As Transactions Speed Up, How Will Banks Fight Fraud?

As quick as slapping a button.

As quick as pressing a button.

Bank of America and U.S. Bank are the latest banks to sign on to realtime payments, joining Early Warning’s clearXchange network earlier this week.

As more banks sign on to the number one name in real-time transactions, the most irksome, time-sensitive financial emergencies may become a thing of the past. Yet it’s also a universally accepted truth that as speed increases, so does fraud.

“It’s a point-well-made that the industry as a whole underestimates the degree of fraud in transactions,” said Lou Anne Alexander, SVP of market development with Early Warning. “We recognize how urgent this is, and are still enhancing the services to anticipate where these threats might come from. [But] part of the combined power of Early Warning and clearXchange is that a wide variety of services maintain continuous identification processes as users initiate new transactions. We’re injecting ID and authentication services into the app, as well as monitoring the transaction set for anomalies and their behavior.”

How fast are the funds actually moving? The transaction messaging may be completed in seconds, but since messaging and settlement are two different parts of the payment process, does the settlement lag behind?

“Although the actual settlement does happen in separate payment systems, the user can immediately use his or her money upon receiving message alerts, whether using a debit, credit or check,” Alexander said. “Fraud and risk management capabilities in realtime allows banks to make transferred money available immediately. If anything goes wrong, the risk for the settlement portion is between financial institutions, and will in no way affect the account holder. This is because the settlement process is really bank-to-bank money movement; they are the counterparties.”

Alexander said the case for realtime payments is clear to both banks and their customers. “This process makes a great difference to a wide array of Americans, whether the funds are insurance money needed to fix a car, or to get a loan from the bank, or whether it’s a theater ticket, we want to get that money available as quickly as possible.”

Indeed, for small business owners, every project can carry the fate of the company with it. With so much on the line, a small business owner can’t afford to miss payroll, for example. Some, for speed, are forced to resort to check-cashing businesses that charge high rates and fees.

“We see these cases frequently,” Alexander said. “We support check cashing businesses, lawn care services, maid services, as they collect checks from customers throughout the week. We see them pay up to three percent of gross revenues in order to get their money in the bank in order to make payroll. Because they are operating in the red, they are really in need of a means of real-time transactions. Now I can immediately pay my lawn with my phone, without making him go and have to cash the check itself, and I don’t have to give him any of my financial account information.”

Many consumers use nonbank services such as Venmo to move funds, and indeed, PayPal CEO Dan Schulman indicated Venmo’s capabilities would soon be increasing. But in using third-party providers, consumers’ exposure to identity fraud, payments fraud and account takeover dramatically increases, Alexander said. Consumers are usually unaware that in such hypothetical instances the liability for repayment would fall on them, and not the financial institutions the external vendor brings together.

Early Warning’s continuous authentication processes avoids this peril, but depending on a consumer’s bank, it may come with a price. “[Banks] make the decisions on their own,” Alexander said. “Some banks actually charge for this service. On a pricing scenario, and we’re not involved in the pricing process, either, when you talk about P2P payment, we see it as an opportunity in peril situations, but the number one use is for writs payments, in other words, to pay their landlord for rent. It is being used for a number of recurring payment cases.”

Pricing may vary, but the other rules of the system do not.

“They do actually share the same rules around network operations,” Alexander said. “There are common rules they adhere to. [Each bank] does individually decide what threshold they can rise to, but all banks adhere to the same standard of waiting time for access to money.”

Almost 30% of the U.S. lives paycheck-to-paycheck. As a consequence, delaying consumers’ access to funds already received has serious economic implications. This is why people still use payday lenders, check cashers and title lenders. To help ease the pressure of overlapping bills and payouts, Early Warning has opened its network to all financial institutions in the U.S. In so doing, they aim to provide real-time P2P service to consumers across the country. The more banks that join the network, the greater access customers will have to realtime capability.

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