FedNow Fraud: how to safeguard your business

fednow fraud

Last modified on April 19th, 2024

FedNow was created by the U.S. Federal Reserve as a real-time payment provider in 2023. It was created for businesses and consumers so they can make instant payments in a matter of seconds. However, even though FedNow fraud offers many advantages to businesses, it also presents a set of challenges, like increased fraud. Read on to find out how FedNow fraud occurs, the impact of it, and how you can prevent FedNow fraud in your business. 

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What is instant payment fraud?

Instant payment fraud is a scam involving real-time transactions. Funds are sent fraudulently to the wrong beneficiary, using an instant payment method like FedNow or RTP.
In a business, this can include false vendors submitting invoices – this is called vendor fraud -, which are paid using instant methods. It can also include CEO fraud via instant payment.

Without verifying that the account details match up to the identity of your true vendor, companies risk falling victim to payment fraud.

 

How does FedNow fraud happen?

Fraudsters take advantage of the instant factor to FedNow’s payment process and put pressure on victims to comply without checking the payment details. Scammers can change banking details for their own and receive payments via the FedNow service.

By impersonating someone else and asking victims to pay via FedNow, fraudsters benefit from the fact there is no account validation feature. This means that their identity could be completely different from the person or company they’re pretending to be, and the victim would have no way to check.

If you have made a mistake, the instant nature of the payments means that you can’t access or recall your funds or get your bank to freeze the transfer. You need to be certain you’re sending the funds to the right beneficiary because the minute you click the send button it’s too late as the instant payment is gone.

To compensate for this faster payment method, The Federal Reserve charges fees of $0.045 cents on payments made using FedNow services.

 

What is the impact of FedNow fraud?

Financial damage

If fraudsters successfully deceive the victims, financial damage is often caused to the business.

In 2022, it was reported that U.S. companies are suffering losses of an average of $300,000 each year due to invoice fraud.

Disruption to operations

Operations could be impacted slightly or entirely depending on the type of fraud and the damage caused.

For example, as soon as fraud is recognized, companies tend to freeze their bank accounts while an investigation is launched. This impacts payments to other vendors preventing you from making further purchases and disrupting the supply chain.

Reputational damage

Once word spreads that you have been a victim of fraud, it could put off other vendors or third parties from working with you.

Our most recent fraud report found that two out of three companies (66%) would stop doing business with an organization if it became a victim of payment fraud and lost its payment.

That is why it is so important to operate FedNow fraud protection methods.

 

How can you prevent it from happening?

There are several FedNow fraud prevention methods that businesses can apply.

Training and Awareness

Training from management teams can display the ways that FedNow fraud and other instant payment frauds are occurring, as well as raise awareness about it.

Education surrounding instant payment frauds should also ensure that you’re always paying the right beneficiary when you’re transferring funds.

Additionally, there should be training offered on how to deal with fraud if you do get caught out. This includes the next steps for workers so it can be reported, and put right if possible before any further fraud occurs.

To ensure that all staff members are on the same page, businesses can share the FraudClassifer model. This helps to outline different types of fraud and how they came to be. It is a useful tool to share with your employees to provide a holistic picture of fraud and helps ensure that everyone’s definition of fraud is the same.

Use of fraud prevention software

We believe that the use of algorithms in the detection of suspicious activity and patterns forms a great part of a plan to fight payment fraud.

Fraud prevention software like Trustpair offer integrations with B2B tools that can help you protect your entire P2P chain. This includes procurement tools, Enterprise Resource Planning (ERP), and TMS.

Trustpair is one of the solutions to prevent payment fraud like FedNow fraud. It consistently checks third-party and vendor data in real-time and monitors transactions. This highlights any suspicious activity to enable your business to be one step ahead of fraud at all times.

Set internal controls

Internal controls can help organizations with fraud prevention, as they act as rules of operations. For example, management teams could set access and authentification rules to prevent unauthorized access to sensitive financial information.

One internal control may be that only approved employees may submit payments through the FedNow system. This ensures that the approved persons have had the proper training and can spot the red flags of FedNow fraud.

Know Your Supplier (KYS) is a part of the due diligence process. It involves:

  • Verifying the legal identity of a vendor or supplier
  • Assessing the financial risk of a vendor, such as debts
  • Evaluate the operating risks of working with suppliers – who their owners are and who they work with

Businesses can use KYS as an internal control, enforcing the system even when external regulation doesn’t. This protects companies against FedNow fraud as they can take the time to assess the risks of a FedNow recipient and double-check that their account details match up with their identity.
A risk assessment is a good place to start.

This can help businesses audit their operations and develop the controls required. For example, many global institutions will enforce the 4 eyes principles to ensure that financial processes are overseen by at least two separate people. This prevents insider siphoning of company funds to themselves, via FedNow.

Trustpair’s services offer 100% security and prevent instant payment fraud by constantly checking third-party data and monitoring transactions. Request a demo to learn more!

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Recap

Instant payment fraud can happen to any business, and as FedNow gets more popular FedNow fraud will likely increase. It can impact operations, and cause financial and reputational damage. To attempt to prevent it, train your staff about it and how to spot it, audit vendors, and use AI solutions like Trustpair that fully prevent payment fraud like FedNow fraud from occurring.

FAQ

No, FedNow does not have fraud protection in-built. It is the responsibility of the business or organization to train staff, use internal controls, and use AI tools to mitigate and prevent payment fraud.

This is up to the banks. Banks and credit unions are free to use the FedNow service if they wish, though it is not necessary if they do not wish to.

Our fraud prevention and detection system helps companies avoid every electronic payment fraud, including FedNow fraud, ACH fraud, and wire transfer fraud. Our software monitors vendor data continuously to detect any anomalies before payments are made. We have access to multiple external banking data sources and can audit in real-time beneficiary information (bank account number, company ID, and localization). This means all your transactions will be 100% secure, including FedNow payments.

Our services also include access to detailed risk analytics, extensive customer support, real-time warnings in case of risky situations, and customized workflows. Our fraud detection system will help your business handle risk management better and your financial teams gain time and efficiency, on top of keeping your funds safe.

Manage the risks related to corporate treasury.

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