Real-time relevance

In July, the Federal Reserve officially launched FedNow, its set of real-time payment rails. It’s an accomplishment deserving of celebration: the on-time delivery of a complex, multi-year project that establishes the foundation for the next generation of payments capabilities for consumers, businesses, and financial institutions.

While acknowledging the milestone, the Fed is clear that it merely marks the beginning of a long-term pursuit of ubiquity and innovation.

The U.S. is far from the first country to implement a set of instant payment rails—and the Fed isn’t even the first to the party in this country. The Clearing House introduced its real-time payment system (branded RTP) in late 2017, and recently announced the completion of 500 million transactions.

Credit unions are playing a significant role in this transformation. Seven natural person and four corporate credit unions were among the 35 financial institutions live on FedNow for its July 20 debut. By mid-November, that number had passed 150.

Conversations with several of these early adopters reveal several common themes, including enthusiasm for the service opportunities the real-time technology enables, a desire to stay relevant to members, and an awareness that the true benefits will play out over time.

“We’re not only focusing on our current members, but also our future ones,” says Katelyn Brown, director of accounting at $1 billion asset Pima Federal Credit Union in Tucson, Ariz. “In order for us to grow and be here in 10 years, we have to be on top of things like this.”

Minal Gupta, vice president of remote services at $10.3 billion asset Star One Credit Union in Sunnyvale, Calif., has a similar opinion. “From the get-go, we saw value in the product. This was something we’d been waiting for,” she says, adding that Star One signed up for the Fed’s pilot immediately.

Despite similar levels of enthusiasm, these credit unions took different approaches to implementation. Pima Federal worked through longtime partner Catalyst Corporate Federal Credit Union, also a FedNow early adopter, to help roll out the capabilities to members.

“Catalyst is doing a lot of the heavy lifting, including monitoring liquidity overnight and for weekends and holidays,” says Brown.

That’s a key consideration for instant payments because funds move continually.

Pima Federal also entered the market in “receive-only” mode, meaning members can receive instant payments but can’t yet send them. “We wanted to get our feet wet first,” Brown explains, adding that they anticipate enabling send capabilities in the near future.

Star One, by contrast, offered send and receive from day one, and built the functionality directly into its own member-facing application, supported by Tyfone. InstantPay, as Star One calls it, simply appears as a new option alongside same-day automated clearinghouse, which the credit union already offered in the app.

FedNow isn’t intended to be a customer-facing brand. “Our members don’t even know they’re using FedNow,” Gupta adds.

Star One’s approach led to a bit of serendipity on FedNow’s first day of live production. “Within the first hour, one of our members found the new option on the app without any marketing,” she recalls.

He used the new option to transfer funds to his daughter—something he otherwise would have done through a less immediate process.

NEXT: Seeking relevance

Seeking relevance

Given Star One’s Silicon Valley location, Gupta recognizes that her members are tech-savvy. However, given FedNow’s intuitive interface, she doesn’t see digital sophistication as a prerequisite for adoption.

“We know that our competitors aren’t other credit unions,” she says. “We see that our members engage with the Bank of Americas and Chases of the world, so we have to provide innovative solutions to stay relevant.”

Jamie Payton, president/CEO at Heritage South Credit Union in Sylacauga, Ala., voices a similar belief. “If you’re going to be a player, you have to stay at the front edge of the technology. It can be a dangerous place, but it’s the place that makes you available to your membership.”

With $175 million in assets, Heritage South is poised to be the smallest credit union to date to enable FedNow. The initial wave of adopters all had $1 billion or more in assets.

The decision to pursue instant payments grew out of the strategic planning process, Payton says. “We saw it as a way to stay ahead of the curve.”

Heritage South planned to roll out FedNow and RTP in November, both on a receive-only basis, through Corporate America Credit Union, which will shoulder much of the off-hours administration.

Payton envisions particular member upside in merchant settlement, insurance distributions, and “getting paid at the end of a shift rather than the end of a workweek.”

The product’s visibility will be mostly through digital channels, but Payton doesn’t view that as an impediment. “We used to think it was for younger members, but we now see digital activity across the board,” including older generations, she says.

Heritage South’s enthusiasm is hardly an outlier.

“There’s been a tremendous ‘hockey stick’ of interest—which is what we expected, but it’s still good to see,” says Brad Ganey, chief operating officer at Catalyst. “We transitioned from educational webinars to ‘here’s what it takes to go live’ in a hurry.”

