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The launch of FedNow: Fast cash or fast fraud?

What U.S. financial institutions and online marketplaces need to consider when weighing their participation in the new instant payment system
The launch of FedNow: Fast cash or fast fraud?

By André Ferraz, CEO, Incognia

With the launch of FedNow, which will enable every financial institution in the U.S. to offer a modern instant payment solution (should they partake), it’s important to consider some of the lessons learned from other countries, like Brazil’s instant payment system, Pix, which launched in 2020 and transformed the way individuals and businesses transact money, and UPI in India.

Similar to FedNow, Pix and UPI were created to modernize the economy by reducing cash transactions, offering an alternative to existing payment systems, and allowing for faster and more affordable transactions with real-time payments. According to recent data, over 130 million individuals used Pix in the last few months, and that number accounts for nearly two-thirds of the population. In addition, Pix currently processes north of $100 billion in payments, driving down ATM and bank withdrawals by 25 percent since 2002.

That said, the launch of Pix hasn’t been without its issues; specifically, fraud and other security concerns have emerged. Here are some of the key learnings that U.S. financial institutions and online marketplaces should consider as they weigh the decision on whether or not to participate in FedNow:

Potential for account takeover (ATO) and cell phone theft

When Pix launched, bad actors set to work learning to exploit the system. Social engineering techniques were used to trick consumers into transferring funds, and phone theft increased significantly. These issues were ultimately mitigated by education, limits on how much could be sent via Pix, options to claim fraud, and the ability to block suspicious transactions.

With FedNow, one of the significant risks of instant payments is the potential for account takeover (ATO) fraud. ATO can occur through hacking, social engineering, or data leakage, leading to the complete wiping out of an account’s funds, including withdrawals of money, credit card and loan applications, and access to savings and investments.

Cell phone theft is also on the rise as stealing a device provides easy access to money in accounts, ordering new credit cards, asking for loans, and other lucrative actions that have a much higher value than the price of a sold device.

Financial institutions that decide to participate in FedNow will need to enhance their capabilities to detect and prevent these attacks. The best practice is to take a layered approach that incorporates a combination of device, location, and identity intelligence to ensure accurate user verification and superior account protection. It is also important to provide straightforward user guidelines to identify and report suspicious activity. In addition, financial institutions should implement risk-based authentication, which challenges risky or suspicious behaviors with step-up authentication, creating additional steps for fraudsters to bypass. It typically combines tools like OTP via SMS and facial recognition. Still, it can benefit from new technologies that analyze device behavior to verify if a transaction or a login attempt is legitimate and matches the account owner’s previous behavior.

Fraud cross-over into many industries

The impact of real-time payments extends beyond just financial services and into other industries, including online marketplaces, social media, and dating apps. With the ability to transfer funds instantly, scammers and fraudsters could more easily target these platforms and their users, creating fake profiles, luring victims with the promise of goods or services, and requesting payment before disappearing with the funds.

Similar to financial institutions, social media platforms, and dating apps need to implement stricter verification processes to ensure the authenticity of user accounts, and online marketplaces should require sellers to provide proof of their identity and location before listing items for sale and implement measures to prevent fraudulent listings and transactions.

A collaborative effort

Another key lesson from the launch of Pix in Brazil is the importance of collaboration between the government, financial institutions, and other stakeholders in developing and implementing effective fraud prevention measures. In order to do so, financial institutions and regulators must work together to establish a comprehensive system that addresses the risks and promotes the safe usage of instant payment systems. In addition, companies in frequently targeted industries — peer-to-peer marketplaces, social media, dating — should collaborate with financial institutions and regulatory bodies to share information and best practices for fraud prevention to combat emerging threats.

Moving forward safely with FedNow

With the launch of FedNow, the impact of real-time payments highlights the need for collaboration and proactive measures to ensure the security and integrity of the payment system. With a collaborative approach, we can create a safer and more secure environment for all users and ensure that the risks of fraud do not overshadow the benefits of instant payment systems.

About the author

André Ferraz is founder and CEO of Incognia, a private identity company offering a location-based behavioral biometrics platform for mobile fraud detection and anonymized location insights.

DISCLAIMER: Biometric Update’s Industry Insights are submitted content. The views expressed in this post are that of the author, and don’t necessarily reflect the views of Biometric Update.

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