What You Need to Know About FedNow^sm 

You may or may not know that the Federal Reserve (The Fed) is planning to introduce a new payment service in 2023 called FedNow ^sm  . The FedNow Service is intended to be a safe and more efficient way to make instant payments and transfer money through the banking system. According to The Fed definition, “FedNow will be a real-time gross settlement (RTGS) payment system with integrated clearing. FedNow Service means that financial institutions across the U.S., will be able to make instant payments in real time, around the clock, every day of the year.”⁽¹⁾

Financial institutions participating in the FedNow Service will be able to send and receive instant payments conveniently to and from businesses and individuals. Money transfer recipients will have full access to funds within seconds, giving them greater flexibility to manage their money and make time-sensitive payments.  The introduction of FedNow Service is considered an innovation for banking customers, expediting the clearing and settling of payments and potentially offering new services for customers.

But is there a risk? Along with progress, consider the increased risk of fraudulent payments and the heightened need for fraud detection. Currently, bank deposits are generally not posted until the next business day. This gives financial institutions time to identify fraudulent activity, and customers the opportunity to stop a payment or dispute a charge before the funds are actually transferred between accounts. Perhaps you have done this with your own credit card account to dispute a charge?

FedNow will change this dramatically. There will be no time to discover fraud. Transfers between banks will be instant, and bank fraud is most common type of financial fraud there is.

What Can You Do to Protect Against Financial Fraud when FedNow Service is Introduced?

It is crucial to understand there will be new and unique challenges due to the speed of transfers and the irrevocable nature of transactions.  There are steps that must be taken to detect and protect your organization from financial fraud.

You’ll find numerous articles and extensive information that The Federal Reserve has published on its website http://www.frbservices.org that address the benefits, as well as risk management, of using FedNow Service.

In summary, The Fed will be providing certain tools as the first line of defense against fraudulent transactions which include:

1. The ability for a bank or other financial institutions to establish risk-based transaction value limits.
2. The ability to specify certain conditions under which transactions would be rejected, such as by account number (a “negative list”).
3. Message signing, which will validate that the message contents have not been altered or modified.
4. Reporting features and functionality, including reports on the number of payment messages that were rejected based on a participating financial institution’s settings. (Such information can be used to verify that transactions align with a financial institution’s own records and detect whether a bad actor may have interceded or deleted records.)⁽²⁾

However, these are basic steps. To be fully protected, your organization will need a system that can identify and deter fraudulent transactions in real-time as fast as the FedNow Service will operate.

The ToolCASE AI suite is the preferred and proven solution for the banking industry.  The ToolCASE AI suite of software products, including Rembrandt AI, RembrandtX, Informant and US3 working together operates as financial fraud and risk detection in real-time. Financial institutions will be notified of fraud instantly, as it’s occurring, live, giving you time to not only detect the fraud, but to stop it before it’s too late. These ToolCASE fraud detection capabilities perform across all banking and lending channels, at all times.

For more information about the ToolCASE FedNow Service risk management capabilities visit https://toolcase.com/#Fednow

(1) The US Federal Reserve 

(2) Frbservices.org