8 Months Into FedNow, Silicon Valley-Area Credit Union Has No Regrets

Last July, six credit unions and seven corporate credit unions were among the 57 financial institutions to line up as early adopters of FedNow, the Federal Reserve’s instant payments service, eager to give their members or member credit unions the ability to receive – or receive and send – payments with no waiting period for settlement to occur.

One of those early adopters was Star One Credit Union ($9.8 billion, Sunnyvale, Calif.), which serves a membership located in the high-tech hub of California’s Silicon Valley. In fact, it was the first financial institution in the nation to initiate a send transaction on the service, and since that first instant payment was sent on July 20, the credit union’s members have completed 8,236 FedNow transactions totaling $11,823,003 (as of March 21, 2024). Called Instant Pay, the service is available to all Star One members through online and mobile banking.

Star One worked with Tyfone, Inc., a Portland, Ore.-based digital banking provider that the credit union first established a relationship with in 2011 for mobile banking, to roll out Instant Pay. Star One migrated its entire digital banking offering to Tyfone’s nFinia digital banking platform in 2017, and three years later, the two organizations partnered to develop a native Zelle solution. Not wanting to leave any digital payment option behind, the credit union had also made Same Day ACH available to its members when it came on the scene in 2016.

Leading up to the Federal Reserve’s launch of FedNow, Star One completed testing and certification for the service. The credit union has its own master account with the Federal Reserve for settlement purposes as well as a direct connection to the FedLine Solutions network, which allows it to access the FedNow Service; this connection also enabled Star One to serve as the sponsor for Tyfone’s connection.

Instant Pay is linked to Star One’s Same Day ACH offering – when a member goes into online or mobile banking to initiate a Same Day ACH transfer, the system automatically checks to see if the recipient’s institution participates in FedNow. If the answer is yes, the member is asked if they would like to send their payment instantly, and so far, no member has replied no to this prompt, according to Tyfone CEO Dr. Siva Narendra. There is no fee associated with an instant payment transaction, just as there is no fee for Same Day ACH at Star One.

“Our objective is to intercept the normal flow the member would follow and navigate them over to Instant Pay if the recipient can receive it instantly,” he said.

Tyfone’s platform-agnostic instant payments solution, which integrates to financial institutions’ core processing systems and enables connectivity to payment originators and digital banking providers through its open APIs, is currently being implemented by four additional financial services providers, according to Narendra.

We recently spoke with Narendra and Star One CEO Gary Rodrigues about their FedNow journey, including how they’re mitigating fraud and how the service is creating efficiencies for the credit union.

CU Times: Why wait for FedNow to implement an instant payments offering instead of utilizing The Clearing House’s Real-Time Payments rail, which launched in 2017?

Rodrigues: From Star One’s perspective, RTP was created by and under the control of the largest financial institutions. When it launched, it felt like it was going to be used in and mostly designed for the larger financial institutions, and it took a while before we really had the feeling that we’d be able to participate in the program. And by then, the Federal Reserve had come out with more information about FedNow, and we decided to stick with FedNow because we saw it as having a partnership with the Federal Reserve, versus a partnership with large banks.

Frankly, it was much harder to get started with RTP back then as a smaller financial institution, while our process with the Federal Reserve has been very easy, especially since we were already moving payments with ACH. Also, the request for payment feature – which I think is going to be a super big part of FedNow in the future – costs 11 cents [with RTP] versus one cent with FedNow.

CU Times: Why offer FedNow send functionality right away, as opposed to just receive?

Rodrigues: We were already participating in Same Day ACH and Zelle, and those were member-initiated payments from online or mobile banking. For us, to say we’re going to offer instant payments, but only receive, it’s like a step backwards for our members and offers very little value. Once we got our hands around the fraud part of it, it was an easy decision and it seemed that send was the only reasonable solution to move forward with.

CU Times: What are the main use cases you’re seeing with FedNow?

