Addressing the Growing Challenge of Instant Payment Fraud for Banks

The financial world is undergoing a significant transformation with the rise of instant payments, also known as real-time payments (RTP), as highlighted in Fintech Global News. As the European Union follows the United States in mandating instant payments, it’s clear that this shift is here to stay. However, with the convenience of instant payments comes the inevitable risk of fraud, money laundering, and terrorist financing, making it essential for banks to adapt quickly.

Hawk AI recently discussed the use of artificial intelligence (AI) in managing instant payment fraud risk in a thought-provoking post. With over 300 banks and credit unions already embracing the FedNow Service in the US, it’s projected that by 2027, nearly 28% of all electronic payments globally will be conducted in real-time, a significant increase from the previous year’s 18%.

The speed at which instant payments occur means that fraud can happen rapidly, necessitating real-time monitoring by banks to protect their customers and financial stability. To tackle this challenge, banks must strengthen their fraud prevention measures.

New EU regulations require instant payment providers to verify the accuracy of the beneficiary’s IBAN and name, even for non-customers, shifting the responsibility for fraud prevention onto banks. Failing to identify and prevent fraud within the narrow ten-second window could result in significant losses for the bank.

The United Kingdom has already set a precedent by holding both sender and receiver financial institutions accountable for fraud damages. Banks must now incorporate anti-money laundering (AML) and anti-fraud solutions to combat money mule transactions and suspicious activities effectively. Furthermore, instant payment fraud often involves unsuspecting victims, necessitating careful scrutiny of payment counterparties.

Maximilian Riege, Chief Risk Officer at Hawk AI, highlights the complexity of combating instant payment fraud, stating, «While the victim plays a necessary part in completing the fraud, the transaction itself is not criminal. This differentiates it from typical money laundering activities, adding complexity to the bank’s role in detecting and stopping fraudulent transactions.»

To address instant payment fraud, banks must harness AI and technology for speed, precision, scalability, pattern recognition, and anomaly detection while reducing false positives. Immediate and accurate checks are paramount, given the brief ten-second window for processing instant payments. The increasing transaction volumes necessitate scalable solutions.

AI’s ability to predict known fraud patterns and identify emerging ones is invaluable in this context. The technology can differentiate suspicious transactions from billions of others, offering a robust solution for fraud detection at scale. Reducing false positives is equally important to maintain customer satisfaction and streamline the instant payment process.

Imagine a scenario where a bank experiences a surge in fraud losses following the introduction of instant payments. In response, the bank implements scalable, real-time AI models to scrutinize transactions for fraudulent patterns, effectively reducing fraud losses, enhancing the customer experience, and conserving investigative resources.

The rise of instant payments presents both opportunities and challenges for banks. To ensure the safety of their customers and financial well-being, banks must embrace AI and advanced technology to combat instant payment fraud effectively. This shift not only enhances security but also streamlines processes and improves the overall customer experience in the evolving landscape of financial transactions.