AFTs Offer New Opportunity—and Risks—for Credit Unions

September 1, 2023
AFTs Offer New Opportunity

Account funding transactions (AFTs) are growing in usage as consumers increasingly embrace digital payment services offered through PayPal, Venmo, Starbucks, Apple Pay and even Uber. For members, AFTs are a more efficient and convenient method of transferring funds, but they have some downsides for credit unions, including reduced interchange revenue and fewer chargeback rights.

According to Visa’s Q1 2023 Performance Trends Summary, AFTs held a 7.0% share of total Visa payment transactions in the first quarter. Overall, AFTs posted 16.70% YoY growth in total transactions for the first quarter, third highest among merchant segments, behind only Travel & Entertainment (T&E) and Discount, Drug & Wholesale.

Co-op has been tracking growth in AFT volume, as well. Within Co-op’s client credit union payment portfolios, AFT transactions largely fall within the “Money Transfer (4829)” and “Cash Advance (6010)” merchant classification codes (MCCs). Both MCCs are up strongly year over year as of July 2023, with Money Transfer up 15.8% in credit and 3.6% in debit, and Cash Advance up 9.8% in credit and 29.2% in debit, on a rolling 12-month basis.

Another merchant classification “Quasi-Cash - Member Financial Institution” where transactions from digital payment services and crypto firms pass thru is up 45.3% in credit and a massive 241.8% in debit on a rolling 12-month basis.

What are AFTs?

The mechanism of transferring funds between accounts has existed for many years, but the specific term “account funding transactions” is a more recent occurrence that wouldn’t be possible without the recent growth in digital payment technologies.

AFT refers to the direct debit of funds from a cardholder’s deposit account at their bank or credit union. AFTs are most often used for services like loading funds on prepaid cards or digital wallets, or transferring funds to an investment account.

The distinguishing feature of an AFT is that the originating payment service provider pulls funds from the cardholder’s account, rather than an institution pushing the funds to another account on behalf of an accountholder. These transactions typically show up as MCCs 6010 and 4829 within the issuer’s payment volume reports.

According to, “AFTs must comply with the rules of the card network (like Visa or Mastercard) and the card issuer, as well as the applicable regulations and standards for financial transactions. Not all cards are eligible to process AFTs.”

How are AFTs Used?

The use of AFTs is becoming more widespread, as illustrated by these common examples:

  • Splitting a restaurant check: The age-old ritual of splitting a restaurant check among members of a dining party has taken on a modern twist. In the “old days,” it was commonplace for individuals sharing a group meal to request separate checks, or to ask the server to divide payment of the group’s bill among two or more credit or debit cards. This practice would generate interchange income for the issuers of each card charged, based on the dollar amount of each separate check, plus a per-transaction fixed fee.

    Now, it’s commonplace for a single patron to offer to cover the entire bill on their card, with the understanding that the other guests will pay them back through Venmo, Zelle® or another P2P app. The P2P service can pulls those funds from each user’s home account via an AFT, which can generate some interchange income followed by the original payment to the restaurant generating higher interchange revenue for the card issuer as a larger transaction.
  • Loading funds into a merchant’s wallet app: In addition to popular stand-alone “universal” wallet apps like Apple Pay, Google Pay and Samsung Pay, dozens of major merchants now offer their own proprietary wallet apps. Starbucks led the way, but has since been joined by Walmart Pay and Amazon Pay, among others. With these apps, as well as with popular rideshare services like Uber and Lyft, users are encouraged to preload funds within the wallet for future use in-store or online. Neither the initial AFT transaction from the user’s primary bank or credit union account, nor any subsequent use of the funds within the wallet, generate any interchange income for the issuing institution.

    The initial AFT from the user’s primary account or credit union account can generate interchange as long as it processes as an AFT. When funds are preloaded the merchant and/or wallet avoid paying future interchange because now they hold the entirety of the funds compared to having to pay for each individual transaction when using a debit or credit card. This is lost interchange to the credit union.

AFTs Present Risks to Credit Unions

Although consumers benefit from AFTs as a more convenient and efficient method of transferring funds, this recent growth in transaction volume presents a challenge for credit unions.

The biggest risk for credit unions is the potential loss of interchange income from members that transfer funds to their favorite merchant wallets, P2P services or digital wallet apps. As the use of such services continues to grow in popularity, credit unions need to keep an eye on their interchange reports and monitor any declines.

In addition, as merchants encourage members to transfer funds into their wallets for future use, these funds are then stored within the merchants’ bank accounts. As this trend continues, credit unions may begin to see an increase in outgoing AFT volume, resulting in a decline in deposit balances. On the other hand, credit unions are also likely to see a rise in incoming funds through the AFT channel. For this reason, it’s important to monitor both AFT inflows and outflows to catch any potential net decline in deposits.

Credit unions may also experience higher fraud losses on AFT transactions, as fraudsters tend to leverage this payment method as a way to receive funds instantly. In addition, AFT-generated fraud losses can be more challenging to recover through the chargeback process.

Lastly, a growing number of wallet services have begun offering their own debit products, and are promoting them heavily to users. For example, Venmo recently offered an incentive for customers to receive 5% cash back on grocery purchases if they sign up for the Venmo Debit Card and use it at least three times by September 6, 2023.

In another twist, Greenlight, a popular digital budgeting, savings and investment app for kids, provides its users with a Mastercard debit card as part of the program. Greenlight is linked to the parents’ bank or credit union checking account, and transfers can be made at pre-scheduled intervals or on demand.

These funds reside within the Greenlight ecosystem, where kids can set up separate accounts for long-term savings, short-term savings and spending, and then use their debit card to make purchases online or in-store. Every transaction generates interchange income for Greenlight and its partner banks, while the parents’ bank or credit union receives no interchange, loses deposit balances on transferred funds, and may miss out on the opportunity to secure these young future members.

What should CUs do to stem the tide?

It’s important to understand that in the age of digital, AFTs are the new norm. These unique transactions are not going away anytime soon, so credit unions need to analyze how they are being used, and use that information to uncover new opportunities for generating revenue and capturing loyal member relationships.

One way to do this is to offer and promote your credit union’s in-house P2P service. Zelle® —which is offered to credit unions through Co-op—is one of the most popular P2P services available, and is free for members to use. For credit unions, it allows you to offer members all the convenience of other P2P apps like Venmo and Cash App, while maintaining the primary financial relationship.

Research where your members are using digital payments, and offer incentives like 5% cash back or rewards points for usage within specific spending categories. This will help generate excitement for your convenient digital payment services and increased loyalty among your members.

SmartGrowth Helps Drive Your Payments Strategy for Future Growth

Payments are the gateway to your members’ everyday financial lives. Co-op’s experienced SmartGrowth Consultants can help you transform your payment program into a powerful engine for non-interest income, loan generation and membership growth. Discover how SmartGrowth can help you see beyond basic transaction data, analyzing your card portfolio to reveal new strategic growth opportunities. Contact us to learn more.

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