FedNow Pros and Cons: How will it affect fraud prevention? (2024)

Before we dive deeper into FedNow, let's take a step back and think about how critical instant payments are in today's economy. In our fast-paced modern world, the demand for real-time transactions has skyrocketed, and service providers have risen to meet that demand. To date, instant payment networks have been adopted in over fifty countries around the globe.

For businesses, instant payments mean quicker access to cash flows, allowing for increased efficiency and agility in operations. For consumers, instant payments mean the ability to transfer money in real-time, providing convenience, speed, and the opportunity to manage their finances more effectively.

All things considered, the advent of a service like FedNow signifies a significant shift in the financial landscape, catering to the modern economy's need for speed and efficiency.

But while instant payments are important and FedNow may prove very useful, the launch of FedNow also raises lots of questions regarding fraud prevention. In particular, given the immediate nature of the transactions, the window to identify and prevent fraudulent activity gets a lot smaller.

This could potentially give rise to new kinds of fraud and scams, making FedNow and fraud prevention a hot topic right now for financial institutions, businesses, and consumers.

Now, let's do a deeper dive into what exactly FedNow is and how it works.

FedNow is a service brought to life by the Federal Reserve for instant payment processing. It operates on a real-time gross settlement (RTGS) system, which means that transactions are processed one at a time, the moment they are initiated, without grouping them together or waiting for a particular time of day.

This is a departure from traditional banking systems which usually batch payments and process them at specific intervals. In the FedNow system, each transaction is complete within seconds, enabling users to have instant access to their funds 24/7, 365 days a year.

This marks a significant shift from the typical 1-3 business days waiting period associated with conventional money transfers. It makes FedNow a real-time payment (RTP) system, designed to meet the needs of today's fast-paced economy. There are no more waits associated with batching or the business hours of financial institutions.

Beyond just speed and accessibility, FedNow also features a series of built-in security measures. These include encryption technology to protect transaction data and identification protocols that are intended to verify the authenticity of each transaction.

As we've mentioned above, the FedNow service boasts several noteworthy features that set it apart from other payment systems. Let's recap the most important features:

1. Real-time Transactions: FedNow operates on a real-time gross settlement system that processes transactions individually and immediately, eliminating the wait associated with batch processing and banking hours.

2. 24/7/365 Accessibility: Accessibility is a cornerstone of FedNow. It's designed to be available around the clock, ensuring users can access their funds and make transactions anytime they need to, including weekends and holidays.

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3. Security: The system uses encryption technology to protect transaction data, and it has identification protocols that are intended to authenticate each transaction.

4. Interoperability: FedNow is designed to be interoperable with existing banking systems and payment networks, which means it can work seamlessly alongside other financial infrastructure. This makes it easier for various financial institutions and businesses to adopt and integrate with FedNow.

These features make FedNow an innovative and potentially game-changing addition to the financial landscape.

FedNow brings a host of potential benefits with it, both for businesses and consumers as well as for the global financial ecosystem.

Impact on Consumers and Businesses

The launch of FedNow is poised to bring a seismic shift in the transactional experiences of consumers and businesses alike.

For consumers, real-time transactions mean no more waiting for checks to clear. Whether it's money from a friend, salary from an employer or a refund from a retailer, funds will be available instantaneously. This could be particularly beneficial in emergency situations where access to funds is urgent.

For businesses, FedNow can bring streamlined processes and improved cash flow management. With immediate payment receipt, businesses would no longer need to worry about cash flow delays associated with pending transactions. Having the ability to send and receive payments at any time can also facilitate smoother business operations and foster better relationships with suppliers and customers.

Overall, the impact of FedNow on consumers and businesses could be very positive, fostering a more accessible and efficient economic environment.

The Role of FedNow in the Broader Financial Ecosystem

It's important to note that FedNow is more than just a new payment system—it has the potential to be a very impactful piece of the broader financial ecosystem. By providing instant, round-the-clock payment services, FedNow could redefine how money moves within the U.S. financial system. It could break down traditional barriers of banking hours and batch processing that have often hampered the flow of money.

