What are bankers telling clients about real-time payment risks?

Real-time payments can revolutionize access to funds, but it also complicates risk management, changing the conversations that banks are having with customers—particularly as the launch of FedNow draws near. 

One challenge is that the sheer speed of processing leaves much less margin for error. 

"The reality with instant payments is the transactions are irrevocable," said Jesse Honigberg, executive vice president of product and platforms for Customers Bank, a $20 billion-asset bank based near Philadelphia, speaking at American Banker's recent Payments Forum in San Diego. "The money is gone."

Honigberg and Uma Wilson, chief information and product officer at UMB, a $38 billion-asset  bank based in Kansas City, discussed issues like fraud and liquidity that are tied to real-time payments. They also discussed how that's impacting communication, pricing and other parts of the banks' communication with clients, and internally between bank departments. 

"Payments is a revenue generator for everyone," Wilson said, adding that all departments at a bank need to be involved in forging policies around sales, marketing, development and risk for all payment options with real-time as an emerging choice. 

UMB has been training staff for about half a year on how to manage real-time payments and engage with clients. The bank is also working with partners to come up with a strategy that mixes different types of digital payments based on needs for each client. "We want to know how many transactions need to be made instantly, or in 24 hours, or in four to five days," Wilson said. 

That discussion with clients includes fraud prevention, and how the banks and clients will work in tandem to mitigate payment fraud. While regulators are considering updated rules to govern responsibility for real-time payment processing risk, both Wilson and Honigberg said certain patterns are already emerging. "Everyone wants to send in real-time, but not necessarily receive," Wilson said.

While real-time payments are based on a good funds model—meaning the payment can't happen unless the payer can cover the transaction—there is less time to spot a bad transaction that results from a hacking, account takeover, phishing, or other type of financial crime tied to payments.  

"You don't have the luxury of accepting the payment with time to spot an issue. You have five seconds to accept it or not," Honigberg said. 

There is a plethora of technological options available and under development to combat real-time payment fraud. Mastercard, for example, is pooling different data sources to improve the artificial intelligence it uses to spot suspicious transactions, and both RTP and FedNow have lists of technology companies that provide support for fraud prevention. These products mostly use machine learning and advanced behavioral analytics to spot potential fraud earlier, before the point of payment. That requires more data on corporate clients and third parties, such as past financial and payment records and relationships with third parties. 

"Building systems to manage this is tough," Honigberg said 

There's also expense involved. The FedNow network is designed to lower costs for real-time payments, and thus far FedNow and RTP fees are similar. Both RTP and FedNow charge $0.045 per payment, and FedNow has a lower transaction limit of $500,000, compared to RTP's limit of $1 million. But these fees are just part of the overall cost for users, as banks will have to upgrade their payment and risk systems to accommodate transactions that process in seconds simultaneously. 

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To manage this expense, real-time payments are expected to be a premium service at first, and it's possible banks' commercial clients could have their cost for real-time payments—or even their ability to access real-time payments—linked to how well they manage fraud and liquidity risk. 

Banks need to think about how they educate businesses on the mix of payment options, speed, cost and the necessity of managing third party fraud risk, Honigberg said. That can come through sales and onboarding, which will require banks to discuss the "value trade" between real-time and non-real time settlement options and the need for businesses to vet their processes.  "There is an opportunity to deepen relationships," Honigberg said. 

UMB is discussing a risk-based pricing strategy for different payment options based on due diligence—the time required for a particular transaction and other factors that can affect risk when funds are moving quickly. 

"Just because there is a new payment rail doesn't mean it's the best option for the customer," Wilson said. "We may not enroll you for [real-time] unless you can show you have good controls in place." 

Banks need to know who their clients are and what kind of fraud they are anticipating, said Gareth Lodge, a senior analyst for payments at Celent, after the Payments Forum conference, noting that a majority of the volume comes from consumers through a bank's app. 

 "For RTP there are very clear and strict rules around the onboarding of corporates, especially for things like Request for Pay," Lodge said, referencing real-time billing—which pairs invoice presentment with real-time processing. 

Request for Pay is one of the largest early use cases for real-time processing. By enabling it for real-time bill pay, the product has the potential to reduce delinquencies and late fees by closely tying payment processing to the payer's account balance. And for B2B payments there is an opportunity with Request for Pay to more closely link supply purchase to the availability of those supplies. The challenge is to ensure that the payee is valid.

There are already pricing models in corporate payments that take that kind of risk into account that will need to be updated for real-time processing. Most merchants or corporates usually don't pay a list price for transactions, Lodge said. "The price they do pay will take into account all sorts of factors, such as volumes, values, value of the client, etc. This latter part will have an element of risk baked into it."

Banks should also be cautious about how aggressively they pursue client policies or price structures based on the risks tied to real-time payments, according to Lodge. 

"I think the flip side is that banks need to remember that fraud exists in all other payment types, so they should be looking at supply chain finance risk relative to other payment types, and how much they've invested to get to this point over many years," Lodge said.