Banks should see securing instant payments not just as an obligation – but as the key to a whole new range of product and customer service opportunities.

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The demand for instant payments – both from businesses and consumers – continues to gain traction and with that traction has come a broader expectation for immediacy and a seamless user experience. Just as digital services like video streaming or content downloads deliver near-instant access, users now expect payments to match this speed and ease. There is a global push for real-time payments as it transforms industries by enabling faster fund transfers, reducing reliance on cash, and improving business’ cash flow. With advancements in digital security, there’s an added emphasis on ensuring these speedy transactions remain just as secure as they are fast. This couldn’t be more important since instant payments are projected to grow at more than 35% Compound Annual Growth Rate (CAGR) globally over the next six years, accounting for more than one in three payments by 2030. Unfortunately, this surge in instant payments also presents increased challenges in safeguarding financial security and necessitates the implementation of enhanced anti-fraud solutions.

McKinsey’s State of consumer digital payments in 2024 highlights a steady rise in digital payment adoption in both the U.S. and Europe. This year’s survey is the first to assess both regions, showing that consumers are not only using various digital payment methods more frequently but are also increasingly starting their buying journeys with these options. Platforms like buy now, pay later (BNPL) and offer marketplaces are examples where digital payments are the starting point of consumer decision-making, rather than merely a checkout tool.

Instant Payments Present Challenges for Limiting Fraud Risk 

Along with consumer adoption of the digital payment trend comes an increasing need to manage fraud risk.  The rise of unregulated payment channels, such as cryptocurrency exchanges and peer-to-peer platforms, yields new opportunities for fraudsters to target. Instant payments present unique challenges in managing authentication and fraud risk due to their rapid settlement requirements, often occurring within less than a second.

This tight timeframe limits the opportunity for banks and financial institutions to conduct in-depth verification and confirmation of both the payee and transaction details, leaving limited room for fraud detection before the payment is finalized. The rapid pace of these transactions can increase exposure to fraud if real-time protections are not implemented effectively, making instant payments a high-stakes area for risk management.

The ambiguity around liability for losses in instant payments also creates a complex risk landscape for financial institutions. In jurisdictions without clear guidelines, determining responsibility for covering fraud-related losses can be challenging. This can expose banks to financial risks and potentially damage their reputations if customers bear the brunt of fraudulent transactions. This lack of clarity underscores the urgent need for regulatory frameworks and industry-wide standards to define accountability and create consistent consumer and institution protections.

The U.S. and the EU are Relying on Regulatory Standards for Fraud Identification 

FedNow, launched in July 2023, is a service from the U.S. Federal Reserve that allows banks and credit unions to offer instant payment services to their customers. Of the approximately 10,000 financial institutions in the U.S., more than 1,000 have already joined the platform, which allows members to offer instant payment services. While FedNow relies on banks to be the first line of defense in fraud detection, it does offer some risk mitigation services. However, it relies on the institutions themselves to monitor and report fraud activity to be shared among member organizations. New regulations in the EU, taking effect in December 2024, will require banks to offer significant fraud protection services. 

Revolutionizing Banking: The Power of Instant Payments

While the shift toward instant payments may present certain complexities, it offers banks a unique opportunity to elevate customer service, significantly boost satisfaction and retention, and introduce innovative services like Authorized Push Payments and Request to Pay.

The European Commission has mandated that all EU banks must be equipped to receive instant payments compliant with the SEPA SCT-Inst standard within nine months of the December 2024 deadline. Moreover, they must be capable of sending SCT-Inst payments eighteen months after this deadline.

To ensure the security of these transactions, banks are obligated to implement robust measures to protect customers from fraud and liability. In response, EBA Clearing, the European Banking Association’s independent payment services organization, has introduced FPAD (Fraud Pattern and Anomaly Detection), a cutting-edge fraud detection and prevention service designed to safeguard both banks and their customers in this new era of instant payments.

Launched in March 2024, this game-changing service draws on the billions of transactions processed by EBA Clearing annually, providing banks with a comprehensive understanding of payment and beneficiary account behaviors. The added value of the FPAD service goes beyond individual institutions’ efforts in fraud prevention. By utilizing a network view, the FPAD service offers banks or PSPs an enhanced view of risks, allowing for more precise risk management. Enhancing in-house fraud prevention systems with FPAD’s analytics and detection capabilities can significantly reduce the number of false positives, streamlining operations and improving overall efficiency. Additionally, the EU has announced the introduction of Verification of Payee (VoP) services from March 2024, with banks facing the obligation to introduce VoP for customer accounts no later than October 2025. 

