How and Why Navy Federal Got Aboard Instant Payments

When the world's biggest credit union decides it's time to offer instant payments, competitors have to pay attention. And joining The Clearing House Real Time Payment Network is just Round One for Navy Federal, as it contemplates adding the FedNow service, too.

Navy Federal Credit Union went live on the Real Time Payments Network in early November and on its first full day received over $2.7 million in real-time deposits, setting a network record.

Adding Navy Federal to the network is strategic to The Clearing House, the private-sector group that runs several payments systems, including the RTP Network, according to Elena Whisler, chief client officer at TCH. The reason is its sheer size and its profile. Navy Federal, at $168 billion in assets and 13 million members globally, is not just the nation’s largest credit union, but the world’s largest.

Whisler explains that its size and retail banking focus should underscore the utility of instant payments to other credit unions, helping TCH recruit additional institutions to the network. As of early December 2023, RTP Network included around 470 financial institutions, 111 of which are credit unions. That leaves thousands of potential institutions that can join.

Admittedly, size is also a challenge. Getting a behemoth like Navy Federal into the system took an approach that was both broad and deep, and it was the antithesis of just “plugging in.” Sovan Shatpathy, Navy Federal’s senior vice president and chief technology officer, likens the experience to building a suburban subdivision from scratch, versus building a new house in an existing neighborhood.

“You’re laying down the new subdivision and putting in the model home and inviting in the first adopters,” says Shatpathy. The launch required getting a lot of pieces into place and making them all work together, to enable members to interact with the RTP Network.

But Navy Federal saw it as a must-have:

“We live more and more in a digital world, and there is a pent-up demand for real-time money movement and money management,” says Shatpathy. Top purposes among senders, so far, have been merchant payments, payroll payments, proceeds from investments, and even winnings from online sports betting.

Getting RTP Instant Payments into Action at Navy Federal

With other payment rails, a major institution like Navy Federal already has a good deal of infrastructure in place, says Shatpathy. He says about 10 different work streams had to progress simultaneously to eventually come together to make the credit union’s Day 1 processing of RTP transactions work smoothly.

The issues that had to be ironed out ranged from fraud detection — especially critical because transfers are literally instantaneous — to connectivity. The good news is that having built the “subdivision” to handle RTP, much of the work that will be required to also offer FedNow instant payments has been done. Navy Federal intends to offer access to both networks eventually.

“There’s a lot of overlap in terms of the backend capabilities, which we’ll leverage,” says Shatpathy. He estimates that 60% of what was done to usher in RTP can be repurposed for FedNow.

Sovan Shatpathy pent up demand for real-time money movement and management

In time, having prepared Navy Federal for these networks, he anticipates a point where the institutions will reimagine how it interconnects with legacy payment rails like wire transfers and automated clearinghouse transactions.

“We’re driving this on a very simple vision, to establish an internal payment hub,” according to Shatpathy. In the U.S, at present, instant payments is the province of TCH’s network and FedNow. (Some might also count Zelle, the person-to-person network run by Early Warning Services and owned by a group of major U.S. banks. Navy Federal is also on that service.) Internationally, on the other hand, there are multiple fast payment systems of all descriptions that could someday be of use of Navy Federal, given its global membership.

“Interoperability across all of these real-time payment rails is a big topic for discussion, but it’s not here yet,” says Shatpathy.

The credit union serves not only naval personnel, but all Defense Department staff, members of other DoD uniformed services, members of the Coast Guard, civilian employees and contractors of all of those organizations and veterans and family members. The credit union maintains nearly three dozen foreign branches. Currently all fall under U.S. banking regulations as they are technically on American soil at military bases.

Read more: Payments Trends 2024: As Shopping, Buying and Paying Blur Together, Banks May Lose Ground

Building Out Navy Federal’s RTP Subdivision

For the 2023 launch, Navy Federal is in “receive” mode on the RTP network. This enables the credit union’s members to receive funds instantly from any customer of an RTP member institution that has “send” capability set up. Sending capability is on Navy Federal’s agenda for 2024.

“Once we have corporate send in place it will have even higher impact,” says Shatpathy. Navy Federal will be able to issue funds to members at specific points of time for specific purposes. For example, instead of a member needing a cashier’s check to finalize the purchase of a car with loan funds from Navy Federal, the credit union will be able to issue an instant payment to the seller’s bank account.

“We’ll be able to fund member auto loans in a matter of seconds,” Shatpathy predicts.

Also on the horizon are internal uses for the running of the credit union itself. These will include processing of insurance payments and payouts, investment transactions and payroll.

This will only accelerate adoption among the membership, says Shatpathy. “You have early adopters and then others join in and soon it’s a mainstream payment method,” says Shatpathy.

How far off is that ubiquity? Shatpathy says he’s discussed usage trends with experts at both The Clearing House and at the Federal Reserve. Based on these conversations, his view is that instant payments channels will handle a growing portion of payments over the next seven to 10 years, and that beyond that things will flip. By then, says Shatpathy, “I would expect faster payments to become more the norm.”

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Getting Underway in Instant Payments in Other Organizations

The launch of FedNow in July has put the spotlight back on the jockeying in the instant payments space. The Clearing House’s Whisler says that to a degree there’s “co-opetition” between the two rivals. This is in the sense that having two players begins to form an ecosystem for instant payments where promotion for the concept feeds both providers.

Whisler says that some new RTP Network members find that adopting instant payments for corporate needs is actually a good way to get started. Many organizations have also benefited from The Clearing House’s express onboarding program.

Based on the experience so far, Whisler says usage of RTP tracks the behavior of other payment channels. People tend to wait until the eleventh hour, whatever their deadline. Fridays, end of day, end of month, end of quarter are all higher-volume periods for RTP. It’s not just brinksmanship. For some companies, a final transaction near the end of a given day or period simply makes sense. Instant payments enables them to have finality.

Whisler says that she has seen a significant shift in the decision-making point for institutions getting into instant payments.

“In the beginning, we thought it would be the transaction banking executives,” says Whisler. “However, I would say that it’s now typically your executive management team. They see instant payments as a strategic initiative that impacts all departments.”

Looking ahead, Whisler says the momentum building for pay-by-bank service favors instant payments. Not only are merchants looking into it, in part to save on card processing fees, but some financial institutions see the trend and want to ride it.

A good deal has to be worked out as pay-by-bank and instant payments converge, Whisler advises. One challenge is how to handle returns of merchandise and refunds.

That’s just an example.

“There’s a lot to be done on the customer experience side and on the governance side,” says Whisler. “We have to work through not only technology but all the consumer rights and protections, liability and more. That’s the tough stuff that people forget about.”

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