The Risks of Real-Time Payments: What to Know for Your Business

Morgan Ackley | Tuesday, October 10th, 2023 | 5 minutes

The Federal Reserve has just launched a new real-time payment option called FedNow. Essentially, this is a way to send and receive money instantly. And while this new payment offering is exciting and convenient for both consumers and merchants alike, it comes with new challenges.

If you’re considering accepting FedNow payments, or any other real-time payment method, make sure you’re aware of the risks. Understanding what’s at stake can help you better adopt new payment options without bringing harm to your business.

What are Real-Time Payments?

Real time payments are bank-to-bank transfers that happen instantly. It’s the digital equivalent of cash. Once a buyer sends a payment to a seller, the money belongs to the seller — available to use immediately. There isn’t an option for a payment reversal.

What is FedNow?

FedNow is a new real-time payment option developed by the US Federal Reserve. It’s similar to existing payment types such as Zelle (US), Faster Payment Service (UK), PayNow (SG), and more. If a consumer uses FedNow to pay for goods, you’ll receive funds available for immediate use.

What Instant Payments Mean for You and Your Fraud Management Strategy

Maybe you already accept real-time payments or bank-to-bank transfers — such as ACH payments. Or perhaps you’re considering offering more payment options to your customers. Regardless of your situation, here’s what you need to know.

1. Faster payments require faster screening.

With instant payment, you have to be able to make approval and decline decisions in less than a second. You don’t have time to conduct manual reviews to screen for fraud. You need technology that can process data and make intelligent decisions in milliseconds.

What can you do?

If your business currently does manual reviews, consider setting up custom policies for orders using an instant payment method. You can decline anything you'd normally review and ask for an alternate form of payment or require further verification protocols, such as step-up or multi-factor authentication.

2. Payments are irreversible.

As a merchant, you already have to scrutinize traditional card payments. After all, you want to make sure you’re not accepting money from criminals or fraudsters. However, if fraud does happen or something goes wrong with the transaction, you can reverse the payment.

However, real-time payments require even more screening because payments are not reversible. You don’t have room to make mistakes.

For example, if you accept a payment from a criminal laundering money, there’s no way to undo the damage that’s been done. And that could put your business at risk of failed compliance, penalties, and other consequences.

What can you do?

The key to minimizing risks with instant payments is to increase your fraud screening protocols. You’ll want to perform risk assessments for everyone who touches the transaction — including the customer and any financial institutions involved.

It comes down to having the right protections in place. Ask yourself if your current tools and technology are robust enough to determine:

  • If the person you’re doing business with is a real person.
  • If the data elements provided match the historical data associated with the person.
  • How risky the person is.
  • If the financial institutions involved are legitimate and trustworthy.
  • The likelihood that the transaction is fraudulent.

With the right combination of data and technology, you can identify who is trustworthy and who isn’t — all within a matter of milliseconds.

3. Fraudsters will target instant payment accounts.

Fraudsters always come up with schemes to steal money or account credentials from unsuspecting victims. And it’s no different with instant payments. As more consumers open accounts with instant payment providers, the more opportunities there will be for fraudsters.

Common schemes include phishing or impersonation scams, rental scams, lottery scams, and jobs scams. The goal of each is to trick users into giving out login credentials or account numbers by posing as an authority figure. Once fraudsters get access to account information, they can easily make unauthorized purchases with your business.

Additionally, fraudsters may request payments on behalf of a seemingly legitimate business, then pocket the money.

What can you do?

You have the power to decide who and how you do business with customers. Consider requiring customers to make an account with you if they want to make non-traditional card payments. Don’t allow guest checkout for these kinds of transactions. If you know the customer, there’s less risk for criminal fraud.

From there, you can increase account protection to reduce the likelihood of fraudsters hacking into customer accounts. For example, you can add multi-factor authentication or step-up authentication protocols when a customer logs in from a new device or location.

4. Customer and supplier expectations are growing.

As more payment options enter the market, customers who are quick to adopt them will expect businesses to do the same. Likewise, suppliers and vendors you work with might start expecting faster payment for services.

However, making any change too soon can potentially be harmful to your business.

What can you do?

Before you make any hasty decisions, evaluate the technologies and fraud tools you’re currently using. And audit your existing strategy.

Are you willing to accept that risk to meet consumer demand? Is your business in a healthy place to do so? Do you have proper risk management controls in place?

If you’re already having difficulties managing fraud and chargebacks, it may be time to upgrade your software or find a different provider before you add a new payment option.

Next, communicate with your vendors and suppliers. Let them know what your expectations and limitations are.

5. Managing your cash flow is crucial.

Instant payments give you the ability to make and receive payments in real time — 24 hours a day, seven days a week. You can use funds as soon as you receive them, which may allow you to use your cash more freely.

However, these payments could have a major impact on your cash flow — for better or for worse. Before you jump into anything new, consider how this might affect your business’s liquidity and your relationships with vendors.

What can you do?

Evaluate your current situation. You need to be in a strong financial position already to take on additional risks. If you’re struggling, accepting a new form of payment might not be the best idea.

If your business is in a good place, work on an implementation plan. You’ll have to adjust your cash flow models to account for quicker payments and potentially less available cash.

Technology That Can Do it All

It might seem like there's more risk than reward for instant payments. And it is important to recognize what you're up against. However, that doesn’t mean you shouldn’t accept these types of payments. You just need a fraud management strategy that is as agile as your payment strategy.

The best way to create a complete strategy is to use technology that can address these instant payment risks and more. If you’re going to start accepting instant payments, Kount can help. FedNow is new, but Kount has been protecting direct bank transfers and other real-time payment methods for years. We know the risks that come with these payment types, and we can help you adopt them safely.

Schedule a call with our team to learn more.

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Morgan Ackley

Content Strategist

Morgan has worked in the tech industry for over 5 years. Her breadth of knowledge and curiosity about technology and all things fraud-related drive her to craft compelling, educational pieces for readers seeking answers.


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