What Real-Time Payments Mean for Your Bank with Lee Wetherington from Jack Henry

INTRO: Helping community bankers grow themselves, their team and their profits. This is the Community Bank Podcast.

CALEB: Well, hey, everybody. Welcome back to the Community Bank Podcast. Thanks for joining the conversation today. I’m Caleb Stevens with SouthState Bank’s Capital Markets and Correspondent Banking division. Today, we’re featuring a conversation between Chris Nichols, our own director of Capital Markets here at SouthState, and Mr. Lee Wetherington. Lee has been on the show a number of times. He’s the senior director of corporate strategy at Jack Henry. He’s extremely funny. If you’ve ever attended a banking conference, there’s a high likelihood that you’ve heard Lee speak before. I think he used to speak upwards of 60 or 70 times per year. I think he’s scaled it back now to about 30 times a year, but still, Lee is always on the conference circuit. And he is on the forefront of what’s going on in the payments world.

CALEB, continued: And so that’s the discussion that Chris and Lee have today: is the future of payments and what real time payments mean for your community bank. Before we get there, I want to make a quick reminder about the Elevate Banking Forum. It’s October 10th and 11th at Ross Bridge Resort in Birmingham, Alabama. We’re bringing the best community bankers together for an exclusive 2-day event, and we’ll be discussing the key strategies that are needed to elevate your bank’s performance in the future. If you’re a community bank executive and you’re looking to innovate, to grow, to stay profitable, to mitigate risk, this conference is for you. So, click the link in the show notes of this episode to view the agenda and to register. That’s October 10th and 11th in Birmingham, Alabama at Ross Bridge Resort. We hope to see you there. And now here’s Chris Nichols’s conversation with Lee Wetherington.

CHRIS: Lee, welcome to the program. Appreciate you being on today. How are things?

LEE: Chris, great to be back. Things are great. It’s a sunshiny day here in Atlanta, that always makes for a good mood. And yeah, things are things are great.

CHRIS: Well, excellent. Appreciate you being on. We wanted to give our listeners slash readers kind of an update on the state of payments, how you see it. So maybe let’s just start there. What is happening out there in the bank payment space? From your point of view.

LEE: Yeah, I think if you were to try to boil it down to one word, Chris, it would be complexity. I think you know some people would say speed, but I would say complexity. Just the sheer number of ways to pay and get paid is mind blowing, is difficult to manage, brings with it all kinds of attendant kind of fears around risks. Whether it’s settlement risks, whether it’s just trying to predict consumer behavior or small business behavior, commercial behavior with payments generally, it’s a very complex ecosystem. And so, if you look at it from that, I think macro lens, I think the winners now and going forward are those who can simplify that complexity, right? Who can make it just very simple for whether it’s consumers or businesses. To move money to receive money. To manage money. And a lot of people sometimes, you know, I find that we have this siloed thinking in our industry, a lot of times we talk about digital over here, and we talk about payments over there, et cetera. You know, some folks don’t stop to realize that 80% of all digital UX is payments. It is either trying to get money to move or to receive money, or to pay a bill, et cetera, et cetera. So, those two things, both digital and payments, really go hand-in-hand. And if you want to be successful in digital, you’ve got to be successful in payments.

CHRIS: Let’s talk about—you mentioned it’s complex, and I think you know the trend is obviously to simplify for the sender of payments, of payments, of payments. So, they just want to get a payment through. What’s your opinion on how much choice do you give the customer? Is there a case to be made that we should still be playing up channels like wires, channels like ACH, in the light of instant payments?

LEE: Yeah, this is—you’ve really cut to the heart of the complexity because, you know, use case to use case, there are very real and substantial and material arguments to be made for why you would want to use one rail over another, et cetera, et cetera. The problem is that the average person, not just consumers, but even the average person and an average business, should not have to be a payment expert. To figure out which of those rails, min which context, for which use case, makes the most sense, whether that’s for settlement purposes for risk purposes, for cost purposes. And this is where we, you know, often get into discussions about smart routing of payments, but even that itself can get complicated because you often can’t presume how a particular consumer or a particular business for that matter, would weigh the different parameters, that would inform a decision about how a particular payment gets routed. So, it’s a lot of complexity. One thing that I’m really looking forward to actually later this year, this fall: the Faster Payments Council’s going to come out. They’ve been doing a really big piece of primary research to map out, like, which use cases are best on which rails and what circumstances and context. And I think that’s going to be a very important piece of research to help banks begin to sort out a coherent payment strategy that will help them understand, “Okay, what do we need to actually do and implement first, second, and third? Whether it’s not just rails generally, but the use cases on those rails mapped to who we’re serving now, or who we want to acquire, and serve in the future?”

