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Managing financial crime risk when connecting to FedNow

Learn the risks associated with processing payments when connected to instant payments systems

Richard Quick
August 22, 2023

What is FedNow?

Instant payments are being implemented globally, with Faster Payments in the United Kingdom, SEPA Instant Credit Transfer (SCT Inst) in the Eurozone and FedNow in the United States. Proving to offer fast, convenient ways to pay for consumers, improved cash flow for businesses and improved transparency and data-richness, they are making a huge impact on all financial services organisations, from banking and payments, to insurance, and gaming. Although the US has been slower to implement ubiquitous modernized instant payments than markets such as India, the UK and Brazil, according to McKinsey, US instant payments growth rates surpassed 60% in 2021.  

In July, the US central bank, The Federal Reserve, announced the go-live of its instant payments system, FedNow® Service. In addition to existing services such as Zelle and TCH RTP, FedNow’s  interbank transfer system, will drive a step-change in U.S transactions, making real-time everything the new normal. With 50 early adopters of the service already, it is set to follow in the footsteps of systems like Faster Payments in the UK and UPI in India.

FedNow transactions support ISO 20022 messages, a global data processing language for consistent, rich and structured data for transactions. By moving to a data-rich common language exchanged amongst banking systems, real-time payment processing is made possible. It provides structured and enriched data and improved remittance information supporting a reduction in errors via automated processing. This more structured and enhanced data also brings the opportunity for improvements in financial crime risk management, particularly through the use of advanced analytics and artificial intelligence to drive operational efficiencies.

How will FedNow affect the US payments ecosystem?

Built to help make everyday payments more convenient, banks and payment processors connecting to it enable their customers to instantly receive pay cheques, pay loans, bills and make instant transfers. It allows small businesses to manage their cash flows without delays, pay suppliers and disburse payroll or insurance payouts, all 24x7x365. For participating financial institutions, it supports liquidity management and settlement services. This represents a shift in the way US citizens pay, with lower transaction times from days to seconds and increased security.  

What are the risks?  

While instant payments will benefit consumers and businesses, it poses challenges for compliance teams. When the industry innovates, so do financial criminals. And with the real-time flows of the new FedNow service, there are additional risk vectors to consider. Payment processors and financial institutions need to analyse their existing processes and solutions against new the instant payment scheme to achieve a compliant around-the-clock service.  

Risks include the quick movement of irrevocable funds through multiple accounts and jurisdictions, leaving no margin for error. Payment institutions need to make sure they have robust anti-money laundering procedures in place that fulfil their compliance obligations in a real-time environment.

How can financial institutions reap the benefits whilst remaining compliant?  

As instant payments continue to grow in volume, institutions should take a holistic approach to preventing financial crime, particularly in cases where software has focused on manual intervention.  

Legacy screening solutions cannot keep up with the large transaction volumes that instant payments bring, nor with peak times at which payments are made and increased expectations of time to review risk.

Transaction screening solutions provide automated transaction review for compliance teams. With the added benefit of the rich data in ISO 20022, institutions benefit from more precise prioritisation, targeted strategies and risk tolerance thresholds can be applied to distinct payments institutions to decrease false positive rates and increase operational efficiency.  

A highly configurable point solution with dynamic analytics and risk scoring powered by artificial intelligence makes it easier for compliance professionals to make decisions with speed and accuracy, and in turn report suspicious transactions in accordance with regulatory standards.

Meeting consumer and business demand

The US still has some way to go when catching up with its global counterparts’ adoption of instant payments. But it is in a unique position in that, there are plenty of use cases to learn from. Connecting to the FedNow Service provides a range of competitive advantages to banks and payment processors, and a smooth transition is possible. By assessing existing processes against the new scheme, and making sure the right technology is in place, institutions can reap the benefits while remaining compliant.  

Discover how payment firms can implement AI to combat financial crime.

Register to join this Finextra webinar, hosted in association with Napier, to learn about different approaches to risk mitigation using AI technology.  

Photo by Marc Sendra Martorell on Unsplash

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