Mitigating Instant Payments Risk to Reap Rewards

You’ve probably heard someone in our industry share a variation of the phrase, “faster payments, faster fraud”—which is simply not true. Both The Clearing House and the Federal Reserve have reported minimal fraud on their instant payments platforms, and these systems are proving to be more secure than other payments channels—including decades-old check rails where fraud has skyrocketed in the past year.

Today’s fraud attacks don’t seek out a faster transaction; they look for a chink in the armor and the path of least resistance. That’s why I’m a big believer in cross-channel fraud detection. In this landscape, we must look at a customer and their transactional behavior across platforms, using it as a comparison to identify out-of-character actions and payments.

Authorized push payments as fraud

Case in point: The biggest source of global instant payments “fraud” has come in the form of authorized push payments. In working with the U.S. Faster Payments Council, I helped write a white paper that explored instant payments systems around the globe—some of which now have been operational for more than a decade—and identified sources of fraud. Time and again, authorized push payments fraud was the number one issue referenced.

These payments seek to dupe customers into sending money under false pretenses. So, while the sender believes that the transaction will have a different outcome than it does, the payment itself has been authorized. These are not new fraud schemes; they are the same tactics fraudsters have used with everything from cash and checks to today’s crypto payments and beyond. They simply deceive the payer with the intent of stealing from them.

Fighting instant payments fraud

The question then becomes, what’s a community bank to do about fraud when considering instant payments rails? Fortunately, the answer lies in staying on the same fraud mitigation trajectory you have been on with all other payments rails, in the form of Know Your Customer (KYC) vigilance and proactive education.

For one, banks want to help educate their customers on the potential for scams. It’s critical that when you release an instant payments solution, in the same breath, you are talking about scams and social engineering. The customer needs to understand using instant payments is just like handing cash to someone, and once it’s gone, it’s gone.

In addition, consider the fraud tools that already help mitigate your risk before a payment is sent and protect your customers. Solutions that employ strong multi-factor authentication, holistic cross-channel fraud detection, and a method for verifying new payees can go a long way toward thwarting fraud and can be applied in the instant payments space.

But to help community banks identify solutions particularly geared toward instant rails, ICBA Payments has partnered with Pidgin, a leading instant payments provider and an ICBA ThinkTECH Accelerator alum. Through their work with Effectiv AI, Pidgin is offering community banks a more holistic instant payments service that includes fraud prevention. To explore those capabilities further, ICBA Payments is currently seeking community bank participants for a pilot program to evaluate its potential [see sidebar].

And this is only one example of how ICBA and ICBA Payments are supporting and will continue to help you on your instant payments journey. Because instant payments should be a value-add to both your bank and its customers, and as demand continues to climb for these solutions, deciding today how you will embrace this opportunity while mitigating risk will position you for future success.

For more information and instant payments resources, visit ICBA.org/instantpayments.

ICBA Instant Payments Pilot Opportunity

Demonstrate the effectiveness of the instant payments model for community banks.

In this pilot, ICBA Payments plans to explore the fintech integration model for instant payments, investigate fraud protocols, identify instant payments use cases that resonate with community banks and small business customers, and develop the business case for instant payments, with the goal of sharing our findings with the industry.

Find Out More/Share Your Interest

For more information on this program, reach out to Nick Denning at nick.denning@icba.org