By Bill Camarda
Corporate finance experts believe faster payments services may lead to new ways to serve consumers and receive their payments, extend and manage B2B credit lines, improve processes (e.g., last-minute payroll), and possibly even reduce borrowing.2,3,4 But they also are concerned that faster payments may bring faster fraud.
As the Federal Reserve's Faster Payments Task Force points out, faster payments transactions are intended to settle irrevocably, challenging participants who won't have the option of clawing back a fraudulent payment afterwards. "Payer and payee service providers, solution operators and processors must exchange payment information in real time. This means accurate identification of payers and their accounts must occur during a short vetting window, making it challenging for payers' service providers to recognize identity theft, account fraud, and account takeover."5
Moreover, systems such as Europe's SCT INST are intended to be available 24x7x365.6 As Julius Weyman of the Retail Payments Risk Forum recently wrote, "A 24-hour operation that doesn't afford downtime, that will be required to operate continuously while moving ever-increasing volumes, is largely unique in the context of banking and legacy payments. Ceaseless operations [are] not only more demanding and less forgiving… they are arguably countercultural across a swath of payment franchises."7
Ten years ago, when the U.K.'s Faster Payments system pioneered instant payments service, related online banking fraud losses initially rose from £22.6 million to £52.5 million in one year.8 But the following year, banks were able to flatten the curve of growth in fraud via Faster Payments services. By 2013, fraud in payment services accounted for only 7 pence per £1,000 of spending: "slightly higher than checks, but considerably lower than cards."9 One approach used by U.K.'s Faster Payments system may be useful for the newer real-time systems: the U.K. launched with modest transaction limits, which were raised as the payment system proved itself.10
In the U.S., the National Automated Clearing House's (NACHA's) move to same-day ACH clearing also raised concerns about increased fraud risk, even though it is not "instant." So far, NACHA says, this hasn't happened. Its February 2017 survey of financial institutions that generate 63 percent of its transaction volume showed that "none reported experiencing any increase in fraud due to Same Day ACH, whether as an originating or receiving financial institution."11
JPMorgan's Executive Director of Treasury Services Steven Bernstein recently offered recommendations to help companies get ready for the Same Day ACH transition.12 His recommendations may be equally valuable for companies getting ready for any faster payments system, whether domestic or cross-border.
First, Bernstein says, educate yourself and your team: "Find out what's happening and when and how it may affect your business, your suppliers, your customers and your competitors."13 Next, he says, review existing anti-fraud measures in detail. He suggests IT "may want or need to add new algorithms, filters, real-time alerts and intraday reports, controls and analytics to detect and flag potentially fraudulent transactions faster. Additionally, talk to your technology provider or providers about updating or upgrading your systems, as well as the devices your employees use to access those systems. Try to eliminate any legacy manual payment processes, and consider becoming end-to-end automated." Last but not least, plan for failure – and create checklists to help act quickly if victimized.14
Deutsche Bank's James Volkwein and Joseph Mauro also make anti-cyberfraud process suggestions: "Companies need to ensure the key processes that attract the most cybercrime attempts, such as those around payment processing, are reviewed at least annually, and that technology control points are embedded in new automated processes. For payments, that means segregation of duties, multiple levels of approval, and daily reconciliation of all transactions."15
With faster payment services, financial institutions will play a critical role in preventing fraud. According to Icon Solutions' Richard Dear, many banks are in the process of revamping their anti-fraud systems for real-time, automating old manual workflows and bringing aboard "adaptive behavioral analytics to monitor individuals in real time and spot exactly when behavior changes… By detecting anomalies across every event and channel, banks can spot and block new fraud attacks as they occur."16 Customers may wish to understand their financial institution's safeguards against fraud, and the role it expects customers to play.
It's reasonable to worry that real-time or near-real-time payment services will lead to increased fraud. But experience shows that may not be the case when financial institutions and customers work together to protect against fraud.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “Federal Reserve commends efforts as Faster Payments Task Force concludes,” Federal Reserve; https://www.federalreserve.gov/newsevents/pressreleases/other20170724a.htm
2. “SEPA Instant Credit enablement: Why bother?,” PaymentEye; http://www.paymenteye.com/2017/07/21/sepa-instant-credit-enablement-why-bother/
3. “Immediate payments and the impact on corporate treasurers,” The Treasurer’s Wiki; https://wiki.treasurers.org/wiki/Immediate_payments_and_the_impact_on_corporate_treasurers
4. “The payment revolution(s),” Treasury Today; http://treasurytoday.com/2017/03/the-payment-revolutions-ttia
5. Faster Payments Task Force Final Report Part Two: A Call to Action, Federal Reserve Faster Payments Task Force; http://fasterpaymentstaskforce.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf
6. SCT INST: What Seems the Same is Very Different, ACI Worldwide; https://www.aciworldwide.com/-/media/files/collateral/trends/sct-inst--what-seems-the-same-is-very-different-tl-a4.pdf
7. “Risks in Faster Payments: Retail Payments Risk Forum Working Paper,” Julius Weyman, Federal Reserve Bank of Atlanta; https://www.frbatlanta.org/-/media/documents/rprf/rprf_pubs/2016/risks-in-faster-payments.pdf
8. Immediate Need for Fraud Prevention: Best practices for preventing fraud in a real-time world, ACI Worldwide; https://www.aciworldwide.com/-/media/files/collateral/trends/immediate-need-for-fraud-prevention.pdf
10. “Faster payments rapidly gaining traction,” Wells Fargo; http://global.wellsfargobank.com/wfinsights-articles-wfinsights-articles-fasterpayments
11. “No Fraud Spike With Same Day ACH, Says NACHA,” PYMNTS.COM; http://www.pymnts.com/news/faster-payments/2017/nacha-same-day-ach-faster-payments-bank-financial-institution-survey-fraud-use-adoption/
12. “Same Day ACH: Faster Payments—and Faster Fraud,” JPMorganChase; https://commercial.jpmorganchase.com/pages/commercial-banking/executive-connect/ach-fraud
15. “Five Corporate Treasury Trends to Watch in 2017,” iTreasurer; http://www.itreasurer.com/Five-Corporate-Treasury-Trends-to-Watch.aspx
16. “Preventing fraud in real-time payments – Richard Dear, Icon Solutions,” Instapay, https://www.instapay.today/2017/04/18/preventing-fraud-real-time-payments-richard-dear-icon-solutions/