Newer technologies to meet member needs require credit unions to adapt, experts say
By Thomas A. Barstow
For years, credit unions and their customers have been adapting to technologies that allow for faster payments and streamlined processes, trends that will continue to accelerate in the years ahead. For those who lead credit unions, experts say, the trick will be to stay on top of these developments, especially as customers increasingly expect to have the latest tools at their fingertips.
Sara Dolan, CFO of Michigan State University Federal Credit Union (MSUFCU), says her organization participates with a number of platforms, including Apple Pay, Samsung Pay and Google Pay. By the fall of 2019, MSUFCU members had made nearly 110,000 credit card transactions and more than 437,000 debit card transactions using mobile payments.
“I think faster payments will be the new normal, regardless of the channel that they flow through,” Dolan says. “Consumers want fast, secure, frictionless payments and will look for their financial institution to provide the options to make this happen in a simple and intuitive manner.”
A number of different products offer similar services. Zelle, for example, is a relatively new way for consumers to transfer funds from their accounts to the account of a friend or family member in a matter of minutes, rather than the days it used to take to transfer money by check.
“Zelle is a new option in the payments space, but there are similar options such as Venmo and PayPal that have been used for several years,” Dolan says. Between January and early November 2019, she says, East Lansing-based MSUFCU received more than 287,000 incoming transactions from Venmo and 123,000 from PayPal totaling $51 million and $42 million, respectively. In that same time frame, MSUFCU credit union members sent more than 391,000 outgoing transfers totaling $43 million using Venmo and 738,000 transfers totaling $48 million using PayPal.
“This is a significant amount of activity,” Dolan says, “and we need to participate to remain relevant to our members.”
FedNow Service on Its Way
Right now, some of the payment providers don’t reach all institutions in the United States, or they charge high fees that make it difficult for smaller credit unions to use their services. In a few years, a new effort by the Federal Reserve Board could help remove that barrier.
Announced last summer, the developing infrastructure called FedNow Service is a system that by 2023 or 2024 will allow for fund transfers within seconds — any time of day, 365 days per year — for institutions served by the Federal Reserve. Initially, the system will facilitate transfers only within the U.S.
Although the FedNow Service is projected to be operational in a few years, it will take many more years to build it out fully, observers note. The Federal Reserve is reviewing public comments on its 2019 Federal Register notice and will publish another Federal Register notice with a FedNow Service description this year. Documents and fact sheets are available on Federal Reserve websites that offer an overview of the plan and features under consideration. (One site is www. frbservices.org/financial-services/fednow/index.html.)
“I believe FedNow will compete in this space and help bring down the cost to participate,” Dolan says, adding that credit unions will need to plan for the impact of faster payments. “Faster payments will benefit members by allowing more flexibility in payment options.”
The FedNow Service fact sheet makes similar points, indicating that the Federal Reserve Board will build an infrastructure for the service that will extend nationwide and be available to the 10,000 depository agencies it works with, and not just those that have joined private networks. A lot of people on tight budgets, especially those in underserved areas, could avoid expensive check-cashing services and other fees if they had access to real-time money transfers through the FedNow Service.
“FedNow should benefit credit unions by leveling the playing field,” says Bill Thomas, first vice president of member operations at United Nations Federal Credit Union (UNFCU), based in Long Island City, N.Y. “The goal is to enable all U.S. financial institutions to offer faster payment services.”
Andrew Morris, senior counsel for research and policy at NAFCU, notes that the initial functionality of the FedNow Service will depend on the Federal Reserve’s views regarding what features are considered critical, as well as the service’s cost recovery model, which remains undecided. He estimates that widespread consumer adoption of real-time payments will take years, but adoption of faster payment options as a whole could occur over a shorter time frame. He notes that the service will be designed to facilitate real-time interbank transactions.
As far as baseline expectations, credit unions might offer online portals through which consumers can make real-time transfers to pay their bills, with the potential for streamlined person-to-person payments, Morris says.
“The member experience and ease of interaction will depend on what the credit union chooses to develop or adopt through a correspondent or other vendor,” he adds. The benefits to consumers could include avoiding late fees as well as allowing businesses to make time-critical payments with ease.
The private sector, meanwhile, has been developing similar systems, including one managed by The Clearing House Payments Co. Dolan notes that The Clearing House’s system is configured primarily for business-to-business transactions, but consumers eventually will have access, too.
Credit Unions Moving Ahead
The FedNow Service should help in the future, but its reach initially will be limited to the U.S. In the meantime, credit unions have been working with current technologies and vendors to meet customers’ expectations of ease and speed in making payments. The experts point out that the current technologies already allow for very fast processing of many transactions. At UNFCU, they seek systems with the potential to serve members worldwide.