CHRIS: From my point of view, though, it looks like the rise of instant payments over the last five years, once banks get to send, once they have, you know, the capabilities to put invoicing statements, you know the full load on there. It’s instant. It’s theoretically cheaper than all other payment rails once you get through, you know, reconciliation costs and, you know, dealing with exceptions, et cetera. Doesn’t instant payments cannibalize almost every other payment channel?

LEE: Yeah, it certainly has the potential to do that, right? But we have to be very careful, and I know you’ve been around payments long enough, Chris, to know that, you know, when you start making bets about, especially at this stage of relatively new rails, what’s going to take, how quickly we’ll get to network effects, you’ve always got the chicken and egg tension of you know, “Okay, yeah, we’ll receive, we just don’t wanna send until others are sending, and we see what exactly the risks are and how best to manage them and feel comfortable and confident in the solutions to manage those risks.” It’s this chicken and egg tension, and it’s difficult really to understand how quickly a new rail or rails or scheme will get to scale, especially when there are other schemes and other rails who are playing and competing at the same time.

LEE, continued: You know, we’re talking a lot of course about RTP and now the Federal Reserve’s FedNow. I still think you’re going to see some really interesting things being done with, you know, Visa Direct, and MasterCard Send. Who are—they know exactly what the economics are. They know what they’ve already figured out, that the newer rails have not yet sorted through. So, I think you will see—in fact, I know we will be seeing even before end of year, some really compelling real time use cases on the backs of those card schemes that make it easier, for instance, for not only generally to pay and get paid, but that will help banks specifically lever the data they already have, like sitting in their cores. To eliminate all friction that we normally associate with setting up a merchant account, right? So, you know, we went, it used to be, you know, way back in the day, “Oh my gosh, if you had to set up a merchant account that was going to be a two-week, three-week process, paper applications, maybe going into the bank itself.” And then we had the rise of the pay facts, right? That, you know, the Stripes, and PayPals, and Squares, et cetera. That you know sort of, they handled the merchant account, they used a bunch of sub-accounts, and then they got that three- or two-week process down to a couple of days. Two or three days, maybe, just to get started.

LEE, continued: I think what you’re going to see is, you’re going to see banks who are now beginning to wake up to how they have to think strategically about data, realizing the data that they have. And if they use it in the right way, they could enable things like a small business being brand new to the bank, being able to tap a button and begin accepting payments because they’ve automated all of the KYB and underwriting necessary because all that data is already resident there on their core for that particular business customer to get them up and going just like that. Moreover, what better place than a bank to address and finally solve for this reconciliation nightmare you just mentioned. This reconciliation nightmare where you’re trying to collect payments through the card schemes. You get a big wire, a big chunk of money. Now you’ve got to, how do you reconcile and map that back to the individual payments that you accepted, get that all squared with your accounting system, and also squared with what money actually showed up inside of your account at the bank? So, I think solving for those pieces of friction, which are still material to the average business owner, is a really big opportunity for banks going forward that is not limited to what’s going on even with RTP and FedNow. I think there are a lot of compelling use cases, RTP especially on the commercial side, we’ve seen a lot of, I think, good inroads there. But it’s wide open and these other these other rails are not going to just lay down and wait for RTP to cannibalize everything, as you just said.

CHRIS: So, let’s bring that down to an operational level. So, let’s take a step back. I’m a 500 million, maybe a billion-dollar community bank. I, you know, I wanna keep my treasury management customer. I wanna keep my commercial customers happy. I want to keep my consumers happy. I can, you know, ACH all day long but, you know, maybe I even have receive capabilities through FedNow or the clearing house. Where do you suggest I take my payment strategy.

LEE: Yeah.

CHRIS: That type of bank. Is it the card rails? Is it? Is it expanding to FedNow? What do you think?