Because it's available to institutions of all sizes (more on this in the next section), FedNow will also give previously underserved segments of the society access to instant, secure payment services.

In essence, anyone banking with an institution that has adopted FedNow will be able to enjoy its advantages.

And good news: FedNow is accessible to all federally insured depository institutions. This includes commercial banks, savings banks, savings and loan associations, as well as credit unions. The Federal Reserve has underlined that institutions of all sizes will have equal and direct access to the service.

This means that even small community banks and credit unions can participate alongside the large national banks, promoting competition and enabling better services for consumers.

The Federal Reserve has adopted a phased approach for the rollout of FedNow.

The initial phase focuses on ensuring the basic functionality of instant payment services. Users will be able to send and receive instant payment messages through their banks, with additional features such as request-for-payment and remittance information planned for future releases.

The next phase will enhance the service's features and its compatibility with existing banking and payment systems, aiming for a seamless integration process. Additionally, the Federal Reserve will work closely with financial institutions and service providers during this period to ensure smooth adoption and transition.

The final phase will see FedNow becoming a fully functional, ubiquitous payment service.

The Federal Reserve is engaging in a comprehensive communications strategy, including education and outreach activities, to inform stakeholders about the features and benefits of using FedNow.

This phased approach allows the Federal Reserve to test, refine, and improve the system based on feedback and operational experience before it becomes widely available. It also enables financial institutions and service providers to gradually adapt to the new system, minimizing potential disruptions.

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.

The role of advanced technologies in fraud detection and prevention

The stakes are high to maintain the security and integrity of the FedNow system. It's critical that we as a fraud prevention community leverage advanced technologies to protect consumers, businesses, and institutions in this new era of expanded instant payments.

Fortunately, while FedNow is new, real-time payment systems aren't, and fraud prevention professionals have long been developing technologies and strategies for dealing with instant payment fraud.

To enable safe and secure instant payment, it's necessary to put technologies in place that can help verify users and quickly verify transactions while introducing minimum friction for users. That’s where location intelligence comes into play.

For example, a user who typically makes transactions from their home address in Santa Monica probably won't suddenly start sending large amounts of money from an industrial street address in Moscow. Incognia's research shows that most people handle sensitive transactions from trusted locations like their homes or workplaces.

This makes a location signal like Incognia's a powerful tool for authentication and for identifying risky transactions. That being said, the value of location intelligence doesn't stop there. Incognia's location technology can also identify patterns in confirmed fraudulent activity and use those patterns to stop future fraud before it happens.

Incognia's location fingerprint is tamper and phishing-resistant

A user's location behavior is a powerful signal that can be used to protect them from fraud. Leveraging this signal makes Incognia resilient against vulnerabilities that make other modern fraud prevention tactics less effective.

Incognia uses a fusion of signals—not just GPS or IP address alone, which are both vulnerable to tampering—to create a location fingerprint that's 17 times more unique than FaceID.

Because Incognia's location fingerprints aren't vulnerable to spoofing or reproducible by fraudsters, they're also phishing-resistant. Even if a user gives up their credentials to a phishing, vishing, or social engineering scammer, location-based authentication can still flag that fraudster's login as suspicious and stop them from making unauthorized transactions.

The launch of FedNow comes with many potential benefits for consumers, businesses, and institutions, but it also comes with some major risks.

To combat the increased risk that comes with widely-adopted instant payments, advanced technologies like location intelligence should be used to detect and prevent fraud. Incognia's location intelligence solution uses highly-precise location data and a proprietary device fingerprint to authenticate users before they make a transaction. Our solution also preemptively identifies risky users and devices before fraud happens so that you can keep them from hurting good users. This ensures consumers can stay safe while enjoying the convenience of real-time payments.

Real-time payments are supposed to make our lives easier, but they can also make us more vulnerable if we aren't careful. While many consumers have a healthy level of skepticism when it comes to online payments and securing their personal information, it isn't their job to stay up to date on the rapidly evolving landscape of fraud and social engineering tactics.

That's why having a robust, tamper-resistant solution like location intelligence in place is a basic necessity for maintaining safety and security in the post-FedNow world.