By Saeed Patel, product and tech expert at Eastnets
The Covid Pandemic has changed many things in life and business and one of these is how customers pay for goods and services. Fast Payment Systems (FPS) and Real-Time Payments (RTP) handle payments, 24/7/365. FPS and RTP were already gaining popularity before 2020, but since then, they have accelerated at pace. Research from industry publication, Pymnts, predicts Real-Time payments to double in 2022. Consumers are driving this change, and the digitization of payments is the flavor of the century, with 2021 moving the faster payments dial to full-on, breaking records by processing 3.4 billion transactions.
This speed of change is impacting banks and can affect how cross-border payments work. Here is some insight into what is trending in the world of instant payments.
Fast Payment Systems (FPS) and Real-Time Payments have revolutionized payment services across the globe. They have been a godsend to many during this time of crisis: merchants can be paid immediately (or almost immediately), instead of waiting for payments to clear and this reduces the risk of payment reversal due to insufficient funds; individuals can use fast payments to send money quickly in an emergency, and more easily manage money using digital wallets; financial institutions benefit through integrated faster payments that build better customer experiences and help shift customers from more costly check accounts.
Here are some of the key trends to watch out for:
Risk of cross-border payments via faster payments
Banks’ cross-border claims, where the recipient and sender are based in separate countries, reached $36 trillion in 2021. Faster Payment Systems are increasingly pushing into the cross-border payments arena, helping to reduce costs and complexity and improve user experiences. Schemes such as the EU’s SEPA (single euro payments area) are developing the frameworks needed to ensure that the rules of cross-border transactions are equivalent across jurisdictions. However, the mechanisms to de-risk these payment types are being explored on a global level by the G20.
At its G20 meeting in 2020, Finance Ministers and Central Bank Governors endorsed a “Roadmap for Enhancing Opportunities and Challenges of New Technologies for AML/CFT Crossborder Payments”. This roadmap has seen success in 2021 with many of the elements covering cost, speed, transparency, and access being met. The next stages of the roadmap involve the improvement of underlying systems. The G20 paper published in October 2021, “G20 Roadmap for Enhancing Cross-border Payments” highlights the need to address the risks associated with cross-border Faster Payments as the transaction volumes increase. The G20 paper asks for consistency in the implementation of standards to help minimize this risk. One of the identified areas of concern, for review, is in the “harmonization of AML/CFT requirements to help address challenges to cross-border payments.”
To address these challenges, the paper refers to a FATF report that explores new technology for AML/CFT. The report, Opportunities and Challenges of New Technologies for AML/CFT” The report highlights that faster payments offer smaller time windows to identify criminal activity, therefore smarter technologies are needed to optimize this window, catching the fraud event in real-time. The report states that these technologies need to be “more dynamic, provide network analysis, and operate at customer, institutional, jurisdictional and cross-border levels”. One of the suggested technologies is the use of distributed ledgers (DLT) as applied to transaction traceability for cross-border payments.
Banks that support Faster Payments will likely be expected to deal with the challenge of verifying a transaction and detecting criminal activity by using smarter AML technologies.
Faster Payment Schemes are part of the digital transformation of payments driven by consumer demands. However, the implementation of the technology that handles fast or real-time payments is a vital part of the cog in the payments machine. An article from an industry publication, Pymnts, featured an interview of the FIS Executive Vice President of Global Real-Time Payments Raja Gopalakrishnan: Mr. Gopalakrishnan said that fast payment adoption can be “boiled down to one word: simplification.”
Gopalakrishnan described the instant payments market as “largely untapped”. He continued to describe how consumers want the convenience of faster payments, but fraud is a stumbling block in adoption. The interview concluded that simplification of the user experience and the use of APIs will help with adoption.
Banks must encompass modern anti-fraud solutions, making them an intrinsic part of this simplification; smart systems that can use machine learning to adapt to change, on-the-fly, can provide seamless and fast background checks during a fast payment. This integration of AML into real-time and fast payment systems to build a more robust, fraud-resistant, payment architecture for all stakeholders.
Regulation and standards creep
Regulations always play catch up as technology speeds ahead. In the case of Faster Payment Systems and Real-Time Payment, hopes are pinned on ISO20022, a global standard that sets an agreed communication format to facilitate electronic data exchange between FIs. Current estimates from SWIFT expect that 80% of global volumes and 87% of the value of transactions will conform to ISO20022 over the next few years. Instant payments will benefit from ISO20022 as standardization of data communications facilitates automation and reduces human error. The results are higher straight-through processing rates that deliver the rails needed for faster payment adoption. A standards-based approach to data exchange also enables better integration with anti-fraud solutions and improved accuracy of data checks.
Banks should migrate towards supporting the ISO20022 standard to facilitate and enable instant payment services. SWIFT expects to support ISO20022, including for cross-border payments, by the end of 2022.
Continuing cyber-threats against payment systems (including FPS)
The selling point of FPS, almost or instant payment, is also its Achilles heel and one that is not lost on cybercriminals. This speed of processing offers opportunities for fraudsters to take advantage of. A Deloitte report talks about the vulnerability window created by removing the time for checks. Deloitte reports that when the Faster Payments system was introduced into the UK in 2008 the losses due to fraud increased by almost 300%. Deloitte concludes that FPS speed, irrevocability, proxy identifiers, high transaction limits, and data-rich transactions all contribute to attracting fraudsters.
As Faster Payments continue to increase in volume, the fraudster will follow the money. One negative trend in the FPS march onwards is that it is likely that fraud will increase with volumes. Money laundering is likely to utilize the speed of transaction. The use of ISO20022 helps by standardizing data quality across borders, supporting and enabling assurance checks to be made in real-time.
Banks must incorporate smart AML/Anti-fraud solutions that are designed to handle fast payments.
Faster Payment opportunities or fast fraud?
Faster Payments schemes such as SEPA in the EU and FedNow in the U.S., are making headway in building the rails for faster payments to increase volumes even further. This increase in volume will map closely to the expected recovery of the travel industry in 2022 and beyond. But faster payments also open a can of (fraud) worms. This needs to be dealt with using the same levels of innovation that FPS utilizes. Fast payments also can mean fast fraud. As the G20 and FATF have noted, ‘fraud fire’ needs to be fought using the fire of intelligent AML solutions. These smart anti-fraud platforms are multifaceted in terms of delivery benefits. An always-on approach to AML and fraud detection is a must-have for banks supporting a Faster Payments Service.