Avidia Bank, a small $1.6 billion–asset bank based in Hudson, chose a path last week that few, if any, community banks in the country have dared to go down. 

The bank recently announced that it has joined The Clearing House and will implement TCH’s real-time payments system, giving its customers the ability to send, clear and settle payments immediately and at all times – 24 hours a day, seven days a week and 365 days of the year. 

The move is one that most small banks have been reluctant to try and a feature that Avidia executives say will differentiate the bank from its competition and make it a leader in the payments space. 

“If you are a bank and you are going to focus on payments, I don’t think waiting is an option anymore. You really need to step up your game and be open to new, faster railways that everyone will desire when they become ubiquitous,” said Bob Conery, COO and executive vice president at Avidia. “If you choose to be reactive and not proactive you are going to be providing it down the road not because you want to, but because you have to, and your opportunity there to gain market share or derive favorable margin are going to be slim.” 

Small Institutions Wary of Real-Time System 

The Clearing House is a banking association and private payments company owned by the largest commercial banks and settles nearly $2 trillion in U.S. dollar payments each day. In 2017, TCH developed a system for all financial institutions that clear and settle payments in real time. 

Unlike central banks in Australia and the European Union, the Federal Reserve currently does not operate on a real-time basis, but instead under a lag model. 

This model is considered risky because when a transaction is made between two parties, the recipient’s receiving bank has paid out the funds before actually receiving the money from the sender’s bank.  

Under a real-time model, the settlement would happen before the receiver has access to funds. 

The Federal Reserve is currently considering switching to a real-time model, but has been met by skepticism, particularly from smaller financial institutions concerned about the resources needed to switch over and support a real-time payments system. 

TCH has so far signed 15 banks to its real-time payments network, mostly regional and large banks such as Bank of America, JPMorgan Chase and Citizens Bank.  

Avidia is the first community bank to join, although TCH Realtime Payments Product Lead Steve Ledford said other smaller financial institutions are in the pipeline and is seeking more input from these players with four new additions to its RTP Business Committee. 

Avidia Bank has been making a digital, national strategy its priority for some years.

Avidia Pursuing National, Digital Strategies 

Avidia Bank’s senior management and board of directors have been thinking about payments for some time – they added it into their strategic plan five years ago, before the word “fintech” was in common use. 

Plans were expedited as the banking environment in Massachusetts, particularly in the Middlesex County, continued to get more and more competitive. 

“We have many banks in New England, especially in Massachusetts, so acquisition costs for traditional banking verticals are pretty high,” Conery said. “It’s challenging. For every customer you lose, you need five new customers to get retention. The population here is moderately growing but not like other parts of country so you have a supply-and-demand issue.” 

The bank began building out its payment capabilities, essentially offering a real-time payments-like system through debit cards and building out its core and APIs to be able to partner with fintech startups. 

Avidia also changed its strategy from a purely local bank to one that pursues business nationally. 

It began to work with fintech partners to provide payment services for gig economy tech providers, direct billing services and created a national instant merchant settlement product through a fintech collaborative that businesses could use without having to build or maintain complex technical infrastructures. 

Avidia has been working with TCH for more than a year on moving to a real-time payments system and had to thoroughly assess the risks and return on investment of TCH’s system. Senior management also had to get approval from the board of directors and then figure out how to go to market. 

The bank could have gone through its core provider, but ultimately chose to complete the integration with an existing fintech partner PayFi, which provides businesses with real-time money movement from one bank account to another through simple APIs.  

Real-Time Offers Strong Appeal to Businesses 

Avidia’s decision to join TCH’s real-time payments network is part of a much broader strategy at the bank. 

Bram Berkowitz

The move completes the “real-time circle of life,” according to Cliff Thompson, vice president of business development at Avidia Bank, which will help the institution meet the needs of all its current business customers, and appeal to new ones as well.  

Ninety percent of businesses expect real-time payments to dramatically transform the way business is done, according to a recent Citizens Bank survey of 150 companies nationwide in a broad range of revenue sizes.  

Nearly two-thirds of survey respondents said that real-time payments will likely mean the end of cash and check payments altogether, while 82 percent of businesses said real-time payments solve many problems with the current payment options. 

A real-time payments system will also make Avidia a much more attractive partner for fintech startups.  

Conery said he wants to offer an incubator-like atmosphere so exciting new fintech companies can develop their products at the bank, and not have to worry about payments. 

While most fintech startups already develop their products in real time, most community banks are using core systems running on technology developed in the 1970s and 1980s, making integration difficult. Conery also said that Avidia’s size also gives it an advantage over larger banks. 

“Some large banks support [real-time payments], but a lot of fintechs are backed by private equity and venture capital and need to get to market early,” he said. “Due to the size of the larger banks, it’s difficult for them to support fintech partners and the rapid pace they really need.” 

Conery and Avidia’s senior managers are convinced the move to a real-time payments system gives them an important leg up on other banks of all sizes. 

“I know a lot of smaller banks have reluctance to join because they think the big banks are out to get them, but we look at it totally differently,” he said. “If I can get the same level of services the largest banks in America are providing, if I can get access to that and provide that to my clients and fintech partners and I can be nimble, I see it as huge competitive advantage.”