By Lou Grilli
Credit unions have several new options, each of which comes with its own set of challenges when it comes to supporting the latest payment forms on behalf of their members.
Decades-old technology, including checks, wire transfers and ACH now sit beside Visa Direct and Mastercard Send push payments. Every member with a smartphone has access to Venmo and some, depending on which financial institutions with which they bank, have access to Zelle.
A little over two years ago, The Clearing House launched a new real-time payment system called, appropriately enough, RTP. And even more recently the Federal Reserve Bank announced it is developing a new service called FedNow that will allow all financial institutions in the U.S. to offer 24/7 real-time payment services. It is expected to launch in 2023 or 2024.
Given all of these developments, what should a credit union do? The answer lies in what use cases the credit union is looking to fulfill.
What Does ‘Faster Payments’ Mean?
While credit and debit card transactions appear to occur in real time, even showing up on the cardholder’s account as soon as the transaction is made, the actual settlement – the movement of funds from the cardholder’s financial institution to that of the payee – takes place after the fact. Settlement of ACH transactions, which includes bill pay and payments made using an account and routing number, can occur on the same day as the transaction is requested, sometimes within hours. For most payment use cases today, these various payment “rails” suffice.
There is a growing need for payments to take place even faster, however; for the settlement of funds to happen in seconds and minutes versus hours and days. Additionally, ACH settlement only occurs on business days – and businesses that need to move funds to a vendor, gig workers who need their paychecks, insurance customers getting a disbursement or two parties conducting a real estate transaction often do not want to wait.
While various industry media outlets and white papers use many different terms (faster, immediate, instant, real-time, etc.), instant payments is the most accurate description of real-time messaging and settlement. This new payments method allows for the transmission of the payment message and the availability of “final” funds to the payee in real time or near-real time, on or close to a 24/7 basis.
How Can Instant Payments be Used?
There are two categories of potential use cases for instant payments: consumer and business, each of which have capabilities to receive funds (the minimum functionality) and send funds (origination). Below are a few examples:
For businesses, it is expected that disbursements will comprise the largest volume of transactions, especially for the insurance and mortgage industries. For consumers, last-minute bill pay activity, including paying rent and utilities, is generally viewed as a driver for a credit union to offer faster payments to its members. Additionally, any use case that currently involves wire transfer, a manual and time-consuming service which is only available when the credit union is open, can easily be supplanted by faster payments.
What Should Credit Unions Do Next?
If your credit union has not thought about implementing faster payments, you are not alone. According to Levvel Research, 54% of small FIs are still just exploring real-time payments and have not taken any immediate steps to act. Many small institutions are evaluating how faster payments fit into their business and operating models. Some are beginning to look into requirements for technical integration and operational necessities, as well as how faster payments can be supported.
Collaboration, something the credit union industry is known for, is key. Conduct joint ideation with peer credit unions to determine what plans are being made or if any customer journey for faster payments has been mapped. Work with a trusted CUSO partner like PSCU as you start establishing your real-time payments strategy in order to leverage its resources, experience and scale in this space; attend webinars and other virtual events; read white papers and articles on the topic from sources like the U.S. Faster Payments Council; and follow the news about FedNow as it develops.
The continuous growth rate of ACH, Zelle and real-time payments commercial transactions indicates there is an increasing appetite for faster payments and a market for all of these products. Every credit union should be looking at the needs of its members, both consumer and business, to determine when and how – not if – they will be participating.
Lou Grilli is a Senior Innovation Strategist at PSCU. In this role, Lou is tasked with building and shaping a superior payment and member experience capability for PSCU and its Owner credit unions. Lou’s long career in payments includes product management, product development and thought leadership in credit, debit, loyalty, mobile payments and digital wallets. Lou has spent the last six years in roles dedicated to the credit union industry.