Banks: Real-Time Fraud Considerations to Maximize the Benefits

The anticipation surrounding instant and real-time payments in the U.S. has captured the attention of financial experts in more ways than one. With the Federal Reserve's launch of their FedNow Service this month, banks and financial institutions are both excited to reap the benefits and wary of the potential risks. When implemented well, banks and other FIs can realize tremendous benefits from the FedNow Service’s instant payments, including enhanced customer experiences and competitive advantages, cost savings on reconciliations, new revenue opportunities, and a streamlined payments infrastructure.

While the benefits of instant payments are substantial, it is crucial to address the associated fraud concerns to realize the maximum benefit and protect customers. In contrast to credit card transactions, which often provide a chargeback mechanism, real-time payments occur near instantly and become irrevocable as soon as customers initiate them. This lack of a refund mechanism, even in cases where parties agree, poses a significant challenge for banks and other FIs that want to be on the giving and receiving end of this new service. Not only that, but the speed and minimal verification involved in instant payments make them vulnerable to exploitation by fraudsters, as these transactions are difficult to halt or reverse. 

Common fraud schemes, such as account opening fraud, account takeovers, authorized push payment fraud, money mule schemes, and other scams targeting the most vulnerable, can yield higher success rates for fraudsters in the realm of instant payments. Safeguarding against these risks becomes paramount, necessitating robust fraud prevention measures, stringent authentication protocols, proactive monitoring systems, and effective anti-fraud collaboration between financial institutions and regulatory bodies.

The U.S. has largely lagged behind other countries when it comes to real-time payments. With only one shot to get it right, careful planning and assessment will be needed to take full advantage and realize the maximum benefit from these services. Here are some top fraud prevention considerations and best practices for banks, credit unions, and other FIs that are preparing to implement the FedNow Service for their customers:

1. Invest in advanced detection and prevention technologies: It’s not uncommon for traditional fraud solutions to employ batch decisioning methods to combat fraud. With the introduction of real-time payments, it is crucial to have an always-on solution that can make decisions at the same speed as transactions, often within milliseconds. The ability to handle high queries per second (QPS) and maintain low latency is of utmost importance for effective and instantaneous decision-making. Traditional verification methods, like passwords or PINs, are not enough to prevent real-time payments fraud.
   
   Always-on artificial intelligence and machine learning (ML) fraud prevention technologies are tremendously beneficial because they are constantly monitoring, tracking and analyzing transaction patterns to be able to detect behavior that may indicate fraud. By leveraging these tools, you can harness the power of behavioral analysis to spot fraud patterns across the payments journey. ML solutions automatically review these data points and can catch fraud and spot accounts that engage in fraudulent patterns even before they act. Ideally, a fraud prevention platform will detect fraudulent transactions in less than 200 milliseconds.

2. Reduce silos in your fraud tech stack: Silos caused by fragmented fraud solutions within your fraud tech stack can hinder a comprehensive understanding of customer activity, leading to gaps and blind spots in your fraud detection and prevention efforts. This understanding becomes paramount when decisioning must happen in real-time. Having a unified perspective enables more accurate and effective fraud detection, as patterns and anomalies can be identified more easily, and more rapidly when pieces of the puzzle don’t have to be put together manually.
   
   In order to achieve comprehensive fraud prevention, it is necessary to shift from centralized data to centralized intelligence. This refers to intelligence that is both accessible and adaptable to any business scenario. A centralized intelligence model is ideal because it allows for actionable insights to be derived centrally and directly available across a system, and throughout an organization.

3. Be proactive and ready to iterate: Managing fraud will always be a balancing act of proactive and reactive measures. One common mistake that many FIs make is launching new products or services without implementing adequate fraud prevention measures, only acting after fraud incidents take place. This reactive-only approach can be detrimental to the success of a solution – forcing the institution to withdraw the service and remedy the vulnerabilities before relaunching. This can be harmful to the FI’s reputation and undermine consumer trust, making it challenging to encourage future adoption of the product. Financial institutions must recognize the constant threat that fraud poses and take proactive steps to mitigate it. There is a misconception that preventing new fraud requires a complete overhaul of current fraud prevention solutions, which can be a daunting and overwhelming task. It’s worth remembering that modernizing a fraud system can and should be achieved through iterative steps. One effective strategy is leveraging different methods of relationship graphing to classify users, particularly during the early phases of launching a new product, like real-time payments. By categorizing senders and receivers based on their likelihood to have a relationship or connection with one another, you can categorize pairings into low- and high-risk segments to allocate fraud prevention resources more efficiently and effectively. This ensures the stringent evaluation of high-risk transactions to stop fraud while reducing friction and providing a much smoother experience for low-risk users. 

4. Collaborate with industry partners and regulatory agencies: The Federal Reserve is closely collaborating with FIs, processors, regulatory bodies and others that will be impacted by the new FedNow Service. Staying “in the know” with others who are intimately involved with this service will help guarantee a more seamless transition for all, allowing more seamless alignment with industry standards and requirements. In addition, by regularly communicating and sharing information with other financial institutions, it will be possible to bridge the information gap between an institution’s knowledge about both the sender and the receiver,  helping to build a protective, unified front that is less penetrable by fraudsters. 

It’s clear that financial institutions across the U.S. have much to gain from the launch of FedNow Service this summer, but time is of the essence when it comes to planning. By prioritizing fraud prevention now, organizations can protect themselves and their customers in the long run from potential fraud threats, ensuring the integrity, security, and long-term viability of their real-time payments' services.