VoP services enable clients to check that their money is going to the right account – an important security measure for instant payments, where transaction and settlement should take place within 10 seconds.

A Catalyst for Innovation and Customer Centricity
The rise of instant payments and immediate settlement of funds between accounts, reveals a cornucopia of opportunities for banks to innovate and enhance customer service. Industry experts within the financial crime fighting community envision a spectrum of product possibilities that cater to diverse customer needs. In order to mitigate the risk of fraud, payments experts need to be thinking ahead and partnering with their banking customers.

For example, instant payments streamlining Business-to-Business (B2B) transactions should bring progress in supply chain finance. By enabling near-instantaneous payments between businesses, banks can expedite the flow of funds and reduce payment cycle times. This translates to improved cash flow management and increased efficiency for businesses of all sizes. 

The reach of instant payments extends beyond domestic borders as well. Banks will be able to facilitate quicker international transactions with reduced fees. This opens doors for greater global commerce and enhanced accessibility for individuals and businesses alike. For fraud experts, it is important for them to have experience in cross-border fraud where stronger authentication measures are employed and closer collaboration between financial institutions and law enforcement agencies across different jurisdictions can share information and coordinate efforts to combat this type of fraud.

Beyond traditional payment processing, instant payments pave the way for innovative financial products. Banks will be able to introduce real-time loan and credit solutions, offering instant credit decisions and disbursals to qualified customers. This will eliminate the lengthy application processes associated with traditional lending, providing a more efficient and user-friendly experience. For the fraud expert protecting the bank, it will be key that they apply sophisticated KYC (know your customer) anti-fraud measures.

The world of micropayments, often used for digital goods and services, can also benefit from instant payments. Banks will be able to enable seamless and secure transactions for small, frequent payments, fostering a more convenient ecosystem for both consumers and businesses. For the anti-fraud expert, AI can efficiently identify patterns and anomalies. Additionally, subscription payments will be automated with greater flexibility and accuracy, ensuring timely payments and eliminating the risk of service disruptions.

Given these opportunities to offer enhanced products and services, banks are wise to invest in robust anti-fraud measures to help with their business growth. Real-time transaction monitoring that employs advanced AI and machine learning to identify suspicious activity patterns will be key. Using fraud prevention software to analyze transactions and flag potential risks should be integral while employing enhanced multi-factor authentication (MFA) to add layers of security. Still, it is equally important for financial institutions to provide clear guidelines to their customers on how to recognize and prevent fraud and to encourage them to report suspicious activity promptly.

Navigating the Challenges: Security and Compliance

While instant payments offer a plethora of opportunities, it’s crucial to acknowledge the associated challenges. Robust security measures are paramount. Banks need to implement strong authentication and fraud prevention technologies to safeguard customer information and financial assets. Real-time monitoring of transactions for suspicious activity and swift responses to potential threats are essential to maintaining a secure environment. Additionally, educating customers about best practices for online security empowers them to be active participants in protecting their personal information and financial well-being.

Regulatory compliance remains a crucial aspect of navigating the instant payments landscape. Banks must stay up to date with evolving regulations and industry standards. Developing effective compliance programs ensures adherence to regulatory requirements and mitigates potential risks.

Customer Education: Building Trust and Confidence

Customer education plays a vital role in the successful adoption of instant payments. Banks should provide clear and comprehensive information about this technology, highlighting its benefits, security measures, and potential risks. Addressing customer concerns about security and privacy builds trust and encourages them to confidently utilize these innovative payment solutions.

Offering training and support empowers customers to navigate the instant payments ecosystem more safely and effectively, ensuring they can fully leverage the convenience and benefits offered by this technology.

Conclusion: A Promising Future

By embracing instant payments and addressing the associated challenges, banks can position themselves as leaders in the digital age. This technology unlocks a world of possibilities for product innovation, customer service excellence, and increased customer engagement. By leveraging instant payments effectively, banks can drive financial inclusion, streamline business operations, and ultimately, deliver exceptional customer experiences. Nevertheless, they shouldn’t do it without first investing in an AI-powered anti-fraud solutions.