How one credit union aims to generate buzz for FedNow

rafapress/Rafael Henrique - stock.adobe.com

Now that FedNow is live, the next step is adding the real-time processing rail to the thousands of financial institutions that aren't using it — including most of the country's credit unions. 

Star One Credit Union was one of FedNow's initial users. It was also part of FedNow's development, participating in a pilot and providing feedback to the Fed on issues such as developing an adoption roadmap, improving financial industry readiness and ensuring a smooth user experience. The credit union is sharing its experience with other credit unions, hoping to build further adoption. 

"A lot of smaller financial institutions and credit unions are intimidated by real-time payments," said Minal Gupta, senior vice president of operations at Star One Credit Union, which has about 120,000 members and $10 billion in assets. 

Star One is chartered in Santa Clara, California, and most of its members are technology workers in Silicon Valley. Other credit unions may not have members that are as tech-savvy, and Star One contends that its experience can help fill the gap. 

FedNow is available to most financial institutions, given that nearly all banks and credit unions have a relationship with the Federal Reserve. While there are about 9,000 institutions that could use FedNow, it's expected to take at least a year for most banks and credit unions to support the Fed's real-time processing network. 

"These smaller institutions see services like FedNow or other real-time rails and see it as a big cost, or they're worried about fraud. The objective for us is to carve a path for others to demonstrate it's doable for all institutions," Gupta said. Star One plans to help other credit unions by sharing information and advice, and it is already consulting with several credit unions.

How Star One uses real-time payments

FedNow had more than 50 users at launch in July, a number that has since expanded to more than 200 as of mid-October, counting banks, credit unions and third parties. 
 

Star One

"This is a 365-day 24/7 service. You can send funds instantly at midnight on Christmas Day," Gupta said. "It has been very exciting to see this take off."  

Star One's initiative comes as other credit unions also try to build adoption for real-time payments. Corporate One Federal Credit Union, for example, is working with credit union service organization CU Answers to build a framework for institutions to integrate with The Clearing House's RTP network, a bank-led real-time system that's about five years old. Star One is focused on FedNow, given the government rail's ability to add thousands of smaller institutions quickly, Gupta said, adding that Star One also supports the bank-led Zelle real-time transfer network. 

The eventual interoperability between FedNow and RTP will make real-time payments agnostic, according to Gupta. "A lot of our real-time transfers already involve the [largest banks]," Gupta said. 

FedNow payments cost about 4 cents per transaction to send a payment, according to Star One. As more financial institutions add real-time payments, the cost of managing a real-time payment service is expected to go down. 

Individual institutions decide what to charge for real-time payments. Deciding what types of payments are a good fit for real-time processing is becoming a project in and of itself for many institutions. 

Credit unions

Credit unions push to make real-time payments more accessible

October 11, 2023 3:56 PM

Rather than honing in on specific uses, Star One is casting a wide net, hoping to bring as many transactions into real-time processing as possible. It does not charge transaction fees for FedNow transactions, viewing the option as a benefit that can add value to its other financial services. 

"We want to make sure everyone can use this," Gupta said. "If people do, they'll naturally gravitate toward banking with us." 

FedNow's slow but steady growth

Other credit unions have also been early FedNow adopters. Hawaii USA Federal Credit Union, which has about 132,000 members and $2.3 billion in assets, added FedNow in an effort to avoid time zone lags that have traditionally led to delays in payments due to overnight closures and batch processing.  

The real-time payments service has also emerged as a competitive necessity, according to Hawaii USA. The Federal Reserve recently projected that more than 350 financial institutions will be live on FedNow by the end of the year. 

"FedNow allows credit unions to compete and offer the same type of instant payments services as the large national banks," said Scott Young, vice president of payment operations at HawaiiUSA. "Credit unions can stay relevant to their memberships by offering products that large financial institutions and fintechs offer, which help with retention." 

FedNow can help smaller banks and credit unions remain competitive, generate new revenue, and better meet their clients' demand for faster ways to move money, according to Elisa Tavilla, director of the debit advisory service at Javelin Strategy & Research. 

Real-time payments enable smaller institutions to take advantage of the account-to-account payment trend, and automate bill pay and loan disbursements for both consumers and business customers, Tavilla said.

"Many consumers want a real-time bill pay acknowledgement that direct billers provide," Tavilla said. By using FedNow, a bank's bill payment system could provide customers with real-time payment confirmation and reduce migration to billers' websites. Instant payments also allow credit unions to make loan disbursements on weeknights and weekends, which is when most consumers tend to shop for new vehicles, according to Tavilla.

"These financial institutions also serve small businesses in their communities, and instant payments can help business customers better manage their cash positions, reduce administrative costs, streamline billing and improve efficiency," Tavilla said.