FedNow and Fraud: What to Expect With the Rise of the Modernized Payment System


The speculation around FedNow Service refuses to die down. Although a real-time payment system already exists in the U.S. in the form of TCH-based RTP, traditional real-time payments have seen a slower growth rate. What’s more, 40% of B2B payments still use paper checks. According to the Association of Financial Professionals Digital Payments Survey, paper checks make a significant lever for B2B payment mechanisms, with 31% of organizations receiving payments via paper checks from their customers. 

With Federal Reserve already supporting 10,000 financial institutions and credit unions, B2B businesses, B2C businesses and even peer-to-peer transactions could benefit substantially from FedNow's 24/7/365 real-time payment processing schemes.

According to Brian Riley, Co-Head of Payments Research at Mercator Advisory Group, the growth of real-time payments is significant and is set to hit $5 trillion by 2023. With that said, FedNow's real-time payments can significantly indicate revenue opportunities for financial institutions. Now is the time for FIs to stay ahead of the competition and maximize growth opportunities by initiating an onboarding journey with FedNow as soon as possible.

Let’s not neglect, though, the role of fraud in real-time payments like FedNow, as there will inevitably exist fresh fraud management challenges for your business. As a result, your fraud prevention and management mechanism must adopt an innovative strategy to minimize risks and remain compliant with FedNow’s security compliance policies.  


Why Consider Fraud Management for FedNow? 

As the FedNow service expands the operating hours with real-time gross settlement mechanisms available for 24x7x365 days, it will potentially foster massive revenue growth opportunities for FedNow participants.

On the other hand, there are immense possibilities for users to optimize FedNow, which aims to facilitate instant fund transfer, clearing, settlement, and reconciliation in real-time.  Based on these capabilities, businesses can easily seek to meet their financial expectations, whereas individual consumers can leverage convenient ways to satisfy their payment needs

Fraud management is an essential component of any payment system, including FedNow. Since FedNow is designed to offer fast, reliable, and secure payments, proper fraud management can ensure that consumers are protected from fraudsters seeking to exploit vulnerabilities in the system. If fraud is allowed to thrive within the FedNow network, it can damage trust in the system and undermine its integrity. 

Unfortunately, fraud can be costly for both financial institutions and their customers. By leveraging a fully-managed digital customer onboarding platform with fraud loss liability insurance, businesses can shift fraud loss liability while ensuring efficient KYC checks. As a result, they can focus on growth instead of fraud and compliance management.


Use Cases and Benefits of Real-time Payments 

Consumer-to-Business (C2B) bill pay 

With real-time instant payment, consumers can send and receive money so that they can pay bills in real time without lag. This process is very useful in preventing late fees while keeping utility services operative. In addition, an RfP messaging protocol is also an essential tool for requesting money in real time, thus ensuring effective cash flow management for both businesses and individuals. 

For low-to-moderate-income households, it might be a very familiar scenario to pay overdraft fees. Financial Health Network claims lower-income households paid $6.7 billion in overdraft fees in 2021. Real-time payments can prevent the likelihood of overdrawing an account or using costly third-party services.  In addition, food delivery or e-commerce purchases can remove payment frictions and foster instantaneous transactions through real-time payments. 

Business to Consumer (B2C)

Nacha CEO Jane Larimer praises FedNow’s capability to support payroll management in critical scenarios, which is unlikely with ACH Direct deposit. 24x7 Real-time payments can facilitate immediate payroll for certain scenarios, such as during holidays when traditional banking does not function or employees who need payments several times a day. Simultaneously, non-recurring schemes like insurance payout can benefit from real-time payments. 

Business to Business (B2B)

Request for Pay (RfP) is a powerful functionality to improve vendor relationships.

Corporate vendors can use RfP to send a “request for payment,” which includes all invoicing information, giving customers enough control over scheduling a payment or enabling instant payment.

Once payment is done, a message will be sent notifying the payment status to the biller so they know when they receive payments in real-time and ship the goods or products. 

By integrating RfP into AP/AR systems or Mobile apps, B2B leaders can improve cash flow and liquidity management and optimize working capital while reducing processing fees relatable to ACH or paycheck. This would eventually help corporates enhance the optimization of operational expenses. 

Besides, A2A or P2P fund moving brings significant convenience to individuals. 

The business value and convenience FedNow brings to the forefront clearly emphasize that consumers of all types would happily embrace real-time payments. However, participants such as small banks, non-banks, retail, and e-commerce need to attract and retain these customers to ramp up revenue opportunities.