LEE: Well, you know, before I give you my opinion, let me give you the opinion of roughly 50 bank CEOs that answered. We do a survey at the top of every year called our “Strategy Benchmark” and we asked this particular question. “What payment services do you plan to add over the next two years?” The top response among those bank CEOs—by the way, also among the credit union CEOs that are part of that same survey research—everybody was saying it’s real time payments via FedNow. That’s what they’re working on. And as you just mentioned a moment earlier, that’s primarily on the receive side. I think for us to move forward, for the bank that meets the profile that you just described to move forward, you really have to not just, it’s not just a matter of “Hey, we have treasury management, or we don’t therefore we should do, you know this rail first and this other rail second.” It’s a matter of who exactly you’re serving through that treasury management service. What is the profile of the businesses or the corporates that you’re addressing, and what are their specific needs?

LEE, continued: It’s all going to get down to very, very specific personas. That is, commercial personas with very specific payment needs that map to particular use cases, which then it will be easy for you to go, “Oh yes, well, we should do, you know, maybe we should do RTP first—the clearing house first, and then we do FedNow. Or maybe we do FedNow first and then we do RTP.” It really gets down to use cases, which is, I’m kind of avoiding your answer, but I’m also trying to encapsulate the hesitancy that we see across the industry because it’s not very clear yet. But I think strategically you always start with who you’re serving now or want to serve, and you get down to the brass tacks of identifying the use cases in question and which rails best serve those use cases.

CHRIS: Okay, but here’s the problem. I have a portfolio. I’m a billion-dollar bank. I got a portfolio of commercial customers and consumer customers, some of which are you know, your simple manufacturing small business that have, you know, normal payment needs, and others are you know maybe payment heavy maybe. I bet the title company or a payroll company, et cetera, and then want the full capabilities, right? I still have this problem where I got to decide what to do next.

LEE: You do, yeah.

CHRIS: Is the FedNow? Is it FedNow send? Is it clearing house send? Is it just focusing on ACH? Is it? You know, that’s, I think, the current strategic problem.

LEE: I think that’s exactly it. This is why I started by saying the word is complexity. It’s going to be, it’s not going to be either-or. It’s going to be both-and. The trick is the sequence of the priority, right? And that’s what you’ve got. You do have to understand where your bread is buttered and start there, and then you sequence the other thing. So, if you’re heavy into corporates or heavy into transaction volumes for those corporates—look, ACH is not going anywhere. Wires, not going anywhere anytime soon. You’re going to be adding and layering on probably the Clearinghouse’s RTP first, if you haven’t done that already. And then while you’re doing that, you’re monitoring very closely how FedNow evolves to accommodate more commercially-specific payment use cases. That’s how I generally see this folding out, at least right now, but most of the conversations and most of the boardrooms I’ve been in, bank-wise, have been very generic and very abstract. They’re not really getting down to those operational brass tacks of understanding what, which payment use case brings the most bang for buck in terms of value and utility to the merchants or the corporates or the small businesses that we’re doing now. But it’s not gonna be either-or. It’s going to be both-and, if not checking a whole lot of these boxes in terms of faster in real time capabilities.

CHRIS: That takes a very strategic, thought-out plan as well as, you know, some capital investment to, you know, make sure a bank of the billion dollars or 500 million has those capabilities in the future.

LEE: Yeah, let me say this. Let me say something that I think I can’t say concretely and specifically for that bank profile, and actually a lot of other banks, if not all banks. One of the biggest blind spots right now, especially when you look at banks, and we asked them by the way, as part of this same survey back in February and March, “What’s your number one strategic priority?” They all say deposits, but a lot of them don’t understand the connection between deposits and payments, right? And so, I would tell you that the average bank in the United States has sitting inside of its retail checking account base. About 13 – 35% of those retail checking accounts are camouflaging micro and small business owners. And because those retail checking accounts don’t give those camouflage micro and small business owners the ability to get paid easily—what have they been doing for the last seven years? They’ve been going to Square, Venmo, PayPal, Stripe, or some other payments-as-a-service enabled third-party platform. And they go there because those entities make it easy to get paid. And then what happened, of course, is once they collect those payments in those third-party settings, most of those dollars never make their way back to the bank. In fact, we did a study 2.5 years ago and found out that only $1 out of every $8 collected in those third-party settings ever makes its way back to the bank. So, if I’m a bank and still deposits are my number one strategic priority, my first order of business is, first of all surfacing and identifying those camouflage micro and small business owners.

