Tech Time: Why One Rail Shouldn’t Rule Them All

technology circuit overlaying Benjamin Franklin on 100-dollar bill
By Abhishek Veeraghanta

6 minutes

Form a deep understanding of member needs before rolling out real-time payments solutions.

In the current economic climate, having access to funds in real time is more important than ever, both for consumers and businesses. Credit unions are taking note, as nearly 30% of credit unions plan to offer real-time payments starting in 2023. But another 23% of credit unions aren’t sure when they’ll offer RTP, according to research from CUESolutions provider Cornerstone Advisors.

For credit unions that aren’t sure when they’ll roll out real-time payments, one reason for the delay could be all the faster payment options they have to choose from. There’s The Clearing House RTP network and the upcoming Federal Reserve’s FedNow Service, not to mention such other options as same-day Automated Clearing House payments and solutions like Zelle.

One payment rail is unlikely to satisfy everyone’s needs, and narrowly focusing on a single faster payment rail could limit a credit union’s ability to innovate and adapt in the future. As credit unions plan their faster payment strategies, it’s important they factor in more than just speed.

Not all payments rails have the same advantages.

There are distinct differences between the various faster payment options that are available to credit unions. Each of these payment rails has its own unique limitations and benefits, so the level of choice available to credit union leaders can make it difficult to know which is best suited for their organization and members.

First and foremost, it’s important to distinguish between real-time payments and faster payments. Real-time payments are initiated and settled almost instantly, including on weekends and outside of business hours.

The most prominent example of a real-time payments network is The Clearing House’s RTP network, which supports instant payments for several use cases, including transactions between businesses and consumers, payroll processing and more. For businesses, real-time payments offer greater control over the timing of payments and the ability to view remittance data immediately, making it easier to manage cash flow more accurately. For consumers, person-to-person payment apps, such as Venmo and Zelle, have been on the rise for years. Because these apps integrate with the RTP network, consumers can send payments in a few taps and recipients can transfer the funds from the app to their bank account instantly.

These benefits are especially valuable in the current economy, where inflation and rising interest rates are posing financial challenges for businesses and consumers alike.

According to the The Clearing House’s website, “the RTP network’s real-time payment capabilities are accessible to financial institutions that hold 75% of U.S. demand deposit accounts (DDAs) and the network currently reaches 61% of U.S. demand deposit accounts.” While the RTP network is open to all federally insured U.S. depository institutions, not all financial institutions have connected to the network.

The other real-time payment rail is the Federal Reserve’s FedNow Service. The service, which is being piloted now by more than 110 organizations, is slated to become widely available sometime in 2023. The goal of the FedNow Service is to facilitate nationwide reach of instant payments, but some uncertainties remain as the pilot program continues to lay the groundwork for the service, which is currently being tested by the program’s participants.

The main uncertainty centers on future interoperability and how different real-time payments networks, such as the FedNow Service and the Clearing House’s RTP, will work together. Consumers and businesses want to send and receive real-time payments no matter where they bank or to which credit union they belong. With interoperability, an individual or business with a deposit account would be able to send a payment to another individual or business without having to choose, understand or even be aware of the path taken by the transaction. However, ensuring interoperability between real-time payment infrastructures is more up to the financial institutions and service providers that operate on these networks than the actual networks themselves.

There are other rails that support faster payments, but not real-time payments. Such faster payment options as same-day ACH payments are settled more quickly than traditional payments, but not instantly and not outside of business hours. However, the ACH network is well-established and therefore accessible to most individuals and businesses with a bank account. This may give accounts that are not currently covered by The Clearing House’s RTP network a way to transact faster, although not in real time.

Credit union leaders must recognize the nuances between the different payment rails while thoughtfully evaluating the needs of members before implementing new payments technologies. It is unlikely that a credit union will find a one-size-fits-all payment rail, so leaders should consider multiple payment rails and how each one can provide unique opportunities to best serve their members.

Member needs should be the top priority.

Consumers’ preferences for how they send and receive payments have changed over the last several years, but their demand for convenience and speed have remained.

According to a survey by the Federal Reserve, 70% of consumers say it is important to them that their bank or credit union provides faster payments capabilities. They also have specific use cases in mind for faster payments, and some are even willing to pay an extra fee to ensure quick access to funds. Nearly one in three consumers said they would use faster payments to make last-minute bill payments and more than half (53%) said they would use faster payments to send money to their friends and family.

By understanding what members are trying to achieve with faster payments, credit unions can better assess and implement new payments technology that will ensure their organization can address members’ current needs as well as respond to future needs.

Flexibility is key.

In addition to deeply understanding the needs of members, credit unions should also consider the flexibility of faster payments technology. Ideally, credit unions will select a solution that effectively serves their members both now and long-term.

Whether a member has a business or personal account, they will expect payment options that suit their needs. Therefore, credit unions need to consider how faster payments technology will help them remain agile to emerging trends, membership growth and future member needs.

To prepare and differentiate their offerings, credit unions should seek out truly flexible payments technology. For example, a payments hub that supports the use of different payment rails, including the RTP network, the FedNow Service and same-day ACH makes it possible for credit unions to add even more value to faster payments for their members. This flexible model allows payments to be routed according to speed, cost and network, ensuring funds arrive when a member expects them and at the lowest cost possible.

The race to faster payments is far from finished.

The race to faster payments is well underway. With a strategic plan and a deep understanding of member needs, credit unions can be well-positioned to win the race against other financial service providers.

Members, whether they’re managing their business’s finances or their personal finances, want to be able to pay everyone they need to pay without waiting for funds to clear and settle. And they should not have to sign up for various payment apps to do so.

The good news is that credit unions can help. By leveraging faster payments technologies that support flexibility and multiple payment rails, credit unions can achieve true payments innovation for their members.

Abhishek Veeraghanta is head of real-time payments platform Pidgin for VSoft, Atlanta.

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