Small banks are both stalking horse and prey in the Clarity Act drama

• Key insight: In the lead-up to the Clarity Act vote on Sept 15, community banks are both the stalking horse and the prey at the same time.
• Supporting data: JPMorgan spends nearly $20 billion a year on their technology budget. By contrast the typical $500 million-asset community bank spends only $4 million, and much of that just keeps the bank running on legacy tech.
• Forward look: Organized programs meant to convince community bankers that stablecoins will drain their deposits are disingenuous.

The phrase "stalking horse" describes when a hunter approaches prey behind a horse, hoping the prey is calmed by the gentle horse and misses the approaching hunter. In the lead-up to the Clarity Act vote on Sept 15, community banks are both the stalking horse and the prey at the same time.

Trade associations dominated by large Wall Street banks find it useful to repeat the talking point that new stablecoins will harm community banks. Yet the erosion of community bank deposits has been at the hands of large banks that have poached their customers.

Let's follow the drama closely. A recent op-ed from Rob Nichols, head of the American Bankers Association, calls for a light fix to the Clarity Act. He professes that all the banking lobbying needs is a slight word change and he's ready to support the Clarity Act.

It's a well-played move in the Washington game and I can imagine in my mind the strategy session at the ABA executive table going into the August recess:

"Sir, we need to mobilize community banks. They make the right foil for Republican senators."

"But we don't want to look obstinate. Write an op-ed and claim a small fix is all we ask."

"But sir, won't people learn about how we skipped White House meetings and sent Mother's Day mobilization kits out to local areas to fight the Clarity Act?" 

"That'll never fit in a sound bite, let's stick with the community bank stalking horse strategy."

The Clarity Act already bans stablecoin yield that is functionally equivalent to interest payments. The ABA's position is to stand firm on another synonym from the thesaurus they would prefer be included in the bill as the hill they are ready to die on while at the same time sending mobilization kits to local members to fight the legislation.

I'll be charitable and note the argument rings hollow.

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Meanwhile community banks have otherwise been prey on the menu for larger banks. Running a small bank is a low margin business and technology costs eat into those margins. The big banks have massive tech budgets, while smaller banks can afford no more than a few million a year in tech just to keep their existing functionality. JPMorgan spends nearly $20 billion a year on their technology budget. By contrast the typical $500 million-asset community bank spends only $4 million, and much of that just keeps the bank running on legacy tech.

Between the Genius Act last year and the Clarity Act vote pending on Sept. 15, community banks have a chance to catch up to their big bank competitors by harnessing new digital ledger technology. Digital ledger technology levels that playing field. Stablecoins are a safe way to send money much faster and more reliably than the traditional payment system.

The irony is that the largest banks at the center of that payment system built it on old programming languages like COBOL, and years of fixes and patches atop that system mean it demands ever larger investments in technology for banks to use it.

But there is a much more efficient and effective mousetrap in stablecoins. The smart contract functionality on the blockchain offers cheaper alternatives to the existing tech vendors banks are paying now. Jack Henry has added stablecoin capability to its network, which covers 1,600 bank and credit union clients and competitor Q2 has followed closely behind. Community banks are already starting to see the opportunity. Vantage Bank in Texas recently projected that stablecoins will lead cross-border payment costs to drop from an average of $6.78 per transaction to a mere 28 cents.

Some small businesses are currently paying overseas suppliers using stablecoins, which settle nearly instantly, more cheaply, and 24/7, unlike the existing remittance system with its weeklong delays and frequent settlement failures.

Stablecoin issuers will have trouble convincing older-generation merchants and purchasers to embrace stablecoin tech, but community bank/stablecoin partnerships match lasting trust with new stablecoin technology. It's a natural fit, and big banks know it. Community banks tend to serve older, rural households. These traditional customers tend to be the last to adopt new technology, which is why their existing trust of their local community banks makes stablecoin issuers hungry for community bank partnerships.

It's a win/win opportunity that big banks, who have been eating the community banks' lunch, should fear most and it explains their stalking horse strategy to fight the Clarity Act.