6 minutes
Credit unions have the freedom to determine their desired level of involvement with real-time payments.
Sponsored by Alacriti
The FedNow® Service, the first new payment rail introduced into the Federal Reserve system in more than 40 years, has just launched. However, there remains a considerable amount of misinformation surrounding this new payment rail. In a recent webinar, Joni Hopkins, VP of the product and relationship management group at Federal Reserve Financial Services, and Mark Majeske, SVP/payments at Alacriti, addressed the top 10 misconceptions prevalent in the market about the FedNow Service.
Here, we will review five of the misconceptions discussed during the webinar, providing clarity and understanding for financial institutions and stakeholders.
Misconception #1: My Credit Union Has to Offer Both Send and Receive and All Use Cases to See a Value
Hopkins dispelled this misconception by emphasizing the flexibility of the FedNow platform. Credit unions have the autonomy to decide whether they want to offer send and receive capabilities or focus solely on receive functionality. The recommendation is for every credit union to, at a minimum, explore the receive only option. This approach allows credit unions to gradually expand their offerings based on their members’ needs and preferences. Majeske shared that he’s seen several financial institutions start out with receive only and build to send as they recognize what their members need and when. It comes down to use cases, and whether members want to use something they’re seeing in the marketplace, like getting payroll faster.
Misconception #2: I Don’t Have to Create Use Cases for Faster Payment Products—Other Financial Institutions Will
Hopkins clarified that while financial institutions don’t necessarily have to create their own use cases, they will inevitably discover relevant use cases within their specific market context. It is crucial for financial institutions to maintain a close relationship with their members, actively seeking feedback to understand their evolving requirements. Hopkins also mentioned that the U.S. Treasury has already participated from the beginning. “On day one, when we launch, the U.S. Treasury will be with us in this journey for FedNow. They’ve been part of our pilot program and have announced that they will be bringing agencies to the table. So, I encourage everyone to at least think of the receive side. The risk is also a lot lower for receive only.”
Majeske agreed. “Your members will find use cases that other financial institutions have put in place, and they’re going to want to use them. As a member, if you see friends that can get payroll two days faster, and your credit union is not offering that capability, that may be an issue. For example, in the gig economy, we’re seeing Uber drivers who want to be paid as soon as possible. Perhaps you can let other financial institutions come up with use cases in the beginning, but over time you’ll find that your members are going to like what they’re seeing and using. You want to keep very close ties with those members to understand what their needs are.”
Misconception #3: A Brand-New Fraud System for Instant Payments Is a Must
Hopkins addressed concerns regarding fraud prevention, stating that financial institutions can choose to add new tools but are not obligated to build an entirely new system. The FedNow Service will offer fraud prevention capabilities, including transaction limits and negative lists, to manage risks and reduce fraud exposure. Financial institutions can leverage their existing fraud systems and explore integration options to enhance security. Majeske recommended that financial institutions look at systems to layer onto existing solutions that are more proactive and can decision transactions in seconds. They should be designed specifically with real-time payments in mind.
Misconception #4: Processing Real-Time Payments Is More Expensive Than Processing Same-Day ACH
Hopkins reassured financial institutions that the pricing for the FedNow Service is comparable to such existing payment methods as ACH, checks and wires. Moreover, fees for receive only transactions will be waived in 2023. The focus should shift from cost considerations to the speed and availability of the service, ensuring the appropriate payment rail is selected for specific use cases.
“On the send side, you’ll see that it is $0.045—so a fairly inexpensive option,” he said. “This is going to give institutions another option for how they’re going to send their payments for their members. This may be something that they do internally or something they offer out to their members directly. But it is a great tool because there are so many things that can happen that make sense in both the instant and the ACH world.”
Misconception #5: I Have to Staff My Credit Union 24 Hours a Day, 7 Days a Week Once We Sign Up for FedNow
Addressing staffing concerns, Hopkins emphasized that similar to ATMs, real-time payments do not require credit unions to operate around the clock. However, having contingency plans in place and establishing communication channels for support is essential. The Federal Reserve will provide 24/7 customer service, which helps address staffing concerns for credit unions.
“I’ve had the opportunity to launch a number of banks into instant and faster payments,” Majeske said. “I know of very few institutions that have added staff as a result of adding instant or faster payments. At Alacriti, for example, we design a working relationship where we do all the heavy lifting for you, and you don’t have to have people there on the weekend, either for the transaction or for fraud. It’s not necessary because all of this is systemic and built around efficiency.”
Next Steps
To proceed with the FedNow Service, financial institutions are advised to contact their Federal Reserve relationship manager and visit explore.fednow.org to research and explore various use cases. The following steps also were recommended by Hopkins:
- Identify and validate real-time solutions. Determine whether to use your core system or a payment provider like Alacriti.
- Make connectivity decisions. Connect directly to the Fed through Fedline Advantage or higher or via a payment provider (the provider must also be coming directly to the Fed).
- Establish settlement decisions. Decide whether to continue using existing settlement methods or explore alternative options.
- Determine send/receive strategy. Assess whether to opt for receive only or both send and receive functionalities.
Majeske provided insights into Alacriti’s involvement and contributions to the success of the FedNow Service. As participants in the pilot program, Alacriti has completed a full end-to-end transaction in the test system and integrated the FedNow capability into its Orbipay Payments Hub. Alacriti’s differentiating factors include being cloud-native, ISO 20022 compliant, and utilizing various APIs to integrate with a multitude of cores. Read the take of one of our clients, Veridian Credit Union, in “FedNow Certification Aligns With Veridian CU’s Mission And Growth Strategy.”
Credit unions have the freedom to determine their desired level of involvement with real-time payments. No matter the level, by embracing the FedNow Service, financial institutions can enhance their payment capabilities, better meet their members’ needs and drive innovation in the rapidly evolving financial landscape.
Kristen Jason is director of product marketing at Alacriti, a CUES Supplier member. To learn more about the misconceptions in the market related to the FedNow Service real-time payments rail, watch the full webinar, Top 10 Misconceptions about the FedNow Service, featuring the Fed and Alacriti.
