community bank to join the FPS discussed how access options played a role in the bank's ability to compete with large FIs.
- In the beginning, the only way a community bank could access the FPS was through a sponsoring bank.
- This option was expensive, hindering, and much like a newborn baby who needed attention all day and night (even on weekends), according to the panelist.
- The FPS sends messages 24/7, in near-real time, but her bank's access model often caused a delay of 15 to 30 minutes, making the bank less than competitive.
- Last year, the bank was able to join as a "Direct Participant" under the New Access Model,, an experience that the panelist compared to parenting a toddler who allows her to sleep through the night, even as it runs 24/7/365. The new model was also much more affordable and provided her community bank the near-real time model larger banks received. (The New Access Model that gives payment service providers and community FIs direct connection began in 2014, six years after the FPS began.)
- The panelist did note a serious obstacle to this access model for the smaller banks: the onerous 12-month certification process to become a Direct Participant is tailored to large banks. The process required significant resources and strained other areas of her bank. She suggested that the certification take a risk-based approach.
Two developments on the way may affect future access options: (1) plans are set to consolidate Bacs, FPS, and Cheque; and (2) the Bank of England plans to grant settlement services to nonbank payment service providers.
The United States is facing a similar challenge: community FIs will have to choose how to access faster payment systems. Some community FIs have begun to offer same-day ACH and will likely consider real-time payments later this year.
Representatives from the Clearing House's Real-Time Payments initiative shared some details on their access model:
- FIs of all sizes will be able to connect directly or through third-party service providers.
- Regional payments associations will play an important role as they collectively represent all U.S. financial institutions plus third-party processors.
- The speed will be the same for all participants.
- Indirect participation will not be available.
- Payments can be made 24/7/365.
While direct access is available for both same-day ACH and Real-Time Payments, some FIs may choose to use a sponsor or correspondent access model. To remain competitive, community FIs will have to understand the advantages and limitations that each access model provides.
The next installment in this series will discuss the U.S. market appetite for faster payments; the one after that will look at the impacts of adoption.
By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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