Over the past fifteen years, the financial landscape has undergone a profound transformation in payments – from slow cheque clearances to instant credits, and from fixed payment windows to on-demand, round-the-clock transactions across multiple channels.
While these advancements have significantly enhanced consumer convenience and transaction speed, they have also opened doors for increased financial fraud and money laundering, exploiting the immediacy and reduced friction in modern payment systems.
As consumers worldwide demand quicker and more convenient payment options, both domestically and internationally, financial institutions face a critical challenge: how to balance speed and safety effectively to meet these demands while preventing fraudulent activities.
The global journey of instant payments
The Council of the European Union recently mandated the availability of instant payments in euros across EU and EEA countries. This regulation requires all payment service providers (PSPs) to enable consumers and businesses to send and receive euro payments within 10 seconds, 24/7, throughout the EU and EEA.
The EU began its journey with instant payments in 2017 with SEPA instant credit transfers, initially adopted by a limited number of banks. As demand grew and the benefits of immediate settlements became evident, the EU expanded this initiative, culminating in the recent regulation for all PSPs to facilitate affordable and accessible instant payments across the region.
Globally, instant payments have reshaped the financial service landscape in several countries, such as the UK’s Faster Payments, India’s IMPS, Africa’s Rapid Payments Program (RPP), and Brazil’s Pix. Similar systems like Australia’s New Payment Platform (NPP), the US’ FedNow, and Canada’s upcoming Real-time Rails (RTR) are also poised for significant impact.
Speed and convenience vs. the risk of accelerated fraud
Instant payments execute transactions in real-time, often delivering funds to recipients within seconds. However, this immediacy poses a risk: fraudulent transactions can be completed before consumers have a chance to intervene, leading to swift loss of funds and complex recovery processes.
Authorised push payment (APP) fraud, where consumers are deceived into authorising payments to criminals, has become prevalent worldwide. Criminals exploit various tactics, including identity theft and social engineering, to manipulate unsuspecting individuals into transferring funds. Once transferred, funds are swiftly moved across multiple banks and jurisdictions, making recovery nearly impossible.
Mitigating fraud in real-time
While traditional payment fraud prevention methods have evolved over the past decade, instant payments present unique challenges due to the sheer volume and speed of transactions. Technologies like Confirmation of Payee (CoP) in the UK, Verification of Payee (VoP) in the EU, and IBAN name confirmation are being implemented to enhance fraud prevention by allowing consumers to verify payee details before authorising payments.
However, combating fraud in instant payments requires multi-layered approaches. Advanced fraud detection systems leverage machine learning models to analyze data from various layers – network, device, application, and account – to detect anomalies indicative of fraudulent activities before payments are executed. Behavioral biometrics tools track user interactions during transactions, identifying suspicious behaviors such as device hijacking or unusual transaction patterns.
Emerging regulatory frameworks, such as the UK’s PSR3 regulation, which mandates shared liability between sending and receiving banks for APP fraud losses, are setting precedents globally. This shift necessitates recipient banks to monitor incoming payments for fraud, marking a significant shift in fraud prevention strategies.
Looking ahead
As instant payments continue to gain momentum globally, collaboration among banks, regulators, and industry stakeholders is crucial to develop standardized frameworks and best practices for fraud prevention. Establishing uniform approaches across jurisdictions will be essential to effectively combat evolving fraud tactics and safeguard consumer interests in the fast-paced world of instant payments.
Source: fintechfutures.com
