While FedNow represents a significant advancement in the transactional experiences of consumers and businesses, its real-time nature also brings some challenges, particularly in terms of fraud prevention.
In comparison to traditional payment methods, with instant payments there's a very small window to detect and prevent fraudulent transactions before the funds are irrevocably transferred. This makes the system appealing to fraudsters.
The US can learn a lot from the rollout of instant payment systems in other countries. For example, in 2020, The Central Bank of Brazil launched an instant payment system called Pix.
Our company has roots in Brazil, so the Incognia team has had a front row seat to learn about the fraud risks that come with launching real-time payment systems. Here's a summary of what we've we've learned:
Incognia’s insight from the launch of instant payments in Brazil
One of the biggest things we learn from the release of Pix is that instant payment systems make account takeover, social engineering, and device theft more valuable for fraudsters than ever.
Why is that? If a fraudster gets access to accounts set up with instant payments, that can mean big payouts for them.
This prospect of major financial gain makes them highly motivated to phish for credentials, steal devices, or do whatever else it takes to gain access to these accounts.
The main fraud challenges associated with FedNow
FedNow's real-time payments offer many advantages, but they also create unique fraud challenges.
The instantaneous movement of funds means there will be little to no time for traditional fraud detection methods to identify and halt suspicious transactions. Fraudsters will certainly try to exploit this quick transfer of funds, executing fraudulent transactions before banks or customers notice the discrepancy.
Moreover, the wide access to FedNow also means a broader attack surface for fraudsters. As more financial institutions, businesses, and consumers use the service, the potential for fraud increases. It's essential for all parties involved to understand the risks and have the right preventative measures in place.
Lastly, it's important to consider that this initial transition phase as FedNow launches will likely be exploited by fraudsters. While institutions and the public are learning and adjusting to the new system, bad actors will take advantage of security flaws or gaps in understanding and awareness to commit fraud. Down the road, transitions periods for the future phases of the rollout will also create new opportunities for fraudsters to capitalize.
These challenges underscore the importance of developing and implementing advanced, real-time fraud detection and prevention strategies in the era of instant payments.