FedNow, Fraud Later?

Four years on from its first announcement, the Federal Reserve’s instant payments service, FedNow has finally launched. The innovative instant payment method will offer businesses across the U.S. a competitive alternative to the Real-Time Payment Network and the Automated Clearing House for payment transactions. The launch has excited many industry onlookers, but for those of us in the online fraud and fincrime prevention sector, it’s also raised a few concerns.

Let’s start with the positives. FedNow aims to revolutionize payment processing by providing real-time transactions for financial institutions. The system can facilitate transactions around the clock, with a value of up to $500,000 and promises ofunprecedented convenience and efficiency for financial institutions of all sizes that use it. It’s hoped that its launch will enable financial institutions to create new, cutting-edge products and services for their customers and members.

An Opportunity for Fraudsters Too

Clearly, the new system presents a remarkable opportunity for financial institutions to leverage real-time payments and offer more customer-centric services in the face of changing consumer demands. However, the history of online payments has shown that as new payment methods emerge, so do fresh fraud tactics. Unfortunately, fraudsters have shown time and time again that they are adept at adapting to exploiting new systems.

As someone who is experienced in this field, it seems almost inevitable that the same will happen with FedNow. Thankfully, the Federal Reserve has gone some way in protecting itself from this scourge. For example, multi-factor authentication for connectivity to the service has been implemented. However, fraudsters have already demonstrated their ability to bypass these systems with the use of fake identifications and fraudulent contact details.

Launch Issue

Therefore, while FedNow provides certain anti-fraud measures, it’s obvious that at launch the system is unable to truly protect against the wide array of weapons fraudsters have in their cache. Perhaps this is why the language on FedNow’s website indicates that the responsibility for fraud prevention does not lie solely with the platform itself. Instead, financial institutions are also clearly expected to play an active role in defending themselves.

Interestingly, the Federal Reserve has confirmed new anti-fraud measures will not be added to FedNow until 2024. In the intervening period, businesses will need to take extra care to ensure they’re doing all they can to protect themselves from losing out to fraud – safeguarding the FedNow system against online crooks.

Taking Additional Steps

To uphold trust in the FedNow platform, businesses must first ensure they’re establishing awareness around the new fraud risks associated with instant payments and build education about the likely strategies that cybercriminals will use to commit fraud in this arena. Account takeovers, account opening fraud, money laundering and identity fraud all remain major threats and must be accounted for by businesses looking to mitigate risk here.

This is particularly relevant as FedNow does not provide an automatic or guaranteed way to reclaim money in the event of fraud. Therefore, it’s essential for businesses to do all they can to prevent this issue from happening in the first instance. Ultimately, if users can reduce the likelihood of fraudulent transactions from taking place, then they avoid the need to deal with these issues later, which could become costly.

Finding the Right Balance

The imminent launch of FedNow presents a remarkable opportunity for financial institutions to leverage real-time payments and offer innovative services to consumers. However, with this opportunity comes the responsibility of safeguarding against potential fraud risks. New payment systems bring new threats, with the onus on those using the system to protect themselves from difficult challenges.

When assessing FedNow, financial institutions must consider fraud as a top concern. Whether being used in a business-to-business context, or by customers or members to facilitate payments, it’s essential that individuals are briefed on the potential dangers of fraud across the FedNow system. The good news is that there seems to be recognition of that fact by players across the ecosystem now that the service is fully launched.

Matt DeLauro is Chief Revenue Officer at the cybersecurity company SEON in Austin, Texas.