Instant Payment Services as a Competitive Advantage

    Small businesses and some individual members may prefer real-time payments

    In the mid-70s, the pizza chain Domino’s grew at an astonishing pace, thanks in part to a 30-minute delivery guarantee that set the company apart from competitors. Today, consumers still demand quick, reliable service—expecting one-day delivery of packages and meals ready in the time it takes to move from the drive-through intercom to the pickup window. The “need for speed” has also entered the financial arena with payment apps that move funds from one account to another and online payments that can be scheduled for overnight settlement.

    The July 2023 launch of FedNow, the Federal Reserve’s new instant payment service, provided a new opportunity for more credit unions to offer a competitive, increasingly popular service to members—real-time, instant payments.

    The demand for real-time payments is growing throughout the world, with 79 countries offering at least one instant payment service compared to 14 countries eight years ago. In the U.S., the momentum is growing among financial institutions of all sizes. The Federal Reserve announced that FedNow had reached a new milestone with 108 participating organizations sending and receiving on the network as of early October; however, some credit unions and smaller financial institutions have been hesitant to pursue instant payments due to liquidity management challenges.

    “FedNow is attractive to credit unions because funds flow through the Federal Reserve Bank system, and the combination of a liquidity management tool and 24-hour/365-day access to the master account streamlines the process and does not require prefunding,” said NAFCU’s Senior Counsel for Research and Policy Andrew Morris, NCCO. “Common concerns include potential fraud risk and uncertainty regarding member demand, but the Fed has alluded that upgrades will include additional tools to manage fraud and future directory functionality to improve the payment experience.”

    There were 13 credit unions that were identified by the Fed as early adopters that were ready and certified to use the system when FedNow launched. Results from NAFCU’s 2023 Report on Credit Unions indicate that 38% of credit unions are considering joining in a receive-only capacity and 31% are considering joining with both send and receive capabilities. Among respondents, those with $1 billion or more in total assets were more likely to consider becoming a FedNow participant.

    For credit unions not currently planning to become a FedNow participant, the two most commonly cited reasons for not adopting the service were lack of resources and staffing (58%), followed by lack of member demand (33%). Notably, a quarter of respondents said that liquidity management risk was a primary concern behind the decision not to adopt, despite the service offering a real-time liquidity management tool.

    “The benefits of an instant payment service depend on the credit union’s vision and how it fits into the overall strategy for payment services,” said Morris. “Some businesses operated by or used by members can benefit from instant payments and some consumers may like the increased control over funds going in and out of their accounts, but other credit union members may be satisfied with existing electronic payment options.” The decision to adopt FedNow requires a careful evaluation of the organization’s goals and expectations of its members, he added.

    Managing fraud risk will always be a challenge with real-time, irrevocable payments, but there are tools that can monitor trends or place limits on the value of funds that can be transferred, and processes that enable senders and recipients to acknowledge and verify transfers, said Morris. “Some credit unions may initially offer the FedNow service to business members, who may have a lower risk profile, as the organization evaluates the best ways to mitigate fraud risk at the consumer level.”

    Certification for use of FedNow includes executing an agreement to meet compliance and technical standards to securely access the payment system, said Morris. “Most credit unions will access FedNow through third party service providers,” he said. “This will allow the credit unions to focus on their core services rather than the specialized infrastructure needed to access FedNow.”

    The best step to take now is the education of credit union leaders, suggested Morris. “NAFCU has a FedNow resource page [] that includes webinars, articles and tools that credit unions can use,” he said. The next step is to determine if the organization has the operational bandwidth to implement, monitor and manage the service. Credit unions should evaluate all operational and technical aspects associated with offering the service to members, whether through online portals or mobile interfaces, he said. “Talk to credit unions members to see if introduction of an instant payment service makes sense,” said Morris. Even if members are not interested now, continue learning and evaluating their payment needs. “While members may not demand the service now, consumer expectations change over time, and demand may grow,” he said. “In other countries, where real-time, instant payments have been around for a while, studies have shown that these payments have been gaining market share.”