The FedNow instant payments rail has the potential to be a boon for smaller financial institutions, including credit unions and community banks. By leveraging FedNow, these smaller institutions can expand into business services such as on-demand payroll services and vendor payment tools, offering faster and more convenient payment options.
During a PaymentsJournal podcast, Jon Budd, CEO of Juniper Payments, a PSCU company, and Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research, spoke about the future of real-time payments and what they mean for small financial institutions. They explained that although participation is optional for banks and credit unions, the move toward instant payments offers new opportunities for credit unions and community banks to attract new customers and increase revenue.
FedNow Could Open New Angles for Credit Unions
The process of setting up faster payments takes time because it involves significant changes to the banking system, moving from batch processing to real-time payments, available 24/7.
“It’s a slow-rolling snowball that will build momentum over time,” Budd said. “FedNow is a top-down initiative. Now that it has been deployed, it’s up to 10,000 financial institutions to upgrade their systems to offer this technology to consumers and businesses.”
And among the financial institutions participating are many smaller institutions that have stayed on the sideline up to this point.
“Many credit unions, as well as regional and community banks, have more trust and prefer to participate in FedNow because it is operated by the Federal Reserve, as opposed to RTP, which is a private system operated by their larger bank competitors,” Tavilla said. “Overall, it is definitely a positive development because it gives financial institutions options, and it also offers resiliency for instant payments overall.”
According to Budd and Tavilla, credit unions have an opportunity to leverage FedNow as they work to get into the small-business space—whether it’s offering on-demand payroll services or tools for small businesses to pay vendors and receive money from vendors.
“According to several studies, over 70% of consumers and businesses look to their primary financial institution—which certainly includes credit unions—to offer faster payments, including real-time and instant payments,” Tavilla said. “This is a great opportunity for credit unions to participate and innovate upon real-time payments.”
Real-World Instant Payments Scenarios
Instant payments can be a real game-changer, helping consumers and businesses in various scenarios. Budd relayed a recent experience he had while buying a car.
“I purchased a vehicle online from a private seller located about 1,500 miles away from me in Kansas,” Budd said. “I flew to Reno, Nevada, to inspect the vehicle and confirm its condition matched the online pictures. We agreed on a predetermined price, and the seller opted for a cashier’s check. I provided the check, and he called the issuing bank, a small community bank in Kansas that I’ve had an account with since I was 8 years old. I’ve never waited more than about three rings for someone to pick up a call, but this time it took 20 minutes to reach someone because the bank was going through a phone system transition.”
The experience might have gone differently, Budd explains, with instant payments.
“I could go to my app and initiate the transaction, and as soon as the seller refreshes his account information on his mobile app, he would see that the funds have been deposited. The whole process would take roughly 60 seconds,” Budd said. “That’s a game-changer. Anytime you would be using a wire or a cashier’s check is a perfect time for an instant payment.”
Budd’s example is just one of many use cases involving instant payments. Funding digital wallets, paying gig workers, and sending disbursements for car loans and mortgages are just a few scenarios we expect to see more of.
In fact, according to Tavilla, the quick disbursement of loans could be one that small financial institutions specialize in. “Many consumers prefer credit unions and smaller financial institutions due to the personal relationships and better rates they offer,” she said. “These financial institutions often serve businesses in their communities, making it possible to streamline billing, enhance transparency, and improve cash management.”
Misconceptions About Instant Payments
According to Budd and Tavilla, there are many misconceptions related to FedNow, including that the government will get rid of paper currency and track consumers’ transactions. But these concerns are off the mark.
“We’ve been operating ondigital currencies for decades,” Budd said. “FedNow is simply just another avenue, a kind of ‘toll road’ to do things quicker than some of the alternatives out there. There’s not necessarily more data that the Federal Reserve could look at as compared to what they’ve been looking at before, but that’s certainly not the intention.”
Another misconception, Tavilla said, is using FedNow as a verb. “People saying, ‘I’m going to FedNow you,’ like ‘I’m going to Venmo you,’ which you wouldn’t be able to do because the Federal Reserve doesn’t provide services to consumers. FedNow is a behind-the-scenes rail similar to ACH.”
It’s important to remember that FedNow is a product upgrade, which will be standard in the future.
“We moved from dial-up internet to high-speed internet, and now that is standard,” Tavilla said. “Similarly, one day, we’ll receive our payments instantly without having to wait for days to receive our paychecks and other payments.”
Conclusion
The FedNow instant payments rail has the potential to usher in a renaissance for smaller financial institutions, such as credit unions and community banks. These institutions, with their strong customer relationships and local presence, can leverage FedNow to expand their services into the realm of real-time payments. This shift offers a range of exciting opportunities, including on-demand payroll services and efficient vendor payment tools, providing faster and more convenient payment options for businesses and consumers.
To remain competitive and attract customers, smaller financial institutions will need to offer services that match or exceed what larger banks can provide. Failing to adopt modern payment solutions like real-time payments could lead to a loss of market share and a decline in competitiveness.
Overall, the introduction of FedNow represents a significant step forward in the world of payments. Smaller financial institutions can seize this opportunity to expand their services, cater to evolving customer demands, and solidify their positions as trusted and innovative players in the financial services industry.