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FedNow Users and Possible Fraud

The Federal Reserve is gathering input from users of the new quick payments system while considering the adoption of new instruments to combat fraud.

During a webcast on Wednesday, the Federal Reserve stated that participants in its FedNow rapid payments system are concerned about possible fraud.

The purpose of the Fed “town hall” was to discuss potential new applications for the real-time payments system, and participants included representatives from the Virginia Department of Treasury and the fintech Plaid, who shared their experiences. But while the 800 or so guests watched the webcast, it also addressed fraud on multiple occasions.

Since its July launch, FedNow’s early volume has been “modest,” according to Bernadette Ksepka, head of product development at FedNow. Nevertheless, she stated during the webcast that there are currently roughly 330 financial institutions using the system, a tenfold increase from the initial 35. She said that they come from 45 states and range in size from less than $500 million in assets to over $3 trillion.

She mentioned in a PowerPoint show that the Fed is intending to increase “configurable fraud controls” among other things as it develops the new system. In addition to some FedNow fraud-prevention features and initial reporting requirements, those tools will be available.

According to Ksepka, “We know that fraud is on many of your minds, and it’s definitely on our minds.”

The goal of FedNow is to expedite payments in the United States so that commercial and consumer transactions can settle and clear in a matter of minutes rather than days. The country is lagging behind other nations that already account for a larger portion of real-time payments in their total volume of payments. Although the RTP network, a private real-time payments system, has been in operation in the United States since 2017, its adoption has been sluggish.

Ajay Andrews, the head of product development at the fintech Plaid, was one of the presenters on the Fed’s webcast on Wednesday. He emphasized the importance of users comprehending the specific risks associated with each disbursement use case, including the potential impact of account takeovers, “mule” accounts, and other scams.

Andrews warned the viewers of the webcast, “You need to have some form of intelligence to understand that the receiver is who they claim to be.” “Because scams and fraud may increase as a result of the rapid money movement, as we have observed in other areas like the U.K. Therefore, planning ahead and implementing those measures is crucial.

According to Ksepka, depending on the “cumulative value and velocity” of transactions, various banks and credit unions will be able to customize fraud-prevention measures to meet their unique requirements and risk tolerances thanks to the Fed’s adjustable tools. These safeguards will probably be appreciated by a sector of the economy that has seen a sharp rise in fraud in recent years.

According to Ksepka, “the goal is to give a participating bank the flexibility to set limits based on a specific customer segment.” “A financial institution might, for instance, choose to impose a more stringent limit on individuals who hold, say, student accounts and to set a higher value or velocity limit for its business customers.”

Payment Services Specialist Kara Ford of the Federal Reserve Bank of Chicago, who facilitated the webcast conversation, went into further detail on the potential features of the new tools. “We are now considering future capabilities that would allow financial institutions to create a control that rejects payments that go over predetermined velocity limitations or cumulative value over time,” the speaker on the webcast said. “Future features may include the capacity to detect higher-risk transactions and adjust controls for various customer types and segments.”

The Fed has been holding discussions with interested financial institutions since September in order to talk about the difficulties surrounding FedNow fraud in the second half of the year.

The Fed’s support for financial institutions’ anti-fraud initiatives, such as network-level tools, participant-level limitations, information and data sharing about transactions, and procedures for fraud reporting, detection, and investigations, were among the fraud-related topics covered during those meetings, according to Ford.

According to Ford, “the input we’ve gotten thus far is helping inform and then shape the next set of fraud mitigation capabilities and tools.”

These discussions have continued since September, and this time they have covered alias-based payment possibilities as well as several ways the Fed could implement them in FedNow.

“We endeavored to gather viewpoints and input regarding the market requirements, encompassing deficiencies that may exist in current alias-based solutions, issues and worries regarding fraud and deceptions, as well as certain security factors,” stated Ford. She added that use cases for an alias directory and “possible alias-based payment facilitation services” were also covered.

FedNow representatives stated earlier this year that there was a considerable demand for use cases requiring the capacity to initiate payments based only on an email address or phone number—what the industry calls a “alias”—that conceals other personal information. The central bank has examined the creation of a FedNow alias directory for financial institutions to enable them to handle accounts in such a setting in order to satisfy that interest.

Regarding any concerns about FedNow fraud, a Fed representative declined to provide more comments.

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