The Federal Reserve Bank of Kansas City examined the capability of U.S. depository institutions (DIs), including banks and credit unions, to send and receive instant payments. It found that many banks, particularly smaller ones, will have to modernize their systems or outsource functions to remain competitive.
The main challenge for many banks, according to the report, is that they were not initially structured to accommodate the 24/7 connectivity that instant payments demand. Wire transfers and ACH transactions typically adhere to specific processing hours, and the receiving bank can adjust the timing of transactions throughout the day.
While larger banks can automate the sending and receiving of funds, smaller DIs often rely on manual intervention by personnel during processing payments. While this approach may suffice for banks with lower volumes of wire and ACH payments, it may not be feasible as instant payments gain traction.
The Global Transformation
Though the trend has been slow to catch on in the U.S., instant payments are inevitable. Smaller banks, which likely can’t afford to build the infrastructure to support it, will have to reach out to third-party companies to outsource their instant payments process.
Fintech companies create payment hubs for banks with connectivity to instant payments rails like Real-Time Processing (RTP) and FedNow. However, many banks will also need to outsource customer-facing operations like mobile banking apps, online banking, and B2B payments.
The adoption of front-end solutions has been slow. Though 1,000 DIs had connectivity with FedNow or RTP as of April 2024, many of those institutions only had the ability to receive instant payments. They could not send payments because they did not have appropriate customer-facing solutions.
Losing Market Share
The Kansas City Fed sees core banking providers, or financial technology companies, as an integral player in the shift to open banking and instant payments. But even though fintechs might be the solution for many banks, they could also be the competition.
“As a result of these developments, DIs may collectively lose market share to fintechs; however, the effects on individual DIs may vary,” the Kansas City Fed wrote. “Proactive DIs may sustain or even increase market share by modernizing their core systems, implementing instant payments capabilities, adopting open banking, and sponsoring fintechs and nonbank businesses through BaaS services.”
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