Helping Corporate Customers Mitigate Fraud: How Financial Institutions Are Planning for the Rise in Real-Time Payments and Disbursements
by Eric Foust
The COVID-19 pandemic spurred large corporations and small businesses alike to double-down on their plans for adopting real-time payments. It also created a prime opportunity for financial criminals. Indeed, faster payments mean faster fraud attempts.
Eighty-five percent of the nation’s financial institutions (FIs) expect fraud attacks to increase as the volume of real-time payments increases, according to Aite Group research. But FIs and businesses aren’t the only entities facing heightened fraud risk. The government, tasked with distributing billions in pandemic relief and economic stimulus payments, has had to overcome serious payment fraud challenges.
Despite fraud concerns, however, the adoption of real-time payments is continuing to gain momentum in the United States—and the tide will continue to shift more rapidly.
Today, several real-time payment options are available. The convenience of person-to-person (P2P) payments, in particular—via both third-party apps and native banking solutions like Zelle®—is fueling consumer demand for faster payments. As P2P transactions become the norm among consumers, we’re seeing an uptick in real-time disbursements as well – for example, in 2020 corporations and government entities sent more than $1.5B to consumers via Zelle® Disbursements
I participated in an American Banker webinar, joining representatives from Aite Group, J.P. Morgan Chase and BNY Mellon. We discussed the current payments landscape, fraud trends and investment priorities, lessons learned from the government’s response to the pandemic, and best practices for implementing real-time payments for corporate customers. In this blog post, I’ll share a summary of our discussion.
The payments landscape is experiencing a sea change.
To provide context for the webinar roundtable, panelists explored the real-time payments landscape and associated fraud trends.
The big news? Paper checks are on the decline for the first time. Checks now account for less than 50% of the total business payments1, according to Aite Group—and faster payments are becoming the preferred payment method.
Forward-thinking FIs and businesses are starting to incorporate an array of real-time payment methods into their payment strategies. Zelle® transactions, for example, can be processed through various settlement systems (or payment rails), including the RTP® network from The Clearing House and ACH. Relatively new push-to-card rails (which “push” funds directly to the consumer’s credit or debit card account) offer yet another real-time payment option. For both corporate and government customers, ACH is the preferred method for consumer disbursements.
The use cases for real-time payments and disbursements are proving to be important and differentiated. In some industries, companies that don’t get started now with faster payments will soon be at a competitive disadvantage. For FIs serving corporate and government customers, this is an important trend to keep in mind.
What’s causing the uptick in real-time payments?
Real-time payments can have a significant impact on customer satisfaction and product differentiation. There is a dramatic improvement over checks with real-time payments due to the fast, easy customer experience. There’s no need to drive to the bank to make a deposit or even bother with using mobile capture on a phone. And there’s no waiting period for the funds to clear.
In addition to those customer-facing benefits, real-time payments streamline business operations. Reducing payment exceptions and improving cash flow, for example, add to the overall payments experience—making the process better for everyone.
COVID-19, of course, has also played a big role in accelerating the use of real-time payments. The shift from paper to digital payments has been top of mind among FIs for quite some time. But the pandemic created an immediate and vital need for faster payments.
Government disbursements are the most obvious use case. But the pandemic also added urgency to the need for payments going to businesses, such as real-time bill pay. Faced with the economic fallout of the pandemic, even a small number of payments in real-time can make a difference in the health and vitality of a small business.
Many corporations and government entities that began using faster payments to address urgent needs now recognize the value it brings for everyday transactions.
Real-time payments are impacting fraud prevention trends.
Fraudsters are also taking advantage of the unique opportunities real-time payments present: it’s available around the clock, it’s fast and it’s anonymous.
Once financial criminals gain access to funds, FIs only have a small window of time to prevent the theft. Indeed, the clock is ticking as fraudsters act quickly to shuffle and launder the money, making it extremely difficult to track. Consider this:
- Eighty-one percent of FIs experienced attempted or actual payments fraud in 20192
- FIs are anticipating an increase in fraud due to real-time payments3
The good news is that most digital payment technologies provide risk mitigation capabilities that go beyond what FIs were doing historically. In fact, fraud mitigation is a big reason companies are adopting new digital solutions.
