Last week we wrote a piece that the biggest threat facing banks is complacency around our traditional processes. Disruption threatens our industry at every turn and even within our industry there is a growing divide between large banks and community banks. Today, we highlight one such area as it an example of our point nicely and highlights the many problems that banks need to overcome in order to create a better process. Today, we look at the competitiveness of community banks when it comes to domestic wire transfers and highlight some of the changes that are about to take place in payments.
Different from many other areas such as Europe and Asia, sending money between banks is more cumbersome than it has to be in the United States. In those countries, sending money between banks is often free and relatively easy. In the U.S., it’s a problem. It is embarrassing that it is 2015 and we just “voted” to move forward with same day ACH. More embarrassing is that we will not have fully functioning same day ACH system until the end of next year at the earliest.
Until then, sending a wire is the only way to move money with any urgency. The need to move money within a given day frustrates a customer at a bank every hour of every day, yet our industry has been slow to respond. Same day payrolls, just in time payment on bills, business-to-business payments, emergency funds to a family member, small person-to-person payments for services and urgent purchases are just some of the use cases that bank customers need to get accomplished in real time.
Unfortunately, not only is it costly to move funds via wire at most every bank in the US, but in 90% of of the non-commercial cases, we require our customer to go into a branch driving up the cost for both the customer and the bank.
All that said, there are a host of issues around the movement of funds that most customers do not appreciate. Compliance, regulation, security, privacy, convenience and verification all present material hurdles. When one starts to understand the complexity of funds transfer, particularly international funds transfer, you begin to appreciate the art that is Bitcoin. While Bitcoin has its own set of problems, it is serving to put pressure on banks and spurring non-banks like Dwolla, Square Cash, PopMoney, PayPal, Venmo, Facebook Messenger, American Express Serve to come up with their own solutions. Some banks have adopted some of these solutions, while a handful of banks have banded together to form their own partnership.
Over the last 3 years, upgrades to the FedLine wire system, have placed banks in a position to overcome all the above challenges. A group of banks (Bank of America, Capital One, US Bank, Wells Fargo and Chase) have banded together to get a tipping point-mass (40% of all deposit accounts) when they formed clearXchange back in 2011. Soon clearXchange will merge with another bank partnership, Early Warning, which will provide further security and fraud prevention as well as add banks like PNC and BB&T. This combined entity will now have a network to rival the charge card networks and will be capable of expanding beyond P2P payments. This solution is open to all banks and some, like Chase, are choose to customize their solution (Chase Pay) in order to deliver a unique experience for the “last mile.”
Banks Charges And Profitability
When it comes to charging for wires, community banks are significantly cheaper than large banks and on par with credit unions (below).
In terms of costs, it all depends on the number of wires a bank sends since most expenses associated with wires are fixed costs that need to be incurred with or without a wire product. In general, sending the actual wire itself cost a bank about 57 cents in direct expenses, but indirect expense to include compliance, insurance, Fedline fees, IT, legal, marketing and other adds about another $3.80 so the partially loaded cost is thought to be in the $4.40 per wire range.
Then there is labor. This is where banks start to get into trouble. The top 50 banks have largely automated wires, at least for wires under a certain amount (typically $3,500) which helps control costs. Community banks and credit unions, on the other hand, still have a very manual process. While managing and processing incoming wires is largely automated for most banks, outgoing wires usually includes the customer filling out a one page form and then sitting with a customer service representative while it is reviewed. A typical review, correction and processing of an outgoing domestic wire takes about 15 minutes of labor time or about another $6.00.
Thus, while incoming wires costs around $5.50 to process, outgoing wires take approximately $10.50. Again, this is all depending on volume so a small community bank with little traffic is highly likely to lose money on their wires, but still needs to conduct the service one to keep their customers happy and two to recover some of their fixed costs.
The Solution – A Strategic Imperative
As you can see above, part of the problem is the economics associated with the current structure. The product of Wires is in a “no-man’s land” that it is not so profitable as to require more investment, but not losing money to require major action to reduced costs. The problem is that as technology advances, banks will have to keep up and new products will be created to further replace the paper check.
Same day ACH will be a major step forward and can’t get here soon enough. However, same day ACH has a variety of shortcomings, most notably the lack of funds availability verification. clearXchange solves a variety of issues but still stops short of being a complete solution. The biggest drawback is the fact that a large chunk of our industry doesn’t have access to clearXchange. Both same day ACH and clearXchange also suffer from being in a batch environment where the future is real time processing when it comes to settlement. Both solutions also need a more robust directory feature so consumers and merchants can register once and keep their tokenized settlement information available for all instead of inputting it each time. Finally, both solutions have yet to be incorporated in business-to-business payment applications and both have an additional set of hurdles when expanding internationally.
Banks will overcome all of these obstacles given enough time, capital and technology. The concern is what happens to the community bank and right now more community banks need to understand that the future of profitable customers lie directly in the path of a more robust payment system. Checks, and even cash, will be phased out and the future of capturing the profitable bank customer (retail or business) will be dependent on providing a robust cash management platform to include a suite of payment capabilities (see our 10 Cash Management Products That Every Bank Needs HERE).
Bank customers will not tolerate a $25 fee to send a wire forever. Community banks need to make payments a strategic initiative and expand their capabilities or risk become irrelevant to the profitable customer. The payment space is changing and in the next 3 years it will be radically altered forever so the time is now to at least have a plan to look at alternatives like clearXchange, adopt same day ACH and invest in products that take advantage of both.
Submitted by Chris Nichols on December 08, 2015