An Ecosystem to Detect and Prevent Real-Time Payments Fraud

The value of real-time payments (RTP) to the financial ecosystem is recognized worldwide. The rapidly escalating level of fraud in these instant, final and irrevocable transactions, however, has become a pressing concern. The unique characteristics of RTP present distinct challenges in fraud detection and fraud prevention. If banks are not identifying potential fraud immediately and engaging the customers in real time and effectively, then they are losing the battle.

At the recent FICO World 2024, I was joined by industry experts – Bhavik (Vick) Soni from Wipro, Manish Andhy from Teradata and Krishanu De from Cognizant Technology Solutions – who shared their thoughts on the rapid growth of RTP systems, challenges of RTP fraud prevention, and the tactics being deployed to address it. Here are some of the key points that were made.

RTP Fraud Is Growing at a Rate Not Previously Seen In Other Systems

According to Vick Soni from Wipro, “the proliferation of RTP across the globe is exponential.”

Card-based transactions remain substantial, of course, expanding at around 8% per year and projected to reach $63.5 trillion by 2027. RTP, however, are growing at a remarkably faster rate, with an expected increase of over 21% annually in the coming years.

Developing economies, which have been more cash-dependent, are experiencing a more rapid adoption of instant payments. Conversely, in more developed economies with established card-based infrastructure, the growth is steadier, though still significant.

A Myriad of Payment Rails

One of the primary hurdles is the existence of so many different rails and mechanisms, which vary depending on the country, for example, Venmo, Zelle, FedNow in the US, UPI in India, and PIX in Brazil. Each have data formats that are unique to them, as well as different messaging requirements.

“Thanks to this diversity of the payment rails, one of the main challenges we're seeing is the fragmentation of data”, said Manish Andhy from Teradata.

In a space where the integration and analysis of disparate data is crucial for effective fraud detection, bringing together this data is one of the key challenges that financial institutions and payment processors are dealing with. “Many are not yet ready to absorb several different structured and unstructured datasets in a manner that provides useful insight,” added Vick from Wipro.

A Strained Ecosystem for Payments

Krishanu De from Cognizant Technology Solutions highlights that “the complexity of detecting RTP fraud in such a dynamic environment has really tested and challenged existing prevention techniques.” Unlike traditional payment methods, RTP often involves extremely high volumes with low individual amounts. Krishanu adds that “this makes it easy for fraudsters to move money through multiple hubs within seconds.”

Coupled with the velocity of these transactions, all the different systems dealing with these transactions are strained, proving very difficult for banks to predict or identify fraudulent activities before they can cause harm.

Who Should Be Liable for RTP Fraud?

If a payment transfer is executed and turns out to be fraudulent, where should liability lie? With the end customer or the bank? This ambiguity poses a significant challenge, leaving financial institutions to navigate the regulatory requirements and reputational risks that come with this uncertainty.

The US is still evolving its approach, with ongoing debate about who should bear the responsibility for fraudulent RTP transactions. In other regions, regulatory frameworks are being developed with banks being liable in certain scenarios.

Both the question of liability and the ability to meet regulatory requirements are significant concerns. They present a greater reputational risk and negative impact on customer retention.

Creating a Fraud-Resistant Ecosystem for RTP

Some financial institutions are beginning to take a more holistic customer monitoring approach, rather than a product, channel or transaction centric approach. Working with partners like FICO, their focus is on implementing a strategy and platform that considers all interactions and signals throughout the payment journey and allows anomaly detection – actions that are not in line with normal behavior.

“Signals are generated from every interaction with the customer and the final decision at the end of the payment journey is based on an aggregation of these signals,” said Manish from Teradata. The bank, however, can intervene at any point an anomaly is detected.

Another key defense against RTP fraud is being part of an industry consortium to enable banks to use advanced analytics based on the trends taking place in the ecosystem.

One of the points I noted in our discussion: “The patterns of scams are complex and the traditional metrics used to detect third party fraud do fall out of the window when it comes to scams.”

Artificial intelligence and machine learning, therefore, will be vital to bringing fragmented, disparate data together to form valuable insight, as well as enabling anomaly detection.

For some, concerns around the extra friction fraud checks generate have been a deterrent. FICO research has, however, shown that some friction is accepted by consumers.

Another point I called out was: “People are okay with some level of friction if they believe their bank is looking out for them.” According to a FICO survey, around three in four consumers are willing to accept additional friction if they believe they are being protected.

However, the way friction is added matters, and this is where the power of hyper-personalization comes into play. Instead of generic messaging like ‘we think this may be a scam’ or ‘are you making a payment to XYZ’, financial institutions are sharing specific intelligence at pertinent points in the journey, not just at the point of payment. The messages are nuanced and are influencing more immediate action.

Looking Ahead

By 2027, RTP is expected to account for 27% of all payments. The sophistication of the fraud and scams tactics targeting them will also evolve. RTP fraud prevention will need to be underlined by continuous innovation and collaboration. Financial institutions must stay ahead of emerging threats by leveraging advanced technology that is highly configurable, customizable, and able to adapt continuously.

How FICO Can Help You Fight RTP Fraud and Scams

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