8 Things Credit Unions Should Know About FedNow Now

“Your payment should clear in a few days.” At some point in the not-so-far future, that phrase is likely to be just as obsolete as the screeching sound of dial-up internet is today.

With last month’s launch of FedNow – the Federal Reserve’s instant payments rail – payment transfers that become available for use by the receiving party within seconds are being pushed further into the mainstream, and credit unions are beginning to view adoption of the service as an imperative. Six credit unions and seven corporate credit unions were among the 57 early adopters of the FedNow Service; in addition, service providers that have begun processing FedNow instant payments for participants include a number of vendors familiar to the credit union movement, such as Fiserv, FIS, ACI Worldwide Corp., Alacriti, Jack Henry and Juniper Payments, a PSCU Company.

That compares to 69 credit unions and two corporate credit unions that are currently participants on the RTP network (the only other instant payments rail in the U.S., which The Clearing House launched in 2017), as well as seven corporate credit unions that are certified funding agents for RTP participants, according to Corporate One Federal Credit Union, one of the credit union industry’s most active players in the instant payments space. About 350 financial institutions total are RTP network participants, the majority of them banks.

FedNow presents a new opportunity for credit unions to join the growing list of financial institutions facilitating instant payments, but with that opportunity comes many questions concerning the operations and technology required for the service, as well as how it should fit into a credit union’s strategic plan. Here are eight things credit unions should know about FedNow now (for further reading, check out the Federal Reserve’s FedNow educational materials here).

1. Don’t use the acronym RTP. “Real-time payments,” or RTPs for short, has been used widely as a vendor-neutral term for payments that settle instantly. However, The Clearing House actually trademarked RTP as the name of its network, so the acronym shouldn’t be used in reference to the FedNow service. FedNow is referring to its service as “instant payments.”

Corporate One, which is a certified Third-Party Service Provider on the RTP Network and a FedNow pilot participant, is using the term “immediate payments” and offers three related services to credit unions: One that establishes a technical connection to the credit union’s core system, enabling immediate payment receipt functionality; a settlement and cash management service; and a send solution that allows credit unions to send immediate B2B payments through their Corporate One account (currently, all three services are available through RTP, and the plan is to make them all available via the FedNow rail as well).

2. There aren’t many differences between The Clearing House and FedNow. The differences between the two rails are minor, and lie in their current transfer limits ($1 million for RTP versus $500,000 for FedNow) and settlement process (RTP uses a joint account at the Federal Reserve Bank of New York, while FedNow leverages a Federal Reserve master account). Otherwise, the two rails are nearly identical from an operational standpoint, despite the increased level of media buzz around the newer rail. “The reason why I think everybody is taking more interest in FedNow is because, a) it’s the Fed, and b) the Fed has been marketing the heck out of it,” according to Jeff Bucher, senior product strategy manager at digital banking solutions provider Alkami Technologies in Plano, Texas. Alkami recently partnered with fintech Alacriti, a FedNow service provider, to bring instant payment services to credit unions.

3. Partner up for the best results. Before they can offer the FedNow service to members, credit unions must consider whether their current operations and systems can support instant payments; connect to the Federal Reserve’s FedLine Solutions network to gain access to the FedNow Service – something they can do on their own, through a service provider’s connection or a combination of both; and decide whether to settle instant payments in their own Federal Reserve Bank master account or that of a correspondent.

Staying in line with the collaboration-rich spirit of the credit union movement, credit unions that have launched or are preparing to launch FedNow have been partnering up with payment processors, corporate credit unions that are certified FedNow correspondents, and/or other service providers to fulfill the service’s behind-the-scenes technical and operational requirements.

Some FedNow service providers have formed their own partnerships, giving credit unions a one-stop-shop opportunity to install the plumbing required for FedNow. Corporate One, for instance, partnered with payment systems company ACI Worldwide, which is connecting to the Fed’s instant payment network while Corporate One is handling the downstream connections to credit unions’ core systems, according to Corporate One President/CEO Melissa Ashley, who also noted any credit union can take advantage of Corporate One’s immediate payment services once they are a member of the corporate.

“One of our main strategic initiatives this year was building out the white glove treatment for the credit unions. We’ve seen them come live on the RTP network, and it really is an all-encompassing kind of project for them,” Ashley said. “[FedNow] is a new rail, and if you have experience in it, you can really help them get there faster than they could have on their own.”

