With their budgets tightening, financial institutions are seeking ways to manage their payments systems more cost-effectively. From mobile to near-field communication, technology and innovation are transforming the payments industry.
As a result, large banks are trying to reap the benefits of new technologies that will enable them to manage payment systems more efficiently. Community banks in general struggle to select, acquire and maintain compliance and process payments themselves. This creates an uphill battle for community banks in serving tech-savvy customers.
Compounding this is that many technology vendors are unable or unwilling to scale their large, expensive solutions for the community bank market. As a result, community banks in many cases are left with solutions that, while cost-effective, may lack sophistication or may come with risks. In many cases, other vendors swallow the good solutions and the vendors that prove themselves capable, again leaving the community bank with few choices.
This presents a business opportunity for correspondent service providers, which are well positioned to act as an aggregator of payment services for community banks and have the economies of scale to deliver a sophisticated payments solution to the community bank channel. Bankers' banks are just one of several correspondent service providers well positioned to help community banks with these services. Additionally, the bankers'-bank model ensures that they will not compete with the community bank's clients, something that has traditionally been a concern for community banks.
Today's community banker lives in a world of ever-changing technology solutions, customer needs, compliance regulations and competition. Often, budget constraints make these bankers reluctant to purchase new technology, as the return on investment and customer demand are unclear. Working with a correspondent service provider to access solutions actually gives community banks a competitive advantage over their larger rivals.
Rather than having to acquire resources and expertise in-house, community banks benefit from the effect of pooling resources and partnering with correspondent service providers, for payment solutions that enable them to choose services a la carte. This correspondent environment allows community banks to pay monthly service fees or per-transaction fees and opens the door for more innovation in payments and better customer service at the community bank level.
Payments solutions offered to community banks from a trusted correspondent partner have a better likelihood of being adopted. The community bank is more likely to make a quick decision on solutions if they don't have to take a risk on an unproven solution for their customers with a large up-front investment.
In addition, they develop a level of trust with their correspondent partner to investigate any solution and vendor they invest in. From their perspective, there is less risk involved from the investment and payments side, as the correspondent partner has tools to monitor, control and implement security and risk controls for the payments system.
The correspondent service providers also have an opportunity to cross-sell other products and services. Once trust is established between a community bank and its correspondent service partner, there are greater opportunities to develop that relationship, as many banks prefer to work with a single service provider that delivers a direct line for all their payments needs.
For community banks, it is still too early to risk investing in mobile payments technology without knowing that customers will fully embrace the technology. Correspondent service providers enable community banks to try solutions for a short period of time without the long-term commitment that comes with purchasing a solution outright.
In the past community banks relied upon a bevy of small but nimble providers to deliver competitive solutions for their customers. As technology has advanced, those same providers have had to adapt or be consumed by larger vendors, reducing the number of strong solution providers targeting community banks.
Because the solutions are now extremely sophisticated, it has become nearly impossible for a community bank to have the expertise or the resources to manage these solutions.
As correspondent banks share the costs across all the community banks in their network, solutions are more affordable for individual community banks. Working with correspondent banks also enables community banks to become early adopters of emerging technologies like mobile payments. Because any community bank is likely to have a small number of customers interested in using emerging technologies, it is much more cost-effective for the bank to pay only for the customers who are actually using the system.
