Juggling Risk And Faster Payments

In the push to speed up settlement, banks must take care not to lose sight of the implications for fraud, compliance, and consumer satisfaction.

In a world where there is almost nothing that cannot be done directly from a smart phone, there is a growing expectation among consumers for immediacy. Frustration with delayed funds availability is only increasing as consumers constantly ask why—in an era of technology and innovation—their payments are often not reflected for several days.

As the financial industry determines how it can improve service by establishing faster payments methods, the question remains: How can we modify and modernize our payments system while still managing risk and mitigating fraud?

Faster payments are certainly on the horizon. For some time, industry groups and regulators have been in agreement on the benefits they will bring both consumers and businesses. At the same time, though, there is a considerable need to explore the new vulnerabilities and compliance challenges that faster payments introduce.

In the 2015 Payments Fraud and Control Survey from the Association for Financial Professionals, fully 62% of treasury managers and other financial professionals said their organizations were targets of payments fraud in 2014.

With the prevalence of payments fraud, the industry must be careful not to let the deployment of a faster payments system supersede fraud-prevention initiatives. Otherwise, the value of instant payments will be diminished by even stronger, faster fraud schemes.

With data breaches making headlines and fraudsters targeting many popular retailers, consumers have definitely become more wary. However, despite their elevated concern over fraud and the protection of their personal financial data, consumers’ desire to have immediate access to their current funds remains strong.

So, in looking at a faster payments landscape, it is evident that if we are to truly focus on the needs and desires of the consumers, the best place to start is by addressing the areas of greatest consumer impact: fraud protection and funds availability.

A Massive Factor

We all know that when an online bill-pay transaction occurs today, it typically requires several days to show up on a biller’s Web site. Since consumers are used to transacting and communicating in real time, the fact that a payment or deposit cannot be indicated immediately is often both puzzling and irritating.

Moreover, there are countless individuals who rely on their weekly or biweekly paychecks to pay their bills. If a bill due on a Saturday is paid with funds from Friday’s paycheck—even if payment is initiated on Friday—it cannot be “paid” until: 1) the bank makes funds available for the paycheck, and 2) the payment is posted through the automated clearing house network.

As the industry focuses on improving settlement speed, it is truly the delays in funds availability that negatively impact consumers at large and that, with the right risk controls, can be drastically improved. While same-day ACH is a starting point, everyone wants their accounts to reflect, in real time, their true available funds, and to have as much available cash for their use as possible at any given time. It’s an idea to which anyone can relate, yet it’s also an issue the financial industry continues to work through.

Fraud is an integral part of faster payments. It is a massive factor that all parties—financial institutions, merchants, and consumers—want to account for prior to the launch of a new payments system. Terms like security, cyber-threat prevention, and layered authentication all have figured in, and will continue to accompany, discussions around faster payments.

With a growing number of fraud schemes capable of occurring on a massive scale with today’s technology and sophisticated cybercriminals, it is harder than ever to stay ahead of the curve. As soon as we block a certain scheme, fraudsters respond with new techniques.

As much as consumers want immediate access to their funds and account information, the prevalence of fraud and account takeover is shaping their views. As banks work to more quickly put money in the hands of its owners, they must be able to gain a stronger understanding of whether the person they are interacting with is who he or she claims to be, whether the person’s device has been compromised, and whether he or she is a human rather than a bot.

A Huge Step

The challenge with faster payments is that it is necessary for due diligence to occur in real time. It cannot be conducted in an hour, that evening, or the next day, which is how most tools and controls currently operate.

There should be technology in place to instantaneously detect whether a customer’s interactions and type of transactions align with that person or business’s typical pattern of behavior. The financial industry is beginning to rely more heavily on technology to promptly answer questions like: does this behavior reflect a normal interaction for this customer within the online-banking portal, and, does he or she typically make transactions of this size?

Between stronger authentication solutions and new methods for scoring account applicants, there are many emerging, innovative ways questions like these can be answered. iPhone 6 users are already familiar with fingerprint biometrics; but this is just the start. The financial industry will need to explore several other biometric capabilities that measure human characteristics and behavioral inconsistencies, such as facial characteristics, iris pattern, voice, and even cognitive biometrics.

Properly and quickly detecting fraud is the best way that the industry can ensure that the imminent system for faster money movement and funds availability is also secure for both institutions and consumers.

The attention regulators have given to both fraud prevention and faster funds availability is very positive. Almost every legislative body is now considering new laws designed specifically to combat data breaches, which have become a prime issue and are responsible for heightening consumer awareness of fraud.

Additionally, it has become clear that regulators want to see faster payments. During his address at The Clearing House Payments Co. LLC’s annual conference in November 2014, Consumer Financial Protection Bureau director Richard Cordray highlighted the importance of consumers having faster access to funds and real-time access to account information, as well as the need for accessibility for all consumers.

While consumers desire better access to their funds, Cordray noted that right now they cannot realistically keep up with the “warp speed” at which technology can move money within their accounts. While banks need to more carefully review transactions to detect fraud, consumers also need adequate time to identify, assess, and dispute any possible fraud.

In taking the lead on faster payments, the Federal Reserve released plans in January 2015 that included a roadmap for overhauling the U.S. payments system. NACHA has been another proponent of faster payments, and in May 2015 reached a significant milestone when its members approved a proposal for same-day ACH, signifying a huge step toward faster money movement.

Shift the Conversation

While mitigating fraud losses and improving customer service are top-of-mind for bank leaders, banks naturally have compliance factors to take into account. Faster payments will impact their ability to comply with regulations such as Know Your Customer (KYC), the Bank Secrecy Act, and rules from the Office of Foreign Asset Control.

Banks will need to adjust how they approach these guidelines and determine immediately whether entities with which they are interacting can legally send and receive funds.

In particular, strengthening KYC and the ability to understand customers and their behaviors will be key to detecting fraud. As payments and funds availability become quicker, it is even more important to recognize when customers typically send payments, what devices they most often use, and the time of day they typically log in, among other elements.

Solving for compliance and diminishing fraud losses are top priorities for banks. Yet, when it comes to today’s ongoing discussions around faster payments, the financial industry should shift the conversation and focus more heavily on the consumer perspective.

A payments overhaul will be complex. So, let’s start by asking, “How can we have the most immediate, positive impact on our customers and their daily lives?” If we consider what is important to them, it is clear that this impact will not necessarily be an initial outcome of faster settlement. It will result from our ability to execute an infrastructure that supports more instantaneous funds availability and greatly simplifies how consumers and businesses manage their money.

The financial industry should first take a closer look at redefining its fraud-prevention techniques and compliance initiatives to make faster access to funds come to fruition in a secure way. Settlement is certainly important and should fast follow a modernized funds-availability model, but addressing consumers’ true pain points is the best place to start.

The industry has clearly taken many positive steps, and through greater collaboration and an emphasis on putting consumers first, we can make their funds accessible more quickly and more securely.

—Lou Anne Alexander is chief market development officer for payments at Early Warning Services LLC, Scottsdale, Ariz.