With FedNow, Every Depository Institution Can Offer Real-Time Payments

smartphone FedNow instant payments
By Yinglian Xie 

8 minutes

Six key considerations for credit unions

The launch of FedNow is a milestone in America’s journey towards payments modernization, enabling another option for digital payments 24 hours a day, every day of the year. While faster real-time payments have been available through The Clearing House’s rails and other popular solutions for faster payments like Zelle, many credit unions have been slower to adopt as they carefully weigh the risks and advantages. That’s a smart choice as it’s important to approach all payments innovations with a fully informed strategy.

Today, many credit unions are thinking through how or when to adopt real-time payments. RTP, Whereas RTP, a real-time payment protocol, is limited to members of The Clearing House, FedNow is accessible to all depository institutions in the United States with the potential to eventually reach every individual and business.

With FedNow, credit unions have an opportunity to delve into real-time payments to meet consumer demand and compete for new members. However, they must continue their strategic approach, ensuring they have the proper guardrails in place. In this article, I share six key considerations on the advantages of real-time payments for credit unions and the risks, empowering them to make informed decisions.

1. Real-Time Payments Like FedNow Are in Demand Among All Types of Account Holders

It’s no secret the real-time payments market is growing rapidly. As of 2022, the market size value was $17.56 billion, and it’s predicted to grow globally by nearly 35% by 2030. That’s because in today’s world, consumers increasingly expect everything to be fast and frictionless, whether they’re ordering groceries or making a purchase online, and the financial industry shouldn’t be an exception. By adopting real-time payments, credit unions can provide members with the speed and convenience they have grown accustomed to.

FedNow’s capabilities power instant payments from consumers to businesses, making it easier for people to pay tuition or bills person-to-person, similar to services like Zelle, and consumer-to-financial-institution to help people avoid late fees or penalties on loan payments or credit cards. It will also allow consumers to make instant account-to-account transfers.

Real-time payments have also become increasingly essential for businesses. Currently, 86% of businesses that generate revenue of $500 million to $1 billion are already leveraging real-time payments, and we expect that number to increase for companies of all sizes. Some of the opportunities that businesses can have through FedNow include receiving instant payments from consumers and making instant payments to other companies, which can help improve their cash flow and operational efficiency. Companies will also be able to send instant payments to their employees to settle debts and invoices and free up capital as soon as they receive a product or service.

It might also surprise you to learn that real-time payments may help support lower-income or underbanked members, especially those living paycheck to paycheck. That’s because there is often a lag between when a consumer pays a bill and when it is received, which can lead to late payment or overdraft penalties. It may also give members faster access to their wages, which can help them avoid loans or check cashing feeds. Regardless of the demographics your credit union serves, there’s a clear demand for instant payments.

2. Real-Time Payments Can Help Credit Unions Attract New Members

Embracing payment method innovation can help credit unions attract new members. In fact, recent research reveals that 64% of members want more innovative payment methods, with 27% willing to switch financial providers to access them. We also know that younger generations are more likely to expect innovation, and credit unions have a vested interest in attracting members under 45 who can contribute to their organizations’ long-term growth.

If credit unions want to attract new members, embracing FedNow could be the next competitive advantage they need to help foster growth. It’s also a unique opportunity for credit unions to demonstrate their ability to adapt and thrive in times of change.

3. Real-Time Payments Offer Cost-Savings Opportunities to Credit Unions

Real-time payments provide credit unions with cost-savings advantages. Through effective implementation, credit unions can streamline their payments infrastructure, minimizing the need for extensive reconciliations. Unlike traditional payment methods that involve delays and manual efforts in transaction reconciliation, instant payments ensure immediate settlement and availability of transaction data, resulting in time and resource savings. Instant payments also offer enhanced visibility for account holders, which could reduce the volume of inquiries and calls a credit union receives. Not only does that improve efficiencies, but that also has the potential to improve member satisfaction scores.

