The Future of Payments: Real-Time ACH and Fraud Mitigation
Real-Time ACH Payments (RTP) via the Clearing House and FedNow are starting to gain traction. For those unfamiliar with this, the US is slowly joining the rest of the advanced world (along with some third-world countries) with immediate transfer of funds via a Central Bank (or designate). Initially, RTP is designed to complement, and eventually replace the current ACH process. You know, the current very large process used for electronic money movement where an Originating Bank asks for funds from a Sending Bank by throwing a request over a fence, then at some time in the future, the funds (or a return) show up confirming or denying the transaction. Then maybe a few days or weeks later, fraud is alleged and there is no real process to fight the reversal of funds. Regarding the new process, The Clearing House (TCH) states that the Q4 2022 RTP numbers showed $22.7 Billion in value contained in 49 million transactions. This is just a small portion of the total ACH value of $75 Trillion and 30 Billion transactions in the same period (Q4 22). This just shows the upside potential of RTP, even without the potential volumes that will be converted from the debit card network. Big volumes can cause big fraud problems.
Sources tell us that over 70% of the checking accounts in the US can get funds pushed to them. But a much smaller set of checking accounts can support funds being pulled. But those numbers are growing daily. FedNow from the Federal Reserve Bank, is planning to launch later in 2023. The vast majority of the volume is payment pushes.
The process of approving an RTP RFP (Request for Payment) involves acknowledgment and approval by the owner of the account that will be debited. This is one verification action where the biggest fraud mitigation process exists. Banks must figure out the process to verify the legitimacy of the request and that the one authorizing it is the true owner (or designate).
Unlike legacy ACH processes, there are no (or very few) opportunities for returns. Once the money leaves the bank account, the normal ACH return process cannot be initiated. The funds are gone. This is not a situation Banks are used to with ACH. To mitigate the risk, this new payment process requires getting authorization from the verified account holder to send the funds. That process is extremely important to get right for Banks. Too much friction and real-time payments will have a very slow uptick in usage. Incorrect fraud mitigation processes and Banks will have significant losses. The way Banks solve this is critical to the success of RTP. Vulnerabilities will be exposed via social engineering, account takeovers, synthetic identities requesting funds, and other known fraud methodologies.
Open Banking via non-bank financial services organizations and eCommerce sites could be the breeding ground for fraud. So Banks will not only need to have processes to protect themselves from losses via RFP, but they will also have to properly manage merchants who can initiate a Request For Payment. Time will tell how this pans out. But one thing is for certain, change is coming. Whether fast or slow, there needs to be a concerted effort to mitigate fraud. Velocity is a catalyst for fraud.
As the Real-Time ACH Payments process continues to gain traction in the US, organizations need to stay informed about the potential risks and vulnerabilities associated with this new payment system.
Organizations like FraudX Digital and others are educated on RTP and Fraud Mitigation and positioned well to help this emerging process. FraudX Digital’s team of experts has extensive experience with fraud mitigation and payment optimization in Banking, FinTech, Merchant Oversight, and eCommerce, and are here to help you navigate this emerging process with confidence. Contact FraudX Digital here to schedule a consultation.