FedNow instant payment: what are the opportunities and risks for your business?

fednow instant payment risks

Last modified on November 30th, 2023

Instant payments are on the rise! In 2022, they amounted to $195 billion — a 63% growth from 2021. But with new payment services come new threats! And Fednow instant payment risks shouldn’t be underestimated. India, a pioneer in the field, has seen a 23% rise in its real-time payment fraud in 2022. Keep reading to learn about the risks that come with using FedNow.

Trustpair provides ongoing account validation that eradicates the risk of fraud, even for instant payment. It’s the ultimate barrier to FedNow instant payment risks. Contact an expert to learn more!

New call-to-action

Why is payment fraud the main risk of FedNow instant payment?

The main threat of using FedNow and other instant payment methods is their irrevocability. Once your funds are sent, you cannot get them back.

That’s true for ACH payments and wire transfers too, but Fednow real-time payment (or RTP) makes it even more dangerous.

Fraudsters have understood this presents an advantage to them. If they can get their victim to send funds, they will themselves disappear instantaneously!

That’s why we’ve seen a rise in Authorized Push Payment (APP) fraud. In this type of fraud, criminals use impersonation and social engineering techniques to get their unsuspecting victims to wire them some funds instantly.

One common scheme is someone texting pretending to be your son or daughter who lost their phone and needs “urgent money”. The victim willingly sends the money and never hears back again from the perpetrator.

Since FedNow services and instant payment methods are cleared out in a matter of seconds, nothing can be done to retrieve the funds.

In the B2B world, fraudsters impersonate different people (your CEO, various institution officials, etc.) but make the same request: they want money.

With B2B fraud on the rise already, faster payment service has become a new market for fraudsters to exploit

In short, Fednow instant payment risks give you an even smaller reaction time if you encounter fraud.

As FedNow services only started rollout in July 2023, most financial institutions aren’t yet up to date with those latest schemes.

Security might be lacking on their end. At the very least, it needs some getting used to, and professional scammers leverage this hesitation for their own gain.

 

How to block fraud risks for FedNow instant payments?

To counter Fednow instant payment risks, you need an adequate risk detection and prevention system.

Increase internal safety protocols for payment methods

Starting to use instant payment methods might be the perfect opportunity to review your current internal controls process. Who approves payments? What control mechanisms do you have in place?

Fednow will force you to upgrade your internal safety protocols. It’s important to review them periodically to ensure they’re still relevant — and efficient!

Another way to better protect yourself against Fednow instant payment risks is to give ongoing training to your employees. Train them to double-check any request to change your supplier’s credentials for example, as this could be a sign of vendor fraud.

Your finance, accounting, HR, and procurement employees should know how to recognize the red flags of fraud — and what to do when they arise.

Implementing the 4-eye method (having two people approve a payment) is also a good way to introduce a pause to increase security when using an instant payment service.
Increasing your safety through your teams is essential to counter Fednow risks, but it’s not sufficient.

Using anti-fraud software

To ensure you aren’t falling victim to payment fraud, you should always check your vendor’s financial information before sending any transactions.

This helps you with compliance with US laws, but it also protects you if hackers get access to your or your suppliers’ email accounts. It prevents you both from being unknown participants in money laundering or other illegal activities.

This is the only comprehensive way to prevent third-party fraud.

While your teams could do it, humans are fallible, and they cannot possibly spend their time constantly checking your supplier’s bank account information for fraud. It’s very time-consuming to do manually, especially as in-depth information isn’t easily available.

That’s why Trustpair exists! Our anti-fraud software helps you prevent and detect third-party fraud.

Your supplier’s financial information is checked automatically before any transaction is sent to their account. We have access to international databases and work with many companies sending cross-border payments.

Real-time check is the only protection that makes sense with real-time payments!

While some help is provided by banks and financial institutions, they cannot fully protect consumers against the risk of third-party fraud, especially when victims are the ones authorizing transactions.

Using Trustpair means you can have all the advantages of quick payments while being completely secured in your procure-to-pay process. We also help secure instant ACH payments and other payment methods.

 

FedNow instant payment: a quick reminder

FedNow is an instant payment service developed by the United States Federal Reserve Bank (also called the Fed). After years of working on this new payment system, it was first rolled out in July 2023.

35 banks and 16 credit unions took part in this soft launch, with the plan to onboard more financial institutions as time goes on.

The goal? Enable faster payments for businesses and consumers in the United States.

Sending and receiving funds within 10 seconds presents many advantages for both parties:

  • 24/7 availability, as FedNow works all day long, all year round, without needing intervention from bank employees. It presents similar advantages to credit cards, without the hefty fees.
  • Instantaneous clearing of funds even between financial institutions (as long as they adhere to the Federal Reserve system), which would normally take 1-2 business days for ACH payments.
  • Real-time cash flow management for customers and companies, making it a good liquidity management tool for both parties.

For the Federal Reserve Board, creating a government-backed system had become a necessity to offer alternatives to private sector services like Venmo, Zelle, or PayPal.

It also aims at aligning the US with other countries that have been developing instant payment services for years, such as European countries, the UK, India, and Brazil.

The Fed supporting the development of the real-time payment service industry in the US gives it more legitimacy. In the current economic climate, users will also appreciate the increased liquidity it provides.

 

To sum up,

Instant payment methods are both a threat and an opportunity for businesses. With Trustpair, you can make the most of these innovative payment systems while being protected from end-to-end in your payments. 

FAQ

The main threat of instant payment is that it will shorten your reaction time in case of scams. The funds are cleared and settlement happens within ten seconds, and there is no way to get them back.

Faster payment transactions cannot be recalled. In case of fraud, your business will unfortunately have to assume the loss.

Manage the risks related to corporate treasury.

Receive our latest news

Subscribe to the Trustpair Newsletter and receive advice every week…
Thanks ! Your subscription to the Trustpair newsletter has been taken into account.

        By clicking on “Subscribe”, you agree to receive the Trustpair newsletter to be informed of news or important information about our services. By subscribing, you agree to our Privacy Policy.

newsletter-icone

Related Articles