I SECURITY & FRAUD Faster Payments, Faster Fraud? NOT SO FAST! BY PETER GLICK, PCBB Is the notion of “faster payments, faster fraud” just a myth? It appears so, at least for two community banks that participated in a recent Federal Reserve online town hall discussing fraud management strategies for the FedNow Service. The $1.3 billion-asset North American Banking Co. in Minnesota allows consumers to use the FedNow Service for instant payments and is now rolling the option out to business customers. The bank deploys controls like velocity, limits and other measures that enable the bank to pull suspect transactions out of the process safely before they are settled via a vendor. “While FedNow does have instant payment capability, the only instant part of it is the actual execution of the payment,” said Ryan McNaughton, vice president of information technology. “The lead time between when somebody wants to execute a payment and when it actually goes through is where we are focusing all of our risk mitigation activities. We are not seeing much in the way of fraud or attempted fraud on the FedNow network.” The $8.7 billion-asset 1st Source Bank, South Bend, first allowed business customers to conduct transactions via the FedNow Service with plans to extend capabilities to consumers. The bank also uses vendors to connect with the FedNow Service, as well as to help the bank stop fraudulent transactions before they are settled using risk mitigation measures that also include Know Your Customer controls. “KYC is everything. We know our clients, and we can put internal controls on each of those clients – on who can approve payments that potentially leave our portals, as well as transaction limits and daily limits,” said Jim Hunt, division head of payment strategy. The bank also partners with vendors to comply with the requirements of the Treasury Department’s Office of Foreign Assets Control to minimize fraud and other illegal activities by sanctioned countries and other bad actors. If transactions are automatically stopped by any of these measures, the goal is to then manually determine as quickly as possible if they are, indeed, fraudulent, according to Hunt. “We really haven’t seen any fraud, and we are definitely scaling transactions quickly,” he said. “However, we always have to be aware that bad actors out there will find ways to exploit. There’s always that next risk. Our concern is that we don’t get complacent, so we try to make sure our solutions are state-of-the-art.” FedNow Service’s Implementation of ISO 20022 The FedNow Service has several built-in capabilities to help banks and their vendors mitigate fraud, including the implementation of ISO 20022, a new messaging standard that enhances communication between financial institutions globally. One of the biggest benefits of ISO 20022 is enhanced fraud and financial crime prevention. The structured and expanded payment format allows for more data to be included with every transaction. With elements like LEI and the purpose code, it’s easier to see where payments are going and why they’re being sent. Structured name and address details for senders and beneficiaries help improve AML and KYC practices, which make screening more efficient and accurate. Unlike traditional Fedwire payments where senders try to fit in data wherever they can, the ISO 20022 format is highly 18 HOOSIERBANKER
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