“We continually work to improve members’ payment experience,” Thomas says. “This means exploring and implementing various partnerships that can meet our members’ global needs.”
For example, UNFCU has partnered with a provider that offers mobile money payments through 26 mobile money payment carriers in 16 countries, an effort that is in addition to its partners for wire transfers, he says.
“As a result, we offer payment options that are fast, convenient and secure, no matter where they are located,” Thomas adds. For example, in 2018, UNFCU launched a service that allows members to transfer money from UNFCU accounts into their M-Pesa mobile wallets in Kenya. M-Pesa is a mobile banking service that allows users to transfer funds through mobile phones. “In 2020, we will expand our mobile money payments to include additional carriers and countries,” he says.
MSUFCU recently launched a member-to-member payment option that allows customers to send funds to each other in real time through the credit union’s online banking or mobile banking applications, Dolan says.
Dolan and Thomas stress the importance of staying on top of the evolutionary changes in technology and the types of services being offered.
“Credit unions should stay up to date with what is going on in payments by performing environmental scans, joining trade associations and attending paymentsrelated conferences,” Thomas says. “You need to be in constant dialogue with key partners, namely core vendors and card processors, to understand the marketplace.”
Morris notes that recent surveys by NAFCU show that more than half of credit unions intend to invest in mobile banking services in the next three years, with a lot of potential seen in person-to-person transactions.
Knowing Your Members
The needs of all customers should be considered, not just members of younger generations who have grown up using mobile technologies, the experts advise.
“It can be hard to categorize how different generations will use new technologies,” Thomas says. “Younger consumers who are digital natives will generally embrace digital methods. However, if you’re able to effectively show the benefits of security and speed, you’ll see the adoption across all generations.”
Morris and Dolan agree, pointing out that the newer technologies are an evolution of online banking. Dolan says that members will embrace new technologies that make payments easy and convenient, as has been seen with the plethora of services adopted through online banking. The true revolution, Morris says, was the widespread adoption of smartphones a decade ago.
But new features might require working closely with members to educate them on the products. MSUFCU encourages its members to use mobile wallets and to make mobile payments, and they’ve created YouTube videos explaining how mobile wallets work. Education, Dolan says, is key.
“It’s important that members understand how to use the payment options available,” she says. “Provide resources about how to use these services in the same way you would describe how to choose between different loan or checking account options. Talk about options that fit best when interacting with members face to face, over the phone or through digital channels, and provide the information online that members can access independently.”
Security and Accessibility Issues
While the new technologies offer a lot of promise, there are concerns that need to be addressed on the management side of conducting business, as well as with customers. Morris notes that NAFCU’s chief concern relates to accessibility, as well as the security of retail operators.
“We have made a point of emphasizing that the FedNow Service must be fair to credit unions in terms of pricing and accessibility,” he says.
Fraud is a concern, but it shouldn’t derail future payment innovation, Morris says. Conversely, addressing the root cause of fraud shouldn’t entail slowing down payments. Instead, Morris says the focus should be on the data security practices of merchants, “where yearly breaches of considerable magnitude have eroded the safety and security of consumers’ personal information.” Real-time payments can be made secure by adopting controls and educating consumers about how the transactions work, he adds.
Dolan and Thomas point out that customers will be reluctant to use a new tool if they are not assured that the transactions are safe.
“Security and global functionality are the two biggest concerns for us at UNFCU,” Thomas says. “We realize that any new payment offering has to be secure in order for members to use it.”
Many of the current payments solutions relate to the U.S. market, but UNFCU’s concerns are global, he explains.
“Our members have an expectation that it shouldn’t matter if they are paying someone in Utah or Uganda. The payment experience should be the same,” Thomas says. “Members need to have peace of mind that any payment they make is secure and that the payment method cannot be easily compromised.”
Security issues, however, need to be balanced with making sure systems are easy to use, and these newer technologies are increasingly more convenient.
“The payments area is evolving rapidly,” Thomas says. “We are very excited about the new solutions we introduced [last year], especially the contactless debit and credit cards. Like digital wallets, these are more secure and convenient payment methods.” They’re also looking to expand their mobile money payments in 2020.
“Regardless of the new technologies,” he says, “offering our members services that are secure, fast and convenient remains our priority.”
Thomas A. Barstow is a reporter and editor based in Pennsylvania. He also teaches journalism at the college level.
This article was published in the March-April 2020 edition of The NAFCU Journal magazine.
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