LEE, continued: And then putting into their hands a payment capability that makes it so compelling and easy and frictionless to begin accepting payments. And when collected, those are coming directly now into the bank. We’re not trying to move them from a third-party back over to the bank. Most small businesses would like to get everything they need from one place, right? But currently they can’t. And what’s happening now is, because those third parties that we mentioned, they just keep adding on services that make them look and feel and smell like a bank. Once they enable those small businesses to accept payments very easily, and they see those payment flows, they have everything they need to automate judgments about credit worthiness, and then to extend working capital or lines of credit to those businesses based on their payment flows. Most boardrooms and even, I think a lot of leadership, and community banks aren’t making these connections between payments and deposits, their number one priority this year and next.

CHRIS: That’s right. And I think that any bank CEO that looks into it, to your point, we’ll find out that, you know, if they do handle payments for their customers, it is the more profitable customers. Payments, for us, is probably the number one correlated, you know, piece of evidence that we have that it’s profitable customer, more payments equals more balances, more fees, more transactions, more enhancements. And I, you know, to your point, I would say, you know, look at your ACH files, look at where that’s going, look at what your small businesses are doing or even your midsize businesses in some cases. See where that money is going and every time you see a Square or Stripe, you know what have you, that should be concerning. And if you add up all those float balances, the money you know at rest at these, you know, fintechs, and then you know look at what you’re losing on deposits. It pays for the business case in and of itself.

LEE: Absolutely. Absolutely it does. You know, I’ve seen different numbers about the total addressable market, sort of the revenue on this thing. Our friend Ron Shevlin at Cornerstone, several years ago, four or five years ago, he put it around 400 billion in terms of the revenue pie. I can tell you that folks at Square, now known as Block, you know that they’re considered maybe one of the most aggressive small business sort of competitors that community banks are up against. I can tell you from conversations with them, internally, they think they’ve only scratched maybe 7% of the total addressable small business revenue pie in the United States. But it’s understanding not only the payments business, but how the payments business feeds the lending and finance piece, and that’s where you get the revenue multiples that banks don’t want to let go of, right? But if you’re thinking of these things in silos, payments over here, lending over there, deposits over in another place, you’re not getting the big picture, and you’re certainly not understanding the mechanism of this competitive threat vector from these third parties.

CHRIS: I want to underscore that point because I think this is the nuance is also lost on many in the industry, that not only should you be combining those, but your payments de-risk, your lending, and so right now maybe you might get that line of credit from that business, but you’re not getting the payments. And if you got the payments, then you know you can pull like a Block or, you know, a Stripe, out of the playbook, and then lend against that payment stream, making that line of credit much, much safer. And so, you know, I just encourage our bankers to always think like, yeah, that you need both to capture the engagement and the, you know, profitability of that customer. And then by separating them, you’re creating problems, not only losing revenue, but also increasing risk.

LEE: For sure.

CHRIS: You mentioned, you know, pay-by-bank, hot trend. Lots of banks are talking about it. You know, if I want to start chipping away at, you know, some of these third-party companies that’s taking the bank’s business, how do I do that?

LEE: Well, I mean in the short term, one of the most concrete and easiest steps to take— incremental steps to take—is just to embed a fintech like a Sionic, or something like that, that white labels pay-by-bank capability. Now the larger nut to crack with pay-by-bank is, it’s the same thing we were talking about with the real time rails is: how do you get to a national, standardized sort of pay-by-bank scheme? There’s some things complicating that road. One is, what kind of form factor are you gonna use at the point-of-sale? A lot of people think it’s gonna be well, everybody knows, and everybody’s comfortable now using QR codes. The problem there is that I don’t know if you’ve been, you know, I don’t know if you’ve been to a WholeFoods lately, but if you’ve tried to bring your Amazon app up, get your in-store QR code up, and then there’s this dance of angling you have to do at the point-of-sale that is always frustrating, always embarrassing, no matter how often or frequent that you do it. And let me tell you that Amazon knows that that sucks, and I’m using their language internally. It sucks. It slows things down at the point-of-sale, which is the last thing that they want. Plus, we don’t have a national standard, a technology and security standard for QR codes. So, if you’re looking at when pay-by-bank is, how we get it to sort of a national schema that’s another hurdle.

