By Ray Birch
PLANO, Texas—With analysts warning the new FedNow offering is a double-edged sword—as faster payments benefit consumers and criminals alike—credit unions are being urged by Catalyst Corporate to implement “layered” defenses.
As CUToday.info has extensively reported, criminals are taking advantage of the speed at which money is increasingly moving, often getting away with funds before fraud tools can stop money from being taken from member and customer accounts, and long before anyone ever notices.
Catalyst Corporate was among the first to offer the FedNow service, including working with the Federal Reserve to develop the platform. The Fed recently reported FedNow had 400 institutions participating as senders or receivers on the network by the end of 2023.
Understanding the Risk
Mark Keeling, senior manager product strategy and product innovation at Catalyst, said that credit unions thinking about stepping into the faster payments space should be fully aware of the functionality and fraud prevention “layers” that are available.
Mark Keeling
“We believe it's important for credit unions to understand their risk,” Keeling said. “I also think it's important they look to providers in the marketplace, especially when they decide that they're going to embed transactions from a mobile device or from an online banking platform, that they feel comfortable with the protections that those systems provide.”
Glenn Wheeler, VP of payments strategy and product innovation at Catalyst, pointed out that the corporate has sought to emphasize to the credit unions it serves that the fraud they could encounter using FedNow is not new.
“This fraud is already in play and has been attempted in other payment areas,” he said. “Credit unions need to be able to accommodate the protections and the security, not only from an instant payment perspective, but also more broadly as an overall strategy for combating fraud around various different payment methods.”
The Defenses
Keeling explained that among the layers of fraud defense available to credit unions is what the Federal Reserve system already provides.
“There’s the FedNow fraud negative list—suspicious accounts organizations won’t send to or receive from—that is built into the system,” Keeling noted. “That is huge, because it allows a financial institution to be able to go ahead and put problem accounts they have externally experienced issues with into that fraud negative list. That will stop those payments from leaving or coming into their institution.
“So, being able to take advantage of that structure and then going back to systems and the layers the credit union already has,” he continued. “They can set transaction limits and velocity controls on transactions. For example, if there is an account takeover of someone’s mobile device and, say, three transactions go through within an hour, they might be automatically stopped. Some of these additional controls can help cut down or stop additional fraud from occurring.”
Additional Advice
Keeling also offered some other advice.
“What might be helpful is additional new user controls,” he said. “If they have a new credit union member, do they allow them to immediately go ahead and use that mobile or online banking platform with the FedNow network?”
Keeling said the payments industry is well aware of the new threats and is responding.
Glenn Wheeler
“There's fraud information sharing,” Keeling said. “Part of the agreement that we all make with the Federal Reserve when we come on to the FedNow system is that we will assist with the fraud investigation. If anything occurs on the front entry gate we will have that assistance from the other party, whether sender or receiver, that we may not have today. Right now, with many of the other payment rails, most of that is just voluntary, and sometimes we get help and sometimes we don't.
“There are many different industry efforts that are going on, and certainly with these workgroups that are happening at the Fed we have been actively involved in from the very beginning,” Keeling continued, noting Catalyst is working with the Faster Payments Council. “There is a fraud working group. We're able, in that scenario, to not just work with other financial institutions but the rest of the payments environment, the rest of the world, including consumer groups, merchants, corporates, government academics and so on. There's a lot of industry effort and initiative around this.”
Where Many CUs Begin
Keeling said many of the credit unions working with Catalyst are starting out with credit-receive only, which reduces fraud risk.
“We have been putting our heads together trying to figure out what are those potential fraud areas that we might see on the receive side. Certainly, the mule scenario comes up within that environment,” Keeling told CUToday.info. “They’re not going to get away with that easily on the receive side. On the send side, however, financial institutions really need to dig into that. Make sure, once again, you are using a layered approach, not just at the Fed’s layer.”
Even the Mules are Fast
Wheeler said Catalyst expects mule crimes—people acting at someone else’s direction to receive and move money from fraud-- will occur with FedNow.
“We've been talking about the mule example. We believe it is applicable in a faster payments world,” Wheeler said. “We're trying to work with and educate credit unions on how to combat that, as well as marshal work with the industry. The short explanation for a mule fraud is when an unsuspecting person in some way gets tied into a bad actor and that bad actor says, ‘Hey I've got a check for $500. I don't have a bank account, but if you'll deposit it, I'll let you keep $100 and you can give me $400. Or I'm going to ACH $500 into your account and you give me $400 and keep $100 because I don't have a bank account.’”
Limited Fraud…For Now
Despite those cautions, Wheeler emphasized the fraud currently taking place related to FedNow is not extensive.
“Right now, fraud as it relates to FedNow, we're not experiencing it. But we don't want to have blinders on, to think that we can't be proactive. Because as volumes and participation start growing…,” Wheeler said.