Exploring the Challenges of Real-Time Payments in the US

In the swiftly evolving world of finance, real-time payments are reshaping money movement globally.

With the mid-2023 launch of the Federal Reserve’s FEDnow service, the United States has made a significant advance. This shift poses new opportunities for banks and payment service providers (PSPs) in the face of evolving challenges.

What strategies can PSPs employ to thrive in this new era of digital fraud?

Real-time payments, or instant payments, essentially allow for the instantaneous transfer of money from account to account on a 24/7 basis. The benefits of this service are undeniable; billions of dollars that are otherwise “locked” in clearance can be processed almost instantly, there is a positive impact on the liquidity of individuals and companies, and it promotes competitiveness.  

Demand for real-time payments is therefore soaring. According to a report by ACI Worldwide and GlobalData, there were 266.2 billion real-time payment transactions globally in 2023, a 42.2% year-over-year increase. And the market continues to surge. The report projects that by 2028, real-time payments will account for 27.1% of all electronic payments worldwide. 

Real-time payments in the US

While the real-time payments market has been established in Europe for some time and its services are expanding (under the Instant Payment Regulation, it will be possible to transfer money in euros across the EU and EEA within ten seconds), the market in the US is still in its infancy with instant payments accounting for only 1.5% of total payments volume in 2023. 

The big leap in this respect came with the launch of the FEDnow service in July 2023. Although instant payments have been available to Americans since 2017 thanks to Zelle and the Clearing House’s RTP Network, FEDnow, developed by the US Federal Reserve, is a fully centralized instant payments infrastructure that will further accelerate the development of the US real-time payments market. 

The demand for real-time payment (RTP) services is strong in the US. By the end of 2023, a total of 331 banks and credit unions of various sizes—from under $500 million to over $3 trillion in assets— had joined the FEDnow network. In the first quarter of 2024, the Clearing House’s RTP Network recorded a total of 76 million transactions with a cumulative worth of $42 billion. With the launch of FEDnow, RTP transaction volume is expected to grow at a CAGR of 31.7% between 2023 and 2028. ACI Worldwide and GlobalData estimate that by 2028, the transaction volume could reach 13.9 billion and a 4.8% market share. 

Instant payments, instant challenges

Today, real-time payments are becoming an integral part of American and global financial reality. However, the evolution in availability and speed of payments presents challenges. One in particular is the rise of payment fraud, which is now as instant as the payment service it often uses. After all, fraudsters always follow the money. 

The United States can learn from others in addressing this issue. The UK launched an instant payment system under the banner of the Faster Payments System back in 2008. The service is popular and growing—in 2023 it processed a record number of over 4.5 billion payments. Unfortunately, Faster Payments is also a significant channel for payment fraud. If we zoom in on the authorized push payment (APP) fraud, a full 90% of fraud incidents happen via Faster Payments, according to the UK’s Payment Systems Regulator. 

Speed is the scam’s best friend

With the development of Faster Payments, UK banks have swiftly learned to effectively defend against unauthorized transactions and account takeovers. Fraudsters have thus turned to the weakest link—the human—through social engineering tactics, often aided by artificial intelligence. 

In fact, speed, the core value of real-time payments, plays to the fraudsters’ strengths, especially in the case of scams. Psychological tactics of social engineering exploit coercion and time pressure. As a result, the simplicity and immediacy of real-time payments present a double-edged sword. By the time the victims realize they have been conned, the money is long gone from their account. 

Speed also plays into the hands of fraudsters when it comes to covering up the tracks. By using instant payments, cybercriminals send money to multiple mule accounts, making it difficult for banks and police to trace where the funds ended up. 

Given that scams are a major contributor to fraud losses in the US, the issue should not be taken lightly. According to the Federal Trade Commission, imposter scams were the most common type of fraud in 2023 and the second highest in terms of financial losses that totaled just under $2.7 billion. 

How to combat RTP Fraud

What lessons can the US draw from Europe? Leading the charge, British regulators have developed methods to thwart scammers and better protect consumers. These include Confirmation of Payee, inbound payment monitoring, and, last but not least, new mandatory compensation for APP fraud victims, which will come into force in 2024.  

We can thus expect changes in the liability for fraudulent real-time payments, including transactions made under pressure from fraudsters by the users themselves. The UK is one of the pioneers of liability changes, but other jurisdictions, including the European Union, are also planning to shift liability for losses from individuals to banks. US institutions can take inspiration—and some are already doing so. Zelle, for example, has succumbed to public and Washington pressure and started reimbursing victims of imposter scams. This is a game-changer for US consumers as the law only requires compensation for losses from unauthorized payments, such as when an account is hacked, or sensitive information is compromised. 

It will also be necessary to step up efforts to better educate users who often get the short end of the stick against experienced, sophisticated, and brazen fraudsters. Communication on a personal level with customers will also be essential once a bank suspects that a customer has fallen victim to fraud. This requires investment to put new procedures in place and to train staff on how to communicate with fraud victims.  

To properly classify fraud, the Federal Reserve created the FraudClassifier Model. It helps organizations navigate the types of fraud to achieve consistency in fraud recognition, tracking, and reporting. 

Modern payment methods demand modern fraud detection

To deal with the threats posed by the proliferation of real-time payments, banks must implement advanced protection against modern types of fraud, including APP fraud. The key is to use artificial intelligence and other advanced technologies that can track suspicious activity in real time, and most importantly, identify deviations in normal user behavior. Outdated anti-fraud systems based on rules and blacklists are no longer sufficient.  

In this respect, the Behavioral Intelligence Platform developed by ThreatMark offers everything that a modern approach in the fight against fraud—which, like payments, happens in real time—requires. By analyzing a customer’s behavioral patterns (mouse movements, keystroke dynamics, phone swipes, and touch events) combined with device and in-session context data, the platform can detect various types of fraud, including the threat of APP fraud, and stop it before the money leaves the victim’s account. A person influenced by a fraudster exhibits subtle but distinct behavioral changes. Behavioral intelligence can detect these nuances. 

ThreatMark’s Behavioral Intelligence Platform was developed in Europe and draws on experience gained in European markets where instant payments have existed for many years. Unlike some other solutions, it is fully tailored to the real-time payment environment and the risks that this transaction method poses. For organizations looking to address fraud comprehensively, including the impact of instant payments and the growing threat of RTP fraud and APP scams, it is an ideal solution. 

This is especially important for consumers in the United States, as banks, credit unions, and PSPs are only required to compensate them for unauthorized payments. Reliable and functional fraud prevention mechanisms are therefore a critical competitive advantage for financial institutions, increasing customer trust and retention. 

Read more about our Behavioral Intelligence Platform