LEE, continued: I think, by the way, if I’m if I’m looking at my crystal ball, Chris, I think ultimately what you need to do is you have, you need some way of tokenizing DDA account numbers, on a national basis, to be able to expedite pay-by-bank nationally, in an interoperable way. And, on a business model that I think most banks would be fairly pleased with. You know one of the things that’s been holding pay-by-bank back is, it seems like well, that this is just going to completely cannibalize our interchange on the card side of the House. Well, you’ve got some of, especially some of the bigger and more progressive banks now, are realizing, “No, you don’t go from a lot of revenue to no revenue. You go to some revenue to some other form of revenue, and the pieces of that pie have not been finalized and negotiated.” Which is why I think it would behoove banks to work with players like the Federal Reserve, by the way. Who could put on the back of FedNow, a capability if we had, you know, if we had a national directory of accounts, if we had a way to tokenize them in a way that made them absolutely secure so no account numbers were ever exposed anywhere in the scheme, and you’re able to do that quickly at the point of sale. I think it would introduce, ultimately, a new golden era that puts banks and community banks with them squarely, sort of, you know, in play, and keeps them in play in terms of the way average, day-to-day payments are made. So anyway, I may be getting a little ahead of myself, but we’re far away. I can tell you that the, you know, the big players in our industry have been positioning for you know, posturing for, you know, they want the biggest piece of pay-by-bank when it comes, I think it’s inevitable. I think it will get here. I think we’ve got some things like I just discussed to work out. But even here in Georgia, right? You have, you know, Fiserv applying for the Limited Purpose Merchant Acquiring charter to be able to expedite things and not a lot of people make these connections, but they’re doing that to set it up, so that it’s easier for them to enable all forms of stuff at the point-of-sale, including what’s coming, which includes of course, this pay-by-bank option.

CHRIS: Well, the angels are singing. The heavens opened up. You’ve just painted the promised land. And I’m hopeful that banks could, you know, start to work there to, you know, bring back the portion of the payment ecosystem that we’ve lost and seeded to a lot of fintechs and third parties. I think it’s rightfully the domain of banks, and we should claim that back. And so you just kind of painted the picture about how to do that. Lee, as we wrap up, any last words that you want our bankers to know about?

LEE: Actually, I would just tell everybody to listen closely to what you said, which is probably the best place to start. Is with basic analysis of your payment flows as they exist today, and understanding, identifying, and then quantifying what’s going out back and forth in between the PayPals and the Squares and the Stripes, the intuits of the world, by the way, all of them. And just gird yourself for what you will see when you do that. But I think that will give you both urgency and clarity about what immediate steps to begin taking to bring home or back to the bank, a lot of this ground that has been seeded to these players because they understood that just getting paid and getting paid easily is the is the first step—is the magic trick. That’s the endgame. No matter which rails you’re using necessarily to get it done. That’s what you need to convert those, otherwise, zombie accounts that are sitting in your retail DDA base into material revenue generating accounts with deepened relationships with those micro and small business owners.

CHRIS: Let me play off, play up something you touched on when you talked about, you know, it’s what your customers want and what the target customers want. And it’s really not what your customers are asking for today, but what customers do you want in the future and what do they need? So, I think that’s a critical element because I hear all the time like our banks aren’t asking for, you know, any faster payments. And I don’t think they know what they don’t know. But I would say those customers that you really want that really are gonna be valuable to your bank. The ones that are going to care, that want to consolidate to a bank, those are the customers we want to go after as a banking industry, and we don’t want to lose those. So, to your point earlier, figure out where the puck’s going. Then you know, trying to architect your bank for that.

LEE: Perfectly put.

CHRIS: Lee, you’ve been fantastic. I think we’ve given some bankers some good thoughts to kind of think about as they set their payment strategy for 2025 and beyond. We appreciate you on the show, and hopefully we’ll see you soon in the conference circuit.

LEE: Yeah, thanks, Chris.