Fraud is not a new concept; fraudsters remain dynamic with their tactics to stay ahead of the financial landscape. Payment methods like real-time payments (RTP) that offer rapid delivery and access to funds present increased problems for issuers seeking to mitigate fraud losses through prevention and detection, making the process of fraud resolution and recovery more important than ever.
As issuers adopt instant payments, it is crucial to evaluate the fraud management processes in place and determine whether account holders have the necessary support channels for disputing and resolving RTP fraud claims.
According to John Dunne, Former Chief Solutions Officer and author at Integrated Research, “Once you move over to a real-time model, there’s typically only a six-second window to decide if a transaction will be authorized.” In terms of fraud rules and the level of complexity behind these rules, there is only so much that can be done during those six seconds, Dunne adds.
A UK Finance report showed victims used the nation’s Faster Payment Service (FPS) in 98% of fraud cases to make authorized push payments in the first half of 2021, while the service also accounted for 92% of fraud loss value in the same period. In Quavo’s 2023 Executive Outlook, CEO and Co-Founder Joe McLean stated, “Fraud is an ever-evolving game between banks and fraudsters seeing what they can tackle next. With regards to these new payment types, fraudsters are certainly looking at RTP and Zelle®…”
Quavo’s McLean added, “Fraud is only going to get worse. People are not going to want to use their money and send money for a transaction if there is no guarantee they will receive the expected goods. Right now, most P2P transactions are people shipping money to one another, but if there is an expectation that this new transaction type will grow and serve as a global retail payment method, there must be rules for consumers to feel secure enough to adapt the service.”
One of the biggest concerns with real-time payments is account takeover fraud. In this type of fraud, a criminal gains access to a victim’s account and then initiates a real-time payment to themselves or another account. The challenge for issuers? How to prove liability to recover the funds to the victim.
Fraud Happens. Now What?
The adoption of Zelle® by some of the nation’s largest banks has provided a cautionary tale for RTP fraud loss mitigation. In a recent PaymentsDive article, editor Lynne Marek emphasizes that the central bank is zeroing in on fraud prevention efforts. Yet, fraud prevention does not stop at alerts and detection. Instantaneous, irrevocable payments may increase the speed and efficiency of the transaction, but it also equates to the inability to control fraud.
Financial institutions are solely responsible for handling the fraud and dispute investigation process and typically resort to a chargeback-centered approach. But without a clear path to determining liability in RTP and P2P fraud cases, these transactions will only increase the risk for issuing financial institutions that support these transactions.
As unresolved claim volumes build, issuers face problems even before litigation—problems such as non-compliance, regulatory issues, and dissatisfied customers. The question issuers will increasingly face will be whether the risks of these pseudo-unregulated, new transaction methods outweigh the benefits to account holder experience.
The Future of RTP for Issuers
Despite the risks of fraud and dispute management issues evidenced by Zelle®, the financial industry is leaning into RTP with the launch of FedNow. The Federal Reserve developed the instant payment infrastructure to allow financial institutions of every size across the United States to provide safe and efficient instant payment services. Financial institutions and their service providers can use the service to offer innovative instant payment services to customers, and recipients will have full access to funds immediately, allowing for greater financial flexibility when making time-sensitive payments.
The FedNow Service will be facilitated by The Clearing House (TCH), a financial institution owned by several large banks in the U.S. Similarly, Zelle® is owned and operated by Early Warning Services, LLC, which is co-owned by seven of the nation’s big banks. As we launch another iteration of Zelle® through FedNow, this begs the question: What lessons did we learn from Zelle® to mitigate fraud losses? Are these institutions that offer RTP prepared for the operational and customer service challenges inherent to offering RTP to account holders?
Despite the lack of a central authority responsible for RTP dispute litigation, issuers can best mitigate risk by leveraging technology and third-party expertise, namely automated fraud management platforms capable of investigating and identifying where the culpability lies to best protect themselves when litigation is less than straightforward.
Concerned about the operational and financial impact RTP will have on your institution? Contact our Experts to learn about our Disputes as a Service™ offering and how it can keep RTP from disrupting internal operations and customer experience.