Rodrigues: It’s mostly account-to-account (A2A) transfers. A lot of members are using it to pay routine bills – paying the gardener, the daycare center, rent payments, that sort of thing. We are working on a teller module, so if someone comes into one of our branches and wants to move money quickly, we see [FedNow] as a way we can migrate out of wire transfers, which are expensive, time consuming and have definite time limits – we have to stop around 1:00 [p.m.], which creates a lot of problems for our members. So we’re going to be rolling that out soon.

CU Times: How are you mitigating fraud risks associated with instant payments?

Narendra: Fraud is an important piece, right? We have native solutions that are real-time within Instant Payment Xchange, which we built for Star One and is now a separate company within Tyfone called Payfinia. The platform also connects to third-party fraud models, because every institution has its own knowledge base and partnerships to build fraud models. As long as they’re real-time in our dashboard, we can integrate them for real-time payments and take advantage of their benefits.

Rodrigues: The Federal Reserve built in some nice features and Tyfone did as well on the interface. One of the features that has been helpful for us is a cool-off period for these transactions. So if it’s a new account, a new sender and a new receiver, we can set some smaller limits for a shorter period of time and then extend the limits as time goes on. A lot of fraudsters might access someone’s online or mobile banking account and then try to get as much money out as quickly as they can because they know they’re going to get detected pretty quickly. To limit that, the smaller limits have been a lifesaver for us.

We use one-time passwords on the payments and we have some flexibility on when and how to use it, which has been great. The Federal Reserve has also been able to identify where there’s been fraud, so if we’re going to send to an account that’s been identified as fraudulent, the transaction can be stopped. And then there’s risk scoring – identifying senders who have high risk levels has been a real money saver for us.

We’ve actually had less fraud under FedNow than we’ve had under Same Day ACH. It’s a fraction of what we’ve had in the past. I want to say we’ve had two or three instances of fraud since we went live last July, which is very little compared to all of our other channels.

Narendra: The way we look at it at a high level is finding strengths, and the stronger the binding, the higher the threshold of the transaction. So if it’s a new recipient, the binding between the sender and recipient is weak, which automatically lowers the threshold. That’s one of the early features we enabled, and what we’re working on now is authenticating the device through the SIM card – authenticating the instance of the application that’s installed within the device on the SIM card. So as the app installs to a particular IMEI number to a particular SIM, if this has happened multiple times and there has been no fraud for that particular device, we automatically increase the threshold.

CU Times: How has Star One marketed instant payments to members?

Rodrigues: We have done essentially no marketing. Members saw it in our app and have migrated to it. When FedNow went live, I think it was at 6:00 our time in the morning, and by 6:15, one of our members had found the FedNow module and completed a payment.

CU Times: How has the introduction of instant payments brought efficiencies or otherwise benefitted the credit union?

Rodrigues: We’re right in the middle of Silicon Valley, so that’s a big part of it. Our members want the latest and greatest payment systems that are out there. But also, we move a lot of payments inefficiently now. Wires would be a good example. We’re sending wires to title companies for funding of loans and to car dealerships and the like, so we see [instant payments] as a way to save money, make it real-time and cut out a lot of inefficiencies that have occurred. There’s a good case to bring it into bill pay in the future, and somewhere down the road to merchant transactions. It’s going to be a lot of crawling before you walk and walking before you run, but there’s a definitely a great business case to transition some of these transactions into the merchant business.

Narendra: The efficiencies Gary talked about from a reconciliation perspective are really critical. Even as a technology vendor, compared to a settlement system like Zelle, from a settlement reconciliation perspective it’s a night and day difference.

Rodrigues: I’m glad [Siva] brought that up, because I can’t make that point strongly enough – the benefit we’ve had from having a single reconciliation with FedNow transactions. Especially with Zelle transactions, frankly it was a nightmare for us to reconcile the authorization versus the post. For a lot of our business, we’ve had ACH and in some cases Visa where you have a dual authorization and post-transaction. For FedNow, it all comes in one transaction, and we’ve had none of those problems. For us, the efficiency has been huge and I’m sure for other financial institutions it’s going to be even bigger.