While processing 30 million check items monthly for more than 3,000 credit unions, Catalyst is keen to balance its portfolio for future payment types as well.

“The 24/7/365 aspect of real-time payments, with all the data that comes along with it, is a no-brainer,” Ganey says. “We believe this will change the way U.S. commerce is conducted.”

The primary pain point is core integration, he adds. That’s why Catalyst emphasized broad enablement.

Ganey envisions an instant payments use case that should particularly resonate with credit unions. “Indirect auto loans are big for credit unions. Dealerships want their payments as quickly as possible, so this is a natural fit.”

NEXT: Lessons in connectivity

glen.sarvady@154advisors.comglen.sarvady@154advisors.comLessons in connectivity

The U.S. isn’t the first country to pursue a real-time payments network. Most experts consider us to be behind the curve.

India (UPI) and Brazil (PIX) are frequently cited examples of initial adopters whose primary objective was to migrate predominantly cash-based economies to digital channels.

Despite significant differences in consumer behavior and banking infrastructure, these prior rollouts offer lessons in terms of connectivity and back-office support.

“Our journey started in late 2016 when our parent organization, VSoft, was part of the UPI launch in India,” says Abhishek Veeraghanta, founder/CEO at Pidgin, another FedNow initial adopter. “UPI gave us a template for what this could look like in other countries.”

Veeraghanta is part of a broad consensus that, given the extensive pilot process, FedNow’s official July 20 launch date was something of a nonevent.

Pidgin’s use of The Clearing House’s real-time network since 2019 also helped.

“We were already live on RTP, so we knew what a 24/7/365 approach required,” Veeraghanta says. “We’re laser-focused on faster payments, so this was a natural extension of what we were already doing.”

He sees FedNow as “democratizing for community financial institutions,” while also pointing to support considerations. 

“How do you handle the operational requirements of an undertaking like this? You need to look at the impact on five-employee shops and single-segment credit unions,” Veeraghanta says. “That’s what drove our approach.”

Gupta says Star One hasn’t had to add any staff to manage FedNow. That could be more challenging for a small shop, however.

“It depends on how hands-on you want to be,” says Veeraghanta, referring to Pidgin’s cloud deployment and outsourced operations management options. “We can even help with sweeps if given the instructions.”

Many credit union and service provider leaders agree that early movers were motivated more by  anticipated demand than a reaction to existing demand. However, Gupta says, “the demand to move money on our members’ time frame has always been there.”

Meaningful traction should build over the course of 2024. “There’s a lot of FOMO [fear of missing out], but there’s also an ongoing education process required,” says Veeraghanta.

Some of this momentum will materialize as more institutions move into send mode. Ganey sees most credit unions starting as receive-only users.

“It gets them on the platform, and gets the staff acclimated,” he says. “In 2024, you’ll see more of the shift toward send.”

Concerns about a critical mass of senders may well be overblown. “The top 15% of U.S. financial institutions cover 85% of demand deposit accounts,” Veeraghanta points out. “If they turn on send, we’ll have plenty of volume. And people need to get paid faster even if they can’t pay faster.”

Several of the largest banks have already enabled send for both RTP and FedNow. The promise of the U.S. Treasury sending government disbursements via FedNow will likely be a strong incentive for credit unions to activate receive-only capability at minimum.

No credit union wants members to see a “sorry, we can’t accept these incoming funds” message.

NEXT: What’s different now?

What’s different now?

Fraud has long been a sensitive topic surrounding real-time payments given the lack of cushion to assess a transaction’s legitimacy and the irrevocable nature of payments.

Brown takes a clear-eyed view on this matter. “Fraud will happen regardless,” she says. “It’s more a matter of setting the right limits and adjusting when needed.”

Ganey adds that the ability to set different transaction thresholds by channel (and potentially for off hours and holidays) could offer further comfort.

Ganey also has a response for those who wonder why this will be different from so many other new payment models that failed to achieve scale. “The retailers and merchants have been at the table with us from day one—that’s never happened before. The parties may have different motivations, but we’re all better aligned.”

This also means retailers are already incorporating these capabilities into their technology plans.

“We’re now at the stage where financial institutions can build this into their plans for real-time posting, and so on,” Veeraghanta adds. “Everybody already has an app for everything. The onus is now on financial institutions to interact in whatever landscape the member is using, creating a stickier membership experience.”

GLEN SARVADY is managing principal at 154 Advisors.