Credit Unions Take A Big Step Toward Instant Payments

Credit unions are often fast followers when it comes to innovation, but the industry is on the ground floor for the development and launch of FedNow, the Federal Reserve’s real-time payment and settlement service.

On July 19 at 6:01 p.m., the Fed launched FedNow. Corporate and natural-person credit unions alike were heavily involved in the conceptualizing, development, and now adoption of the service as a complementary alternative to the ubiquitous ACH Network.

Nacha has been adding payment windows and same-day functionality for the past few years, but its batch processing doesn’t offer true instant payments with immediate availability of funds.

FedNow, in development for several years, works non-stop to meet consumer demand for instant, secure, reliable financial transactions.

“Just as credit unions use the ACH system, FedNow is the next version of ACH,” says Gary Rodrigues, president and CEO of early adopter Star One Credit Union ($10.3B, Sunnyvale, CA). “Everyone should participate. It’s a cost-effective and secure payment system. We think eventually all credit unions will want to offer FedNow and take payments back from the fintechs.”

Consumer Demand

Competition might leave credit unions little choice but to adopt FedNow.

“If credit unions do not embrace this new infrastructure, they’re likely to lose members to other financial services providers that do offer instant payment capabilities, which consumers are coming to expect,” says Kurt Stevenson, senior vice president of payments at Alloya Corporate FCU, a Naperville, IL-based provider of wholesale payments and other services to approximately 1,400 credit unions.

Alloya expects real-time payment volume in the United States to grow to at least 6% of total payment transactions in the next five years, Stevenson says, an estimated 18 billion out of 322 billion payments.

He also points to surveys by PYMTS and PSCU last fall that found 64% of credit union members rate payments innovation as a top factor in choosing a financial institution; 27% would switch financial institutions based on that factor.

Brad Ganey, senior vice president and chief operating officer at Catalyst Corporate FCU, expects swift adoption and the impact to be transformative to consumers, businesses, and the financial institutions that serve them.

“There have always been challenges with availability of traditional payment systems outside business hours and across time zones,” says Ganey, whose Plano, TX-based corporate is the largest payments aggregator in the credit union space. “FedNow will knock down these barriers and provide a faster way to send and receive government payments, payroll, insurance claims, and so many others. We also believe this payment rail will have more rapid adoption from merchants because they were at the table alongside financial institutions from the beginning developing this solution.”

Credit unions had a significant presence among the 110 or so financial institutions and processors comprising a pilot program launched in January 2021 to support FedNow development, testing, and adoption. That was followed this past June, just a few weeks before the live date, by the naming of 57 early adopters to complete formal testing and certification. Now, it’s time to get in line.

“The sooner the start, the better the outcome as there will be significant demand among financial institutions to be onboarded with the FedNow service and the process takes time,” says Stevenson, the Alloya payments executive.

Credit unions that got in the long queue for Zelle a few years ago might remember that well.

Meet, And Beat, The Competition

FedNow is one more way credit unions can level the technology playing field currently dominated by larger commercial banks and fintechs.

Rodrigues at Star One says his credit union’s FedNow service, called Instant Pay, is an answer and alternative to Venmo, PayPal, and other third-party payment options.

“Our members are using these fintech apps, and we want to be our members’ primary payment services provider,” he says. “Fintechs have controlled the real-time payment market. We like that we can now directly compete with them with a system that’s even better than what’s been available.”

Pima Federal Credit Union ($1.0B, Tucson, AZ) is taking a systematic approach. On July 19, it was up and running on FedNow in the first moments the system was live, the first Catalyst credit union to do so.

“This is an ongoing, multi-phase project that we have consolidated into three phases,” says Eric Renaud, president and CEO of Pima.

According to Renaud, members will be able to receive payments from participating financial institutions or service providers in phase 1 and send payments in phase 2. Phase 3 will include integration into the credit union’s online and mobile banking platforms.

That approach jibes with advice from Iowa’s largest member-owned financial services cooperative and FedNow early adopter.

“Start with a long-term plan that identifies your opportunities to get the most out of this network for your members and your internal processes,” says Renee Christoffer, president and CEO of Veridian Credit Union ($7.0B, Waterloo, IA). “Identifying your use cases is an important early step. That was vital in determining our roadmap for moving forward.”

A2A, P2P, And Beyond

Star One, Pima, and Veridian are among the shops testing the waters by going receive-only, a step that Alloya SVP Stevenson embraces.

“Receive-only, real-time payment processing is a strong yet low-risk starting point for credit unions to get involved,” he says.

For its part, Alloya is piloting several P2P solutions and expects one or more of them to be available to member credit unions later this year, jump-starting what’s expected to be a growing list of uses for the real-time payments service.

Credit unions are preparing, too.

“FedNow is currently more of an account-to-account service,” says Rodrigues at Star One. “But there are several different use cases in the works, such as tokenized P2P transactions and bill payments.”

Christoffer at Veridian says she also sees a wide variety of use cases for instant payments with far-reaching benefits for internal operations and member service alike.

“Using instant payments for things like loan payoffs, closing costs, and more will increase efficiency in loan processing,” she says. “We’re also exploring uses in our member application and onboarding processes. Overall, instant payments will allow us to offer an improved experience for our members in a wide variety of interactions.”

At Pima, Renaud sees the potential for FedNow to compete with products and services like bill pay and wire transfers.

“When it comes to high-priority situations, real-time payments offered through FedNow will be preferred over wire transfers since they will be free and instantaneous,” he says.

He also sees the potential for FedNow to replace ACH in the future.

“This would be beneficial for businesses, government agencies, and individuals alike since it would mean receiving payments sooner,” he says.

Integration, Integration, Integration

Adopting institutions have to integrate FedNow with their existing services, including external payment rails such as PayPal, Venmo, and Zelle, as well as ACH and RTP rails. That requires critical connectivity among the complex systems involved in this money movement and integration with the heart of the credit union’s technology, its core processing platform.

“Core readiness and integration are a must for real-time transactions to occur,” says Stevenson at Alloya. “Alloya and our technology CUSO, Aptys Solutions, have been working closely with as many credit union core processors as possible to integrate with our real-time solutions. Although many cores have been receptive to integration with Alloya, others are uncertain or unlikely. Conversations with the core processor are critical.”

But as adoption becomes widespread and integration work advances, additional application developers and providers will be able to integrate with the solution, enriching the value far beyond simple transfer of funds, says Ganey at Catalyst Corporate.

“We’re not targeting a single provider but rather multiple efficient, cost-effective applications that will fuel credit unions’ ability to stand out,” Ganey says.

Retain And Attract Members

FedNow boosts cooperatives’ ability to serve and compete by offering services that are on par with, or even exceed, those available through larger competitors.

This is crucial for retaining existing members and attracting new ones, especially among younger demographics who are more accustomed to real-time services and are growing more dominant in the market every year.