Today’s consumer expects a digital banking experience that offers autonomy, accessibility, immediacy, and cost-efficiency. While some credit unions have heavily invested in these areas, instant payment platforms are often doing it better. However, credit unions can work to level this playing field by developing more accessible digital banking platforms that offer fee-free and frictionless transfers.

Currently, many financial institutions’ online platforms are inconvenient and difficult to use. A Javelin study found that “43% of millennials abandoned their financial institution’s mobile app after finding it too labor-intensive and slow”. In some cases, these young members are at risk of abandoning their primary financial institution altogether.

Although credit unions have the benefit of a smaller community, passionate membership, and a clear mission, the cumbersome peer-to-peer transfer process offered by most cooperatives isn’t cutting it anymore especially considering the extra expenses imposed onto the consumer through transfer fees.

While it is true that credit unions face regulations that third-party platforms such as Venmo do not, creating a fee-free future is still possible. Years ago, wire transfers were a labor-intensive process, making fees an operational necessity. Now that the technology exists to automate many of these services, there are fewer direct costs to institutions, so the need for fees has decreased. Credit unions may earn vital non-interest income by charging transaction fees, but they don’t provide much value to members, who now have fee-free options.

The State of P2P Payments Today

Some institutions are already making changes. Amplify Credit Union went entirely fee-free earlier this year, including wire-transfer fees, overdraft fees, and more. Their reasoning behind this transition was that many members were said to have grown resentful of the money being taken out of their accounts from fees even when the fees added value for members. Beyond that, these fees go against the mission of credit unions, especially since the fees being paid are not shared across membership in an equitable way.

Going fee-free saved Amplify’s members almost $2 million annually and has boosted member engagement and loyalty. Other credit unions have followed suit and lowered or eliminated certain fees. Banks, on the other hand, responded by creating a peer-to-peer payment platform, Zelle.

Zelle was created by a fintech company owned by Bank of America, Truist, Capital One, JPMorgan Chase, PNC, U.S. Bank, and Wells Fargo. It is a platform attached to one’s financial institution that much like Venmo and PayPal allows for free and instant peer-to-peer transfers. It has quickly become the most widely used money transfer service in the country, with over $490 billion in payments sent last year alone. After the release of Zelle, fewer customers left these top banks for competitors, as many were satisfied by the easier and cheaper online experience.

Other banks and credit unions can also partner with Zelle, allowing their members to send and receive transfers on the app, even if the receiver does not belong to a partner bank or credit union. Zelle has over 1,000 current partners (including about 500 credit unions), all of whom customize the app.

The Risks of Instant Transfers

These free and instant payment platforms come with risks, however. Recently, Zelle made headlines for excessive fraudulent charges on the platform. Since traditional bank and credit union peer-to-peer transfers have a slight delay a day or so those institutions have an extra time window that adds a level of security that is absent from instant transfers. It therefore becomes nearly impossible to retrieve money sent on these instant transfer apps unless the receiver is willing to send it back.

Currently, the law requires banks and credit unions to refund only unauthorized transactions, which creates a gray area: users believe being duped inherently makes a transaction unauthorized, but the powers behind Zelle disagree. Essentially, in exchange for the convenience of the instant, fee-free transfer, institutions are passing the risk onto the consumer.

While many Americans are losing money through these instant-transaction scammers, these fraudulent charges can be avoided through better financial education. As with any new technology, users must be taught about pitfalls and best practices, including the inherent risks of instant transfer platforms. As member-focused institutions, credit unions are uniquely built to safely guide their members into using newer and better technologies. Additionally, Zelle’s partner institutions have customizable security settings on the platform, allowing credit unions to tailor it to member needs.

The Next Frontier For Credit Unions

The time has come for credit unions to create or partner with a transfer app that offers users an experience as youth-friendly and frictionless as Venmo. Credit unions can do this by offering many of the fun and popular features of Venmo, PayPal, and Zelle, such as sending thank you notes or emojis alongside peer-to-peer transfers or allowing users to buy cryptocurrency within the app.

Credit unions can also take the immediate step of partnering with Zelle to create this digital experience within their own institution while being weary of the risks that come with instant transfers. Developing insurance partnerships to add a financial backstop and reduce the risk of adopting these platforms may be a necessary cost.

Lastly, credit unions can create features beyond what Venmo and PayPal offer, such as automatically transferring portions of peer-to-peer payments into savings accounts or donating portions towards community outreach. They can also create additional features by integrating other services currently offered by fintechs and other partners into their internal digital experiences. Some potential routes include managing personal investment portfolios or creating free and instant international payments, as some banks have begun to do with SWIFT gpi.

Many credit unions, having partnered with Zelle or having expanded their digital banking platform, have made progress toward a more seamless member experience. Yet, there are still more opportunities to provide services not yet offered by these third-party platforms. The goalposts for member service are ever moving, and fortune tends to favor the bold and innovative.

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FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.22

Callahan & Associates | CreditUnions.com

Source: Callahan & Associates, Federal Reserve

• Credit card delinquencies at credit unions and commercial banks are back on the rise after unexpectedly improving during the pandemic, thanks to expanded unemployment benefits and stimulus checks from the federal government.
• At just 1.01%, credit card delinquency rates at credit unions at the end of the first quarter were nearly three quarters of a point below their for-profit counterparts, though for now credit unions are closer to reaching pre-pandemic delinquency levels than banks.
• Delinquency rates at banks and credit unions alike have been on the rise for the last four quarters following the end of government-backed pandemic-relief programs.
• The increase in delinquencies is largely a good thing. Credit card spending among credit union members fell $5.8 billion during the first year of the pandemic as lockdowns and social distancing led to a decline in consumer spending.

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