How FedNow is a catalyst for credit union disruption

This is the second of a four-part series on disruption in payments. Part one can be found here.

The Federal Reserve's instant payments network, FedNow, has been live for less than half a year, but some participating credit unions already say it will be a differentiator in attracting both consumer and commercial members.

The Fed's instant-settlement system launched in July and already has more than 300 financial institutions enrolled, including over 50 credit unions. Since it's still so early in the adoption cycle, the credit unions that have enrolled with FedNow are looking at a much longer-term view of how real-time payments can attract and retain members.

The benefits of FedNow cut across multiple demographic groups, these credit unions say. The speed and convenience appeal to younger consumers who are accustomed to instant gratification, but it also appeals to retirees who want immediate access to government benefit funds. Businesses also have unique needs that can be improved through real-time payments, these early-adopter credit unions say. 

One of those taking such a holistic view is the $7.2 billion-asset Veridian Credit Union in Waterloo, Iowa, which is looking at real-time payments as an enhancement to its current products and services and to improve members' overall experience with money movement, said Amy Faley, Veridian's manager of ACH. 

Businesses and consumers have been looking for faster, more efficient payment options for years, she said, predicting that the demand for instant, digital financial products and services will only grow over time. 

"That's especially true of payments," Faley said. 

Veridian says there's a broad variety of use cases for instant payments. In addition to the convenience for its members and business partners, the credit union will reap benefits within its own operations. 

Using instant payments for things like loan payoffs, closing costs and more will increase efficiency in loan processing. "We're also exploring uses in our member application and onboarding processes," Faley said. 

Veridian is committed to offering real-time payments through both The Clearing House and FedNow, she added. 

The Clearing House's RTP network, which is owned by a group of the nation's largest banks, has been up and running since 2017, while FedNow has been in pilot stages since mid-2023.  

As of today, RTP has a larger network of banks than FedNow, but because of the Fed's sponsorship, it is likely the Fed will surpass the RTP system over time, said Jeff Voss, managing partner for consultancy Artisan Advisors. 

Another differentiator is RTP's $1 million transaction limit compared to FedNow's $500,000, he said. 

The $6.8 billion-asset Kinecta Federal Credit Union in Manhattan Beach, California, went live with FedNow for receipts only in mid-October, and so far activity has been light, said CEO Keith Sultemeier. But the reconciliation and settlement process has gone well, and the credit union has not experienced any issues or member concerns, he said.

Instant payments through FedNow will benefit members who need quick access to their funds to either pay a bill or deposit money into their accounts. The increased risk management being rolled out for FedNow will provide the convenience of instant payments with a security-first approach and added layer of protection for Kinecta members.

"This real-time accessibility will promote the use of online banking, and the opening of new accounts both consumer and commercial," Sultemeier said.

As an early adopter, Kinecta has an edge over its competitors, Sultemeier said. Digital transformation is key for financial institutions to be able to provide members with convenient, on-the-go banking options, and instant payments is a part of that transformation, he said.

"The goal is that instant payments through FedNow will give us a competitive advantage, that will increase the number of consumer and business accounts opened," Sultemeier said. 

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Tyler Beck, chief operating officer for Five Star Credit Union in Dothan, Alabama, said working with FedNow aligns with what its members want: much quicker access to their funds. It also separates Five Star from other institutions because it allows more convenience in receiving payments. 

"In the short term, this is a huge differentiator," Beck said.

The $780 million-asset Five Star is community development financial institution-certified. The credit union serves many low-income communities that other financial institutions have left behind. Five Star's participation with FedNow gives people in those communities the same access to their funds that those living in larger cities enjoy, Beck said.  

Five Star began by implementing receiving only with FedNow so it could assess the risks involved and better understand the process. 

"We are building a better infrastructure to now be able to send through FedNow," Beck said. "This will give us the ability to create new products and services to deepen relationships with our members."

Amplify Credit Union in Austin, Texas, has not yet joined FedNow but is taking a hard look, said Lisa Larson, Amplify's vice president of payments and operations.

Credit unions can often have a posture that they're going to sit back and wait for innovations to happen to them, but the $1.5 billion-asset Amplify will not, she said. 

"We believe that sooner than later, government payers will start using FedNow to disburse benefits, so credit unions with an aging member base who are not ready for that will miss a big opportunity," Larson said.

Amplify also believes growing adoption of instant payments will lead younger depositors to see it as "table stakes" in their choice of financial institution. 

For both of those reasons, Amplify has shifted away from thinking about real-time payments as a specific rail and instead views payments modernization as a strategic direction. 

The credit union will focus first on its ability to add automation to wire processing in a way that prepares it to engage in faster payments. Then, Amplify will add capabilities to receive real-time payments.

"Once we're comfortable from a risk management perspective, we'll start sending instant payments," Larson said.