A concern for many people and businesses is not having the money they need, when they need it. Delays caused by processing functions and limited financial institution (FI) operating hours can mean that money doesn’t make it where it’s supposed to go on time.
However, that may soon be much less of a problem with the increasing adoption of real-time payment solutions by eCommerce retailers and online marketplaces. These modern payment rails can authorize and settle money movements within seconds, and many are available virtually anywhere and at any time.
So what is real-time payment, and how is it different from the similarly-termed “faster” payment? How does real-time payment work, and who makes it happen? What are real-time payments being used for, and why? And how can financial institutions defend against crooks looking to capitalize on the advantages of real-time payments to commit fraud? We’ll address each of these questions by covering the following:
The first step to understanding real-time payments is to know a bit more about what they are.
Real-time payments are account-to-account fund transfers that are initiated, cleared, and settled in close to real time. That means the beneficiary of the transaction gets near-instantaneous access to the transferred funds. It also means that real-time payments can’t be reversed once authorized.
According to Yuriy Kropelnytsky, Softjourn's Payments Expert, "Real-time payments make payments frictionless for customers since they are initiated, cleared, and settled within seconds of a purchase. To make payments in real-time, the bank's backend system must be available 24/7, keeping both users and the bank secure and protected from fraud. RTPs ensure that customers will have speed in payments, instant settlements, and easy access to their money, any time they need it."
Most modern real-time payment systems have near-100% uptimes. That means they can be used to send money at any time of day, any day of the year. That includes holidays and weekends, in many places!
Real-time payment systems currently only support “push” transactions; they allow one account to send money to another, but not to request (or “pull”) money from another account.
As for how real-time payments work, the process is rather simple:
- The payer initiates a transfer of funds from their own bank account to a payee’s account. This may also contain a message that includes additional details related to the transaction (like booking details for a property rental, for example).
- The payer’s bank checks the transaction and authorizes it if it’s legitimate.
- The transaction (and message) are sent to a real-time payments platform, which again checks the legitimacy of the transaction before deciding to approve or reject it.
- If the transaction is approved, it is settled immediately, and the funds are deposited into the payee’s bank account.
- The payer receives a notification that the transaction has been completed.
Sometimes, terms such as “faster payments,” “immediate payments,” or “instant payments” are used to refer to real-time payments. On one level, these are simply ways of referring to real-time payments in different areas of the world.
On another level, though, there are distinct differences between “faster” payments and “real-time” payments. Faster payments are simply forms of electronic payment that post and settle faster than in traditional payment systems – say, writing, delivering, and depositing a check. However, while they can be initiated and posted quickly, they don’t always settle quickly. Settling can take minutes, or even hours.
Real-time payments, in contrast, are both posted and settled within a matter of seconds. So all real-time payments are faster payments, but not all faster payments are real-time payments.
Real-time payments are touted as having several benefits for financial institutions, non-financial businesses, and everyday people. Here are just a few of them:
- Faster cash flow: Timely access to funds is critical, especially in emergency situations. Real-time payments allow both individuals and businesses to immediately access the funds they need, whenever they need them.
- Increased payment transparency: When money is locked by processing functions, such as authorization holds, it can paint a confusing financial picture. Because real-time payments settle almost immediately, it’s easier for individuals or businesses to know exactly how much money they have access to at any given time.
- Fewer wasted resources: Real-time payments are not only fast, but they also cut down on costs and other resources (e.g. printing paper checks) necessary for more traditional payment forms. This makes businesses that use them more efficient.
- More inclusive financial industry: Because they’re simpler and less expensive to access, real-time payments are seen in some places as a way to provide financial services to people who wouldn’t otherwise have access to them.
- Easier avoidance of payment failures: In some ways, real-time payments increase trust between payers and payees. The ability to send extra information with payments reduces the risk of things like printing errors, and makes it easier to quickly correct other kinds of mistakes. Also, because transactions can’t currently request money from other accounts, and need to be authorized by the payer’s bank before being sent, payers can’t send money they don’t have or request money from those who don’t have it.
- Reduced risk of payer fraud: The fact that real-time payments clear almost instantly and automatically send a confirmation message to the payee makes it difficult for a payer to commit fraud by taking them back after agreeing to them.
Real-time payments have the potential to improve efficiency in many different contexts. Here are a few examples.
Peer-to-Peer (P2P)
People sometimes borrow money from their friends or family members, and real-time payments offer a secure and convenient way to pay them back. Also, many who live and work abroad will send money back to their families in their home countries. Real-time payments offer a way for those families to get money faster without waiting for as much processing work.
Business-to-Consumer (B2C) and Consumer-to-Business (C2B)
Businesses can streamline paying their employees’ wages and other reimbursements using real-time payments. RTPs can also create added speed and trust in situations where a business has to pay out to a customer, such as with a rebate, refund, insurance claim, or legal settlement.
Of course, real-time payments can assist transactions going from customers to businesses. They can allow customers to make fast, secure payments at the point of sale. Or they can avoid problems and penalties with paying time-sensitive bills, as transactions settle almost instantly.
Government-to-Consumer (G2C) and Government-to-Business (G2B)
Governments can use real-time payments to quickly and securely send money to people for things like tax rebates, wage subsidies, pensions, unemployment benefits, and loans. This is especially useful for financially-insecure people who may depend on getting government assistance in a timely manner.
Consumer-to-Government (C2G) and Business-to-Government (B2G)
Governments can also use real-time payment systems to collect payments from individuals and businesses for things like taxes, loan repayments, registration fees, and political donations. Again, these types of payments settling almost immediately helps to avoid costly penalties for not filing mandatory payments on time.
