The Issues Being Raised by FedNow

July 2, 2024

By Ray Birch

SAN ANTONIO—With the FedNow Service currently in use by well over 300 financial institutions, there are some new questions to be asking according to one person.

SWIVEL CEO Jason O’Brien told CUToday.info there are certainly opportunities ahead for faster payments, but those come with some hurdles and concerns that have prevented some CUs from stepping into the space.

SWIVEL is a payments arm of SWBC.

“We have had lots of conversations with financial institutions across the U.S. And there’s lots of interest in money moving faster,” said O’Brien. “I think we’ve got to poke beyond that and get down to the questions of what very specific transactions an institution would benefit from by receiving money faster. But also, on the flip side, what very specific transactions will they benefit from by sending money and settling instantly?

“I think you have got to dig through the surface of faster settlement and get down to, as a credit union, which transactions do we want to put into this environment and how do we encourage and grow the utilization of that use case,” O’Brien added.

Instant Gratification

O’Brien noted that CUs are focused on member experience, and in the current environment, that often means how they can provide members with instant payment gratification.

“Yet, there are real questions and concerns around instant payments adoption for CUs,” he said.

And, there are hurdles.

“What we see right now in the industry is a lot of institutions wanting to receive money instantly, but not being super eager to send money out,” he explained. “There’s a lot of implications for why that is. Everybody knows these networks are growing and are certainly part of our future in U.S. banking. But right now, in these early days, the utilization is relatively low.”

O’Brien said that despite the interest from consumers and financial institutions alike to move money faster, there’s currently not a solid understanding of what specific transactions will benefit from faster activities.

A Shared Question

And from the FI side, there’s another question that is almost universally shared, he said: What’s the ROI?

“There’s some fixed costs that go with any deployment of technology and operations,” he said. “We’re used to the executive team generally working for return on investment on these projects. So, if utilization isn’t really understood that makes it a little bit difficult to get that ROI defined.”

O’Brien said that’s not so much of an issue for faster payments innovators.

“These folks are really getting involved in helping these networks grow in the early days. But for the wider use cases for more financial institutions, that ROI calculation gets more and more important,” he said.

Jason O'Brien

Are You Ready?

Another matter slowing adoption is operational readiness, according to O’Brien.

“The U.S. banking system spent decades on old batch processing. A lot of these historical settlement activities take place at certain times of the day,” he said. “We have to transition risk operations, reconciliation activities, equity management and exception handling to support this 24/7/65 model. Moving operations of an institution behind the scenes to support that is a big challenge today.”

Are credit unions ready for that?

“There is a healthy adoption. We’re very excited with the Federal Reserve getting in and really creating some competition,” said O’Brien. “When any new technology hits an industry there’s an adoption curve. So, on the far left of that curve you’ve got these early adopters and innovators. While we have healthy adoption, we have to cross the chasm of adoption and start defining some solid use cases and help answer ROI questions.”

What’s Being Tackled

O’Brien said SWBC/SWIVEL has been working with financial institutions for years helping them bring in money from outside via ACH, debit cards, credit cards, and for very specific use cases—like loan payments funding, new accounts and certificate of deposit campaigns.

“We’ve got operational understanding of how institutions do those today in batch environments,” he explained. “We’ve got technologies today that we use to help actually mimic instant capabilities, instant crediting capabilities, even though settlement takes place overnight. Our job right now is to make sure that operationally we can enable an institution to deploy very specific use cases that will have strong adoption and that will return a value for their institution.”

Use Case Development

He said SWIVEL is working on developing use cases for faster payments in the areas of lending, new account funding area and even commercial—such as paying vendors.

For example, SWIVEL offers Connect2Core, a “hub” that provides real-time payment data posting, allowing instant visibility of account transactions.

“Connect2Core helps CUs take a more informed, strategic approach to instant payments, providing an effective transaction enablement approach that lets them realize the benefits of an instant payments environment without needing to fully commit to a specific platform or rail,” O’Brien said.

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