The Faster Payments Era: New Channels and Expectations
August 9, 2023
The shift to real-time payment infrastructure requires a focused effort, but the shift is inevitable. The time is now for all key stakeholders – financial institutions, core service providers, software companies and application developers – to devote the resources necessary to support instant payments.
Former Vice Chair, Federal Reserve Board
The U.S. financial industry is experiencing a faster payments revolution. Payment channels such as Zelle® are more popular than ever, and others are growing – driven by the desire for faster, frictionless payments accelerated during the COVID-19 pandemic. The Clearing House’s (TCH) real-time payments platform RTP®, which arrived in 2017, processed over 50 million payments in Q1 2023 – and the Federal Reserve is releasing FedNowSM Service this month.
COVID-19 infused incremental pressure and special focus for providing instant, contactless electronic payments, accelerating the buildout and adoption of real-time payments.
Amid this rapid change, there is significant apprehension surrounding anticipated fraud; this sentiment is amplified by liability shifts for faster payments in other jurisdictions, such as the U.K., to mandate reimbursement for fraud victims. As faster payments enter the mainstream in the U.S., it is crucial to understand what to expect and how a consortium approach can help your institution adopt these emerging rails with confidence by effectively combating fraud and reducing member friction.
What Are Real-Time Payments?
A subset of faster payments, real-time payments are initiated and settled nearly instantaneously – within seconds of initiation. Their networks are always online – providing members with constant, 24/7 payment capabilities. TCH RTP®, as well as the Federal Reserve’s upcoming FedNowSM Service, are both examples of real-time payment platforms. Real-time payments have broad applications in the industry – for example, TCH RTP® is seeing considerable account-to-account use for B2B, B2SMB and B2C transactions, as well as for P2P transfers within the insurance, utilities, gig economy, payroll and vendor and supplier disbursement industries.
Benefits of Faster Payments
At any given time, delayed payments may total as much as $3 trillion globally.
The first new U.S. payment rail in decades, faster payments enable rapid, convenient and high-limit transfers with fewer fees for consumers – helping to democratize the financial system through freer access to payment services. They also eliminate charge backs for businesses, as consumers may only transfer funds they have available in their accounts. This creates greater transparency and certainty between payers and payees. Overall, the speed and certainty of faster payments allows the financial industry to reduce the amount of funds locked in processing – as much as $3 trillion globally at any moment.
New Avenue for Fraud?
Criminals see real possibilities using faster payments for fraud. Any new avenue for payments will attract good and bad actors, however faster payments present unique opportunities for fraudsters.
Unlike most payment rails in the U.S., faster payments use a push payment system where the payer directly initiates the transaction and controls the amount and destination of the funds. This creates vulnerabilities for Authorized Push Payment (APP) fraud, such as romance scams and Business Email Compromise (BEC), where victims are deceived into sending payments to accounts under criminal control. Faster payments are also irrevocable – they cannot be canceled or recalled, some settle instantly, and up to $1 million can be sent in a single transfer. There is an extremely narrow window for detection and interdiction before fraudsters receive, and can immediately withdraw, massive amounts of funds.
Consortium Analytics: Fighting Faster Payment Fraud Holistically
With respect to instant payments, financial institutions should consider taking a holistic approach to combating fraud.
Federal Reserve Banks
The faster era of payments is underway, bringing great opportunity with TCH RTP® and FedNowSM Service, but also significant risk – particularly with respect to fraud. To adopt these new channels with confidence, financial institutions need an effective, holistic fraud solution that provides insight into the risk of payments beyond the four walls of their institution.
Verafin’s consortium approach to payments fraud prevention leverages over 300 million account profiles to consider the complete picture of risk across the entirety of a faster payment Payments from accounts with a history of legitimate activity across the consortium are analyzed as lower risk, while payments involving new or unrecognized accounts are analyzed as higher risk. With this robust insight, your institution can reduce member friction by allowing legitimate transfers to proceed uninterrupted, while also using real-time analysis to stop suspicious payments and immediately prevent loss.
Connect with Verafin for more information on their consortium approach to combating payments fraud.
Verafin is the industry leader in enterprise financial crime management, providing a cloud-based, secure software platform for fraud detection and management, BSA/AML compliance and management, high-risk customer management and information sharing. More than 1,200 credit unions use Verafin to effectively fight financial crime and comply with regulations. Leveraging its unique big data intelligence, visual storytelling and collaborative investigation capabilities, Verafin reduces false positive alerts, delivers context-rich insights and streamlines BSA/AML compliance processes. Verafin has industry endorsements in 45 states, including the TBA, WBA, FBA, MBA, and CUNA Strategic Services.