As of this writing, over 70 countries support real-time payment systems. Here are a few notable ones.
The Zengin System
Believe it or not, real-time payments aren’t all that new; they’ve actually been around since at least the 1970s. That’s when Japan’s bank payment clearing network – the Zengin System – was able to start processing transactions in close to real time. However, it didn’t achieve ubiquitous availability until 2018.
The Clearing House’s RTP Network
This was the first real-time payments system in the US, launched in 2017. Run by an alliance of the major banks, it’s available to all federally-registered financial institutions. Its integration into several popular peer-to-peer payment services – such as PayPal, Venmo, and Zelle – has helped to spread the popularity of real-time payments in North America.
FedNow
FedNow is a real-time payments system that is expected to be launched by the US federal reserve in July 2023. Its aim is to provide ubiquitously-available real-time payment services for mass adoption by US businesses. Its focus on domestic businesses is expected to help it compete with similar payment services, such as the Automated Clearing House (which isn’t a RTP system and is mainly used by consumers) and FedWire (which is an RTP system, but doesn’t have ubiquitous availability and is geared towards international transactions).
The fact that real-time payments settle almost instantly and can’t be reversed once authorized is an advantage in some circumstances. However, they also make RTP systems lucrative targets for fraudsters looking to capitalize on increasing RTP adoption.
An example is authorized push payment fraud, where a criminal uses social engineering tricks (such as impersonation) or hacking techniques (such as account takeovers) to pose as a legitimate payee in a real-time payment. Because the payment can’t be reversed, it’s difficult for a victim to get their money back. In addition, the fraudster can use the fact that real-time payments immediately settle to launder the stolen money through multiple channels very quickly.
The potential for this kind of fraud has led governments and regulators to consider measures to better protect against it. Here are some suggestions.
Educate Consumers and Employees About Fraud Risks
According to Ian Wright, Managing Director at BusinessFinancing.com.uk, "With any new technology, fraudsters will always be quick to try and find a way to exploit it, and real-time payments are no exception. Responsibility for staying protected lies with all of us.
Financial institutions already use AI and machine learning in fraud detection to spot unusual activity more quickly and easily. Consumers also have a responsibility to check details before making payments and to take action quickly if they get a notification of a transaction they have not authorized; most online banking apps can freeze an account immediately before you've even contacted your bank."
As such, the number one thing financial institutions can do to prevent real-time payments fraud is teach consumers and employees how to protect themselves from common fraudster tactics. Some tips for doing so include:
- Not responding to – or opening attachments or clicking links in – suspicious emails/texts
- Using strong, unique passwords for each of their different accounts
- Knowing which channels a business will never ask for personal information over
- Verifying their personal information with their financial institutions
- Setting up notifications for transactions involving their accounts
- Verifying requests of payment information, or changes to it (via phone, email, etc.)
Monitor Incoming and Outgoing Transactions
Banks and RTP platforms still have some say in whether real-time payments are authorized. But unlike traditional payment systems, like paper checks, they have much less time to evaluate how likely it is that a transaction is fraudulent. When monitoring real-time payment transactions, behavior analysis and link analysis can be useful to look for clues like:
- How much a transaction aligns with a customer’s financial history
- Whether or not the payer and payee have a prior relationship
- When an account was created, and whether it’s sending or receiving payments (or both)
Leverage machine learning to assess risk in real time
Of course, real-time payments fraud detection is difficult when transactions take mere seconds to complete. Fortunately, real-time payments are data-rich, and there will likely be many more of them in the future since they take so little time to process. That makes them ideal for training machine learning models to look for known fraudulent patterns, or irregularities that might point to new fraud schemes.
Set Transaction Limits, and Potentially Require Dual Approval for High Values
One of the basic things many RTP systems are doing to combat fraud is setting limits on the amount of money that can be moved through any single transaction. This limits the amount of damage a single instance of fraud can do. It also gives financial institutions more time to detect and react to patterns of small-value transactions that could be indicative of fraud.
Along with this, financial institutions can flag transactions above a certain value threshold to receive greater scrutiny. They may even require dual approval for some of them; while this may slow down the process a little, it can take some of the risk out of transactions that can cause a lot of damage if something goes wrong with them.
Create Internal Watch Lists for Suspicious Accounts or Users
Many countries and international organizations have sanctions lists that contain individuals and groups they don’t want their citizens, companies, or member states to do business with. Similarly, financial institutions and RTP platforms can have internal watch lists for accounts and identities that may be tied to fraudulent activities. Then they can automatically block authorization of transactions from shady entities before the money goes anywhere.
Be Ready for Real-Time Payments Fraud with Unit21
Real-time payments offer many potential benefits for individuals, businesses, and financial institutions alike. However, they also present challenges in terms of how to stop them from being used for fraud.
The fact that they complete in mere seconds and can’t be taken back once authorized makes them attractive to criminals. In general, faster payment methods mean faster payment fraud, and fraudsters will find whatever means possible of exploiting these systems for their own benefit. Maintaining payments compliance will be more important than ever for companies to stay safe.
As real-time payments are more widely adopted, they highlight the importance of financial institutions having state-of-the-art anti-fraud and AML programs that can assess risk faster. Unit21’s transaction monitoring solution looks at a wider set of activities and data sources for greater context. This doesn’t just allow financial institutions to reduce their false positive rates — it also lets them detect activity patterns that typically lead to fraud, potentially stopping the crime before it even happens.
To see it in action, book a demo with us today.
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