4. Fraudsters Are Ready to Exploit Real-Time Payments; Credit Unions Must Be Ready Too

Now let’s dig into the risks. FedNow won’t necessarily lead to a sharp rise in transaction fraud—real-time payment systems hold security advantages over traditional payment methods—but it means fraud will happen faster, and we will see new types of transaction fraud, which will be more sophisticated.

The Fed says that controlling instant payment fraud means financial institutions should examine and potentially upgrade their systems. To start, it’s important to understand why real-time fraud is enticing to fraudsters. First, real-time payments are instantaneous and irreversible, unlike credit card transactions that allow for chargebacks. The second is because fraudsters know financial institutions may have difficulty detecting and stopping instant payment fraud if they aren’t adequately prepared. Lastly, fraudsters have mastered tactics like account opening fraud, account takeovers, push payment fraud, money mule schemes and other scams targeting the most vulnerable. Unfortunately, these schemes yield higher success rates with real-time payments. 

Many of these real-time scams rely on some kind of authorized payment fraud. Fraudsters know that most financial institutions have powerful systems to catch unauthorized fraud, so they are homing in on their social engineering skills to gain a victim’s trust and use it against them. That might look like a phishing email or a message through social media offering a job or an investment opportunity to illicit funds and trick the person into verifying the payment. In these scenarios, the credit union either needs the member to flag the fraud or a sophisticated fraud system to flag it.   

A common mistake we have seen financial institutions make is to launch a new service without the appropriate fraud capabilities. Inevitably, fraud will occur, and then they’ll jump into action. Depending on the damage, they may have to withdraw the service to fix the vulnerabilities, harming their reputation and undermining trust. For a new payment method as significant as real-time payments, credit unions need robust fraud prevention measures, stringent authentication protocols, proactive monitoring systems and effective anti-fraud collaboration between financial institutions and regulatory bodies.

Credit unions should create and complete a comprehensive assessment of their systems, payment infrastructure and processes before launching real-time payments capabilities. This includes the evaluation of payment platforms, core banking systems, connectivity options and settlement capabilities. By identifying detection and prevention gaps and reviewing security measures to align with real-time payments, credit unions can proactively prepare to fight real-time fraud.

The fraud risks may seem daunting, but it isn’t a reason for credit unions to back away from real-time payments. Instead, they can take a strategic approach to implementing real-time payments and real-time fraud detection.

5. Fraud Detection Must Happen in Milliseconds  

Preventing real-time payments fraud requires a real-time prevention approach. Chances are your credit union relies on foundational fraud prevention like two-factor authentication, anti-money laundering and crowdsourced abuse reporting. While helpful, offering those tactics alone isn’t enough.

The solution for real-time payments fraud lies in machine learning, both unsupervised and supervised, which detects suspicious patterns as they happen. Remember, fraudsters are using time against you, so you need an always-on solution that can make decisions just as quickly as transactions are occurring—within milliseconds. When it comes to decisioning and real-time payments, high queries per second and low latency are extremely important. AI and machine learning technology can constantly monitor, track and analyze transaction patterns to detect fraudulent behavior. By leveraging those tools, you can harness the power of behavioral analysis to spot fraud patterns across the payments journey.

6. Educating Employees and Members About Fraud Is Key

Another critical piece of the real-time fraud prevention puzzle is educating employees and members on how to spot fraud and report the activity. Remind them to triple-check information before sending a payment; how to identify and ignore suspicious emails, such as phishing; know which businesses will never ask for their personal information; and more. They should also know what sort of protection they have if they get defrauded. Be sure to send regular updates to keep members informed.

The launch of FedNow is an opportunity for credit unions to embrace payments innovation and meet demand for instant transactions, attract new members and foster business growth. However, it’s crucial to prioritize fraud prevention to ensure the integrity and security of their real-time payment services and protect themselves and their members. If credit unions take a proactive and strategic approach, they can equip themselves for success.

Yinglian Xie is CEO/co-founder, DataVisor.

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