Cross River makes jump to real-time payments. Will other small banks follow?

Cross River Bank in Fort Lee, N.J., this week became one of the few small banks to join The Clearing House’s real-time payments system. Strengthening its niche as a bank to fintechs was a clear motivator.

The $1.91 billion-asset bank for the past decade has provided technology startups access to a banking-as-a-service platform, with a particular emphasis on helping them comply with consumer protection regulations. Now, Cross River is joining the RTP network to offer faster payment capabilities to its current clients and stand out as an appealing partner for new fintechs.

“This is a natural extension of the services we already provide,” said Phil Goldfeder, Cross River’s senior vice president of public affairs. “Joining the RTP through The Clearing House will only enable us to enhance those services while giving us a competitive edge as a community bank.”

Cross River partners with a variety of fintechs including Affirm, Best Egg, Coinbase, Railsbank, Rocket Loans, Transferwise and Upstart. As the bank took steps to integrate itself with RTP, it did so in concert with its partners.

“We’re in constant communication with our partners to discuss where the current friction points lie, where the pressure points lie and how we can use the technology to address those issues and make those processes a bit easier,” Goldfeder said.

The Clearing House has long predicted that one of the RTP network's benefits will be new capabilities developed by both banks and fintechs. For example, the popular savings app Digit in April introduced an instant overdraft-protection feature that rides the rails of JPMorgan Chase’s real-time payments service, which was built based on the RTP service.

Goldfeder said it is too early to know exactly how Cross River’s partners will integrate RTP into current and future offerings, but observers say the system will significantly change business models going forward.

“Real-time payments is going to change the way innovators are trying to protect consumers from late fees and overdraft fees, because if you can move your money quickly from account to account, it really doesn’t matter where your money is sitting because you’re never going to be late with a payment,” said Ryan Gilbert, a partner at Propel Venture Partners, the investment arm of BBVA.

Gilbert said he anticipates improvements to lending services, point-of-sale financing, and the way employees are paid as a direct result of how banks and fintechs use RTP. “This is really going to empower consumers and small businesses to use their money and move their assets around and be in full control,” he said.

Cross River’s alignment with the Clearing House’s RTP network also might serve as a warning to other small banks awaiting the launch of the Fed’s competing service, FedNow.

In August, the U.S. central bank announced plans to develop an RTP network that is meant to connect more than 10,000 banks and credit unions nationwide. That decision came nearly a decade after policymakers began discussing an overhaul of the U.S. payments system to speed up clearing.

However, FedNow might not be completed until 2023 or 2024 at the earliest. Cross River said it did not want to wait that long.

“Most community banks that are looking to the Fed are in a holding pattern right now," Goldfeder said. “There was a lot of pomp and circumstance around the announcement, but ultimately you’re not going to see anything until 2024 or 2025.”

“Those banks that are forced to wait are only putting their customers at a disadvantage while the bigger banks are finding ways to move along,” he added.

Bryce VanDiver, a partner at Capco, said community banks have been slow to adopt RTP to date because good uses for it have not been well defined.

“From a pure financial standpoint, are there community-bank-specific use cases that customers have that require RTP? If so, how do they price?” VanDiver asked.

“The lack of a well defined use case continues to be a barrier or constraint to adoption,” he added. “Payroll use cases are often cited, yet the ACH network was originally designed in the early 70s to provide ease of money movement to mobile government workers. Almost 50 years later we continue to cite payroll and exceptions payments as a use case for faster payments.”

But VanDiver said Cross Bank’s adoption of The Clearing House’s RTP could spur other banks to do the same despite FedNow’s intent to serve smaller institutions.

“FedNow specifically mentioned low-volume institutions as a primary reason that they wanted to operate a real-time payments network,” VanDiver said. “This could potentially be the start of a community bank trend to move to the RTP.”