Participants can unleash benefits by:

  1. Staying in the business by conforming to the competition
  2. Growing revenues i.e., transaction fees or selling other product offerings

As the growth opportunities are immense for FedNow participants, it is also essential to manage fraud. Fraud is not new, it is the same existing threat as ACH or paycheck.

Unless your fraud and risk management framework isn’t as fast as instant payment, your customers will go elsewhere, denying you growth and scalability. 


What Are the Unique Fraud Risks Associated with FedNow? 

Real-time payments occur instantly. Since transactions happen within seconds, FIs and customers can experience unique challenges.

With traditional payment types such as ACH and wire, users can have the flexibility to revoke a transaction before it is processed. However, real-time payments are irrevocable, meaning none can cancel the transaction once payment is made. With that, since the bad actor poses as the payee, he withdraws money instantly. 

In addition, real-time payment architecture confronts threats from the same threat profiles, including synthetic fraud, unauthorized use, authorized use, account takeovers and identity theft

One growing concern is that cybercriminals can easily trick consumers into making payments and cause financial damage. As per Nick Stanescu, SVP, and FedNow business executive, instant payment architecture will introduce fresh fraud management challenges. To minimize risks, it is essential to raise the fraud management capacity with improved security controls. 


Is Your Current Fraud Management Process Capable of Handling Modern Threats? 

The Federal Reserve reported that many financial institutions still have a fraud detection system built on batch processing and manual processes. This kind of fraud detection system can easily allow false positives and pass fraudsters as genuine users to further expose financial risks to consumers. 

In many instances, financial companies stack disparate tools one over the other, creating more friction for customers during the onboarding process. As a result, they tend to lose customers and also revenue opportunities in the future. 

Another approach that is quite common amongst financial institutions is that they rely on shared secret data. So, using outdated credit bureau data also means you invite deceitful candidates onto your platform. 


What To Consider When Modernizing Fraud and Risk Management Systems

Discover what could be innovative approaches across the fraudulent landscape. Connect with vendors and technology partners and confirm if they could provide a holistic view of transaction patterns as they occur in real-time. Also, ensure your fraud and risk management framework offers real-time fraud detection capabilities. 

The effective approach to identifying unusual behavior across the payment platform is by using AI and machine learning capabilities, such as those from Instnt,  inside your fraud detection system. What is promising about this technology is that it can learn over time by accommodating itself with predictable user behavior. If there is any change in this behavior, AI and machine learning can flag it and immediately reject the transactions.


How Does Instnt Access™ Upgrade your Fraud and Risk Management Framework? 

As you seek to onboard more good customers to your platform and aim to generate revenue, KYC processes stand significant. To keep pace with the current regulatory system while eliminating friction from the onboarding process during KYC signup, you need a fully managed AI-powered customer acceptance platform such as Instnt Access™

When customers are digitally onboarded with Instnt Access™, they gain self-sovereign identity management capability. With Instnt Access™ using Hyperledger decentralized blockchain, users can bind their credentials cryptographically, store them in an identity wallet and gain total ownership of their verifiable credentials that no one can ever decrypt. Simultaneously, since their identity wallet is portable, customers no longer need to provide KYC information repeatedly, reducing friction and facilitating the digital onboarding of more good customers. 

In addition, Instnt Access™ also offers identity verification using biometrics, selfie, and OTP-based mobile number authentication. These unified capabilities help you keep pace with KYC compliance and eliminate AML risks while reducing costs on customer acceptance.


Get FedNow-Ready With Instnt Access™

Instnt Access™ conforms to Fed Reserve plans for anti-fraud measures scheduled for 2024.  One consideration is to identify a large number of low-value payments in a short window. By detecting this unusual pattern, Fed urges FIs to implement a mechanism to reject the transaction. Instnt provides constant and periodic monitoring across the platform to detect and flag such behavior and help FIs remain KYC compliant. 

If you want to stay ahead of the competition and gain FedNow benefits, connect with the experts at Instnt to launch a modernized fraud detection solution. 



PYMNTS - FedNow Says Features Will Help FIs ‘Raise the Bar’ on Fraud Management

The Federal Reserve - Fraud and instant payments: The basics

The Federal Reserve - Unlock instant payment use cases with the FedNowSM Service 

Alacriti - Real-Time Payments Are Ubiquitous: Is Your Business Ready to Accept Real-Time Payments?





About the Author

Instnt's fraud loss indemnification technology provides coverage of up to $100M for fraud losses stemming from synthetic, third-party, and first-party fraud. With Instnt's comprehensive fraud loss protection, businesses can confidently extend their services to a wider customer base, enabling them to embrace more opportunities and enhance revenue streams while maintaining a secure, fraud-free environment.