Will FedNow Truly Rewire the US Payments Landscape?
Fraud, Security, Implementation Hurdles With Fast Payment Program
The new FedNow service has been hyped as a way to revolutionize the U.S. approach to payments, thanks to the Federal Reserve’s perception as a stable payments network provider and its access to a built-in customer base of thousands of national, regional and community financial institutions. The large volume of banks with access to an instant payments network may lead to a significant acceleration in faster payment adoption.
Large-scale adoption of FedNow will take time, and growing pains are to be expected. It will also take time to fully understand the consequences, particularly with regard to security.
Faster payments can potentially lead to faster fraud. For banks, that changes the emphasis from fraud remediation, reversing payments after fraud is suspected or discovered, to fraud prevention, ensuring the frauds don’t happen in the first place.
As a payment rail available only to financial institutions, many of the security measures will be their responsibility on either end of the transaction.
FedNow does offer some tools, including how institutions can set their own payment limits, and it maintains a “negative list” to identify accounts ineligible for FedNow. FedNow users are also required to report fraud on their platform to the solution provider.
From a cybersecurity perspective, the Federal Reserve will follow ISO20022, a universal financial industry messaging scheme, potentially implementing encrypted messaging between payers and payees, as well as multi-factor authentication and rule-based access on the banking side.
While banks already have fraud departments in place, FedNow creates a need to reinforce them, with more of an eye toward speed and agility than the current protocols in place for traditional payments. Banks can also take additional measures on top of what the Federal Reserve is already doing, such as using its negative list of accounts to proactively identify and respond to fraud in real time.
Financial institutions implementing FedNow also must review training materials and resources, such as the Federal Reserve’s FraudClassifier model, to actively monitor activity.
Whether the new U.S. government-backed, real-time payments system truly rewires the country’s payments system or not depends on whether it is able to get financial institutions across the spectrum to adopt FedNow and use it to offer their own B2C payments solutions – while baking in sound anti-fraud and cybersecurity measures.
If you have questions about IT security and how changing technology affects your bank, call ITPAC today.