4. Don’t wait to enable receive functionality on both rails. Ashley and Bucher offered the same advice for credit unions that have yet to enter the instant payments space: Get connected to both the RTP and FedNow rails to enable functionality to receive payments now. Credit unions that fail to do so will miss out on deposit opportunities.

Ashley said setting up a receive-only profile is a light lift for credit unions from a technology standpoint and low risk due to the finality of the payments, and that when Corporate One has enabled receive functionality for credit unions, they typically start seeing deposits come into members’ accounts on day one through apps like Venmo, PayPal and Square.

“Credit unions don’t control what is shown to consumers, but consumers are starting to experience the ability to complete these payments whether their credit union has enabled these solutions or not – and they are being directed toward financial institutions that are offering these solutions,” Ashley pointed out.

Credit unions can later evolve their strategies to incorporate send functionality – something that only about 30 financial institutions total currently have in place.

“A lot of the payment providers are offering incentives or discounts to set up send. That doesn’t necessarily mean you need to enable it, but you can set it up so that capability is there, so when you do want to enable it for a specific use case, you already have it there as a credit union,” Bucher said.

5. Determine the best use cases for your credit union. While receive functionality benefits credit unions and their memberships across the board, send functionality is less one-size-fits-all and should be implemented strategically. The Fed recommends financial institutions consider how instant payments could help meet their business and consumer customers’/members’ unique needs, as well as how the service could improve their internal processes and the experience of their employees.

According to Ashley, key instant payment send use cases for credit unions include account-to-account (A2A) transfers, payments initiated by business members, bill pay (although Bucher pointed out that instant bill payments are limited to companies that accept them), person-to-person (P2P) payments and expedited payroll. And, Ashley noted that the credit unions using Corporate One’s B2B immediate payment send solution often leverage it to get funds to indirect auto lenders and for mortgage settlements outside of business hours.

Bucher recommended credit unions pinpoint their heaviest ACH and wire activity (domestic only, as RTP and FedNow does not support international payments) when considering instant payment use cases. “You need to think about, what am I using ACH and wires for right now, and how can I use [instant payments instead]? Because they’re cheaper, easier and faster – they’re even faster than wires,” he noted.

6. Consider an instant payment fee. Depending on the credit union’s business model and the use case, implementing an instant payment send service for members could lead to a new stream of noninterest income, according to Bucher, whose company is currently beta testing A2A instant payment send functionality for its credit union clients that allows them the option of charging members $1 per transaction. “We’ve talked to a lot of credit unions and payment providers, and we’ve done some of our own research, and it seems that having a fee is not unacceptable to a lot of consumers when it comes to faster transfers,” he said. “Plus, if you’re replacing wires and ACH with RTP and FedNow, there have already been fees in a lot of use cases for those, so replacing that fee income might be a really good idea.”

7. Instant payments can benefit members in a bind. Easing the minds of members facing financial difficulty is something credit unions do well, and instant payments can help them further their cause even more. Members who are past due on a loan can send a payment to their credit union without having to worry over the next few days about whether it will clear, for example. And, for members awaiting emergency funds such as a government stimulus payment or insurance payout following a natural disaster, an instant payment means less time waiting.

8. Adopt or risk irrelevance. As the use of instant payments grows, credit unions may want to consider the fact that their back-end systems that support ACH and checks will eventually become obsolete – and if they don’t embrace this new way of sending money, so will they.

“The biggest banks in the U.S. are working with the biggest companies in the U.S. to leverage these new rails and find out, how do we get claims paid to people who are desperate to get their homes fixed after a hurricane in a more instant fashion?” Ashley said. “You have to pay attention to what’s happening out there. The consumer expectations are going to get higher and higher, and credit unions really need to focus on these new capabilities.”

However, it may be a while before a full, nationwide shift to instant payments takes place.

“Here in the United States, we’re not necessarily great at adopting new ways of doing things,” Bucher said. “When it comes to payment rails, there are still a lot of people and companies that write checks. Consumers are going to adopt [instant payments] right away, but the businesses that they pay aren’t necessarily going to because they have processes in place with ACH, wires and things like that. So I do think it will take over, but it may take longer than people want it to.”