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

The Federal Reserve’s FedNow^sm Service, a new instant payments infrastructure for the nation’s financial institutions (FIs), is expected to catalyze broad access to instant payments for consumers and businesses. When it launches later this year, the 24/7 service will come equipped to support popular use cases such as account-to-account (A2A) transfers and bill pay, in addition to features that help mitigate fraud.

According to Nick Stanescu, senior vice president and FedNow business executive, Federal Reserve Financial Services, fraud management features are a high priority for FIs and are being tested along with transaction flows in the countdown to launch.

“We’re making great progress, finalizing development of the first release in anticipation of our go-live date in the May to July timeframe,” he told PYMNTS.

The Federal Reserve has spent years developing the FedNow Service to facilitate instant payments for all regulated FIs that choose to sign on. In terms of the service itself, access will be provided through the Federal Reserve’s FedLine network, which serves more than 10,000 FIs directly or through processors.

As of the end of January, the FedNow Service is in the testing and certification phase, which is the final phase before launch. Early adopters in the FedNow Pilot Program — FIs, processors and service providers among them — are now sending test payments messages to one another using the FedLine infrastructure.

Additional Anti-Fraud Measures in 2024

The Fed plans to roll out additional anti-fraud measures in 2024 and beyond. One feature under consideration, for example, would enable FIs to activate a control setting that rejects payments that exhibit unusual frequency patterns or cumulative value over a period of time. This could address fraudsters’ efforts to work around transaction limits by originating large numbers of low-value payments in a short window.

Later potential features could provide the ability to fine-tune controls for different types of customers and screen non-value messages, such as requests to send payments to potential bad actors.

Other updates under consideration would leverage the FedNow Service network to monitor for aggregated concentrations of inbound and outbound activity (a sign of potential mule activity) and use machine learning to score transactions.

In the meantime, education will be key, in effect guiding FIs on how to connect and get on board in order to apply instant payments to a variety of new use cases. There also will be the need to educate those same FIs about FedNow features and capabilities that can complement and strengthen FIs’ existing fraud mitigation efforts. The Fed has launched its online FedNow Explorer resource to help with that education among other ongoing efforts.

Faster Payments and Faster Fraud

The rise of instant payments is a reminder that while fraud itself may be as old as human civilization, new ways of making payments invariably introduce fresh fraud management challenges to financial services sectors and their customers.

“The schemes are mutating as the payment system evolves, and it will be critical for payments stakeholders to work together in order to minimize risks,” Stanescu said.

Although the rails may be modernizing, some of the old, tried-and-true fraud tactics remain ongoing threats, including identity theft and account takeovers. FIs, he said, have identified external fraud risk as their top concern.

Although debit cards, check fraud and automated clearing house (ACH) have been the primary targets of the bad actors, he said that instant payments will start to gain more attention as a target.

“The cybercriminals will use the same strategies to commit fraud with instant payments,” he said.

Since there are no automatic or guaranteed ways to get money back in the event of fraud, there’s the need to “raise the bar,” as Stanescu said, to boost security controls for account enrollment and payment initiations, and to guard against unauthorized payments. FIs will learn from features built into other payment platforms (for example, the “Are you sure?” prompt that Zelle users must click before executing a transfer).

Consumer education will be critical here, he said, noting that there’s an advantage in the fact that these FIs know their customers and can more readily identify anomalous behavior.

Stanescu told PYMNTS that security features are being built into the FedNow Service to help all FIs, including community banks, as they apply their own risk management efforts toward instant payments.

As FedNow comes to market in the middle of the year, Stanescu said he expects that the most immediate use cases will be focused on A2A transactions and bill pay, and there will be request for payment “built in” to the launch.

The FedNow Service is also positioned to add new features on a “fast-follow” basis right after launch, and then on a continuing basis as market needs evolve.

“There will be a whole set of use cases and applications that are going to leverage FedNow that we have not even been thinking about yet,” Stanescu told PYMNTS.