As FIs prepare to go live with their faster payment offerings—and think about how to help corporations reduce fraud risk—transaction monitoring is becoming a top priority. Many FIs are focusing on directory models, which leverage market data to strengthen verification and authentication.
Business-to-business directories, for example, can help FIs authenticate business partners, suppliers and vendors. They can also be used to verify that electronic payments are going to the intended customer’s bank account—and not to a bank account belonging to fraudsters.
In the consumer or small business space, directory services ensure that the person or the small business can be authenticated—registering with a token, for example, to verify that the person really is who they say they are. Each token a consumer enrolls with, for example, must be verified via one-time password (OTP), Mobile Authorization or a similar process.
FIs are also investing in organic verification tools. Whether they use an algorithm or internal due diligence or target multiple threads of a payment, it is imperative that FIs help identify— on behalf of the client—when a payment seems suspicious.
An emerging fraud prevention trend centers on account validation services. Rather than relying solely on the information they collect through different sources, FIs are seeking tools to pre-validate that transactions are originating from the proper account. The goal is to validate accounts at the time information is being acquired (e.g. via real-time payment processing or ACH processing)—and then use that as a continuous point to check that data.
The Nacha rule change presents a prime opportunity for long-term improvements.
The Nacha rule change supplementing WEB debit fraud detection went into effect on March 19, 2021. To comply, ACH Originators must make “account validation” part of their fraud detection system.
Corporates working in good faith toward compliance have up to one year from the effective date to implement their solutions—and it’s essential that FIs do their part to help. Consider this core insight from Aite Group’s 2020 report:
“As payment fraud continues its upward trend for both banks and businesses, protecting transactions in a real-time environment has become an increasingly important cornerstone of relationships between banks and their clients.”
As businesses prepare to comply with the rule change, they should avoid taking a “band-aid” approach, and instead implement a future-proof solution. Rather than focusing solely on WEB debits, for example, they should think about preventing fraud across their business, regardless of the payment type.
To support their corporate clients, forward-thinking FIs are looking across the board in terms of what they are going to deploy—from micro-deposits to ACH pre-notifications to real-time account validation.
Protecting customers from payment fraud requires a holistic approach.
Amid the pandemic, as more than 150 million government relief payments were processed, there was bound to be fraud. Looking ahead, institutions can apply the lessons learned from government disbursements to their own real-time payments environment—the most important of which is to be adaptable and prepared for whatever comes next.
Moving forward, for example, FIs can help mitigate risk for government entities by investing in whatever fraud mitigation tools might help—not just in the short term, but also down the road. Because in addition to these urgent types of disbursements, there will always be regularly scheduled payments, like tax refunds.
To mitigate real-time payments fraud and really make a difference—for both government and business customers—the solution has to be as broad as possible, offering an array of options. An end-to-end solution offers more fraud protection, while also enabling payments that are more available, more instant and more transparent.
Customer education is equally important in reducing the risk of fraud. FIs should educate all customers—consumers and businesses—to recognize the signs of fraud (e.g. emails that have spelling errors, suspicious sender email addresses, urgent requests that appeal to emotions, asking for credentials). For business customers, in particular, it’s important to also educate them on things like insurance policies related to fraud and having regular process reviews.
In this post, I’ve only touched the surface of our roundtable discussion. You can watch the full webinar to catch our in-depth conversation on a range of topics, including:
- How to use data and technologies to mitigate real-time payments fraud
- How to improve security while providing a frictionless payments experience
- What steps FIs can take now to protect corporate customers
Watch the webinar now: Disbursements - Mitigating Payment Fraud in Corporates and Government
1Aite Group Survey of New Economy Businesses, July-October 2019.
2”Worse Than Ever. Results from the 2019 AFP Payments Fraud & Control Survey.” Association for Financial Professionals, 2019
3Market Trends in Mitigating Fraud Risk Related to Real-Time Payments. Aite Group, July 2020