Faster Payments Are Here: How to Ensure Your Current Core Keeps Up
Credit
unions are increasingly pressured to meet member demands for faster, more
efficient payment solutions. In fact, according to Jack Henry’s 2024 Strategy Benchmark report , the
overwhelming majority of financial institutions plan to expand their payment
services within the next two years, with 63% of credit unions planning to add
real -time payments via FedNow.
Beyond FedNow, many credit unions are also adding the RTP network, the instant payments system operated by The Clearing House and the primary competitor to FedNow. While the network is backed by nearly 20 of the world’s largest banks – long-standing rivals – credit unions realize the value of faster payments to remain relevant. However, of the nation’s nearly 5,000 credit unions, just over 120 have joined FedNow compared to more than 570 banks, and just over 110 are on the RTP network.
Corporate credit unions, or "the credit union's credit union," are stepping in to support smaller institutions on their journeys to adopt faster payments. As an example, Corporate One FCU said it connected 18 credit unions to the RTP network in 2023 and had nearly 20 other credit unions in queue for the first quarter of the year, according to a press release.
Mass adoption of instant payments is inevitable and credit unions must be ready. After all, consumers and businesses alike expect the convenience of faster payments. The challenge is that core systems, which are already becoming strained, are unable to handle the surge in transactions. Existing cores are designed to reliably process transactions in batches, but they are not designed to support money movement across digital channels 24/7/365 days per year.
However, credit unions do not need to rip and replace their entire core processing system to facilitate instant payments, which is great news for organizations that may not be ready for a full core conversion.
Instead, there is an easier, more cost-effective alternative: a high-performance ledger that is designed to enhance a credit union’s existing core.
Replacing Legacy Systems May Not Be Required
Innovative solutions can integrate with existing legacy systems, facilitating instant payments efficiently. These solutions bundle transactions and relay them to the core system at scheduled times, optimizing both processing time and cost.
By adopting these solutions, credit unions can preserve their current core system investments, replicate data without starting from scratch, and avoid large-scale transformation efforts. This enables the testing of new systems in a low-risk, cost-effective manner while ensuring critical functions for continuous member service, such as real-time transaction authorization and balance updates.
This method mirrors the approach taken in Brazil, where banks use high-performance ledgers to handle real-time transactions, maintaining 24/7 availability. Cloud technology further enhances these capabilities, offering scalability and responsiveness to digital demands even when core systems are offline during non-business hours, which is when half of RTP transactions are processed, according to The Clearing House.
How Brazil Modernized Their Tech Infrastructure to Handle Instant Payments
Currently, Brazil processes over five billion instant payments per month. This is over 150 times the number of transactions in the U.S. Not surprisingly, Brazil’s massive adoption led to significant infrastructure challenges.
The rise of instant payment volume initially strained Brazil’s legacy core banking systems. Instead of cash and credit, consumers switched to paying merchants and individuals by Pix, Brazil’s instant payment method. The number of transactions hitting the core banking systems accelerated, requiring financial institutions to authorize each Pix consumer payments and post the receipt of merchant payments instantly.
Large merchants accepting Pix payments also experienced a dramatic increase in transactions. Some banks were even required to deliver account statements on thumb drives due to the high volume. It quickly became clear that a core system capable of processing thousands of transactions per second was essential.
For Brazil, the transition to real-time posting and 24/7/365 transaction availability meant modernizing core and partner systems.
However, like credit unions, replacing an existing core system wasn’t feasible. This approach is complex, requiring tremendous resources and added investments. Instead, core banking replacement became less urgent once modern software was introduced to relieve core banking systems from real-time demands.
Credit Unions Must Offer Faster Payments to Remain Competitive
Credit unions do not have put faster payments on hold until massive IT upgrades are completed and risk losing market share. There’s no time to waste either. By 2027, real-time payments are anticipated to account for 28% of all electronic payments globally, according to ACI Worldwide.
Among small businesses, Datos Insights recently revealed that a staggering 92% of businesses anticipate making significant investments in payment enhancements over the next 12 to 36 months. Jack Henry’s report further explores this trend, citing that businesses will focus their investments on faster payments solutions to improve cash flow, secure working capital on-demand, and manage payment timing effectively.
This represents an incredible market opportunity for credit unions to support business members. In fact, 78% of all financial institutions plan to expand SMB services, including payments. Additionally, more than half of credit unions (62%) plan to target a business niche over the next two years.
Representing a $13.7 billion revenue opportunity, growing their SMB services makes sense.
However, existing core systems pose challenges as they stand today. Yet, the time and resources it takes to vet a new core solution, convert to the new system and then roll out relevant instant payment options to members can seem rightfully daunting.
At a time when competition for deposits and wallet share remains fierce, particularly for member business relationships, credit unions cannot afford to put their faster payment strategies on hold for a full core conversion. To overcome this challenge, credit unions should look to the experiences of other nations, notably Brazil, and recognize the benefits of introducing a high-performance ledger to a legacy core system.
Mass Adoption of Faster Payments on the Horizon
While instant payments are still in their infancy in the U.S., it is likely that financial institutions will experience a similar dilemma as Brazil. As demand among consumers and businesses increases, credit unions must prepare.
Modernizing core systems is imperative and a practical path forward, allowing credit unions to remain competitive without a complete core replacement. Otherwise, it is almost certain they will lose to other institutions in the race to offer faster payments.
About Author:
With over
30 years of experience, Matera’s
Core banking and Pix instant payments solutions are used by 2 out of the top 3
global banks, 3 of the top 10 U.S. banks and one-third of all banks in Brazil.
Over 300 million Pix instant payments are processed per month using Matera’s
solution and 60 million of those are initiated by QR codes. For more
information, visit www.matera.com.