Fraud in payments is nothing new. For decades, scammers have exploited the lag between when a transaction is initiated and when funds are verified and settled. One of the most notorious examples is check kiting, a scheme where fraudsters take advantage of the traditional three-day clearing window for checks. By writing bad checks and exploiting the time it takes for banks to process them (sometimes even leveraging time zone differences), perpetrators can withdraw funds that don't actually exist.
Even today, check fraud remains a persistent issue. A recent TikTok trend encouraged individuals to deposit checks without sufficient funds at ATMs, falsely claiming that banks like Chase had loopholes that allowed instant withdrawals before the checks bounced. This misconception led many to unknowingly commit fraud, highlighting the risks inherent in slower, paper-based payment systems.
Are Instant Payments More Susceptible to Fraud?
With the rise of digital payments, some financial institutions initially hesitated to embrace instant payment systems due to concerns that fraudsters could exploit the speed of transactions to quickly withdraw stolen funds and disappear. After all, traditional payment rails like ACH and wire transfers typically offer some delay, providing time for fraud detection and intervention. Instant payments, with their immediate settlement, appear to remove that buffer.
However, the reality is that instant payments can actually reduce fraud risks when implemented correctly. Unlike legacy payment methods, instant payments leverage real-time fraud detection, data-rich messaging standards (i.e. ISO20022), and built-in security controls that make transactions more transparent and traceable.
How Instant Payments Reduce Fraud Risk
While fraudsters have found ways to manipulate slower payment methods, instant payments provide key security advantages that can mitigate risks more effectively than traditional approaches. Here's how:
1. Data-Rich Transactions with ISO 20022
Instant payment networks like the FedNow Service and The Clearing House's RTP® Network are built on the ISO 20022 messaging standard, which enables richer data transmission with each transaction. Unlike checks, which carry minimal metadata, ISO 20022 messages can include:
· Sender and recipient details
· Purpose of the transaction
· Invoice or reference information
· Real-time status updates
This additional data makes it easier for financial institutions to verify transactions, detect anomalies, and flag suspicious payments before funds leave the account.
2. Real-Time Fraud Monitoring and Scoring
Legacy payment fraud detection often relies on batch processing, which means fraudulent transactions may not be flagged until hours or days later. With instant payments, fraud monitoring happens in real-time.
Advanced fraud detection tools can:
· Analyze transaction patterns and flag unusual behavior
· Score transactions in real-time, assessing risk before funds move
· Automatically trigger additional authentication for high-risk payments
This means that rather than giving fraudsters a multi-day window to exploit, financial institutions can intervene immediately when a transaction seems suspicious.
3. Built-In Payment Limits
One of the biggest fraud risks with traditional payments (especially checks and ACH) is that once a fraudulent payment is processed, it can be complicated reverse the transaction and determine liability. Instant payment networks address this risk through transaction limits and institutional controls. For example, FedNow and RTP include:
· Network-wide transaction limits (soon to be capped at $10M, with financial institutions setting their own thresholds)
· Participant-specific negative lists to prevent known bad actors from initiating payments
· Customizable business validation rules ,allowing institutions to block transactions that don't meet internal risk criteria By contrast, check fraud has little built-in protection. Once a bad check is deposited and cashed, recovering funds can be extremely difficult.
4. Greater Transparency and Traceability
Check fraud often succeeds because paper checks lack real-time tracking. Once a fraudulent check enters the system, tracing it back to the perpetrator is difficult, and fraudsters can cash out before detection.
With instant payments, every transaction is digital and fully traceable, giving financial institutions greater visibility into:
· Where the payment originated
· Who received the funds
· Any intermediaries involved
This audit trail makes it far easier to investigate fraud and prevent repeat offenders from gaming the system.
Faster Payments, Stronger Security
Contrary to the belief that instant payments create more fraud risk, the reality is that they offer stronger security measures than traditional payment methods.
By leveraging real-time fraud monitoring, ISO20022 data-rich messaging, transaction limits and negative lists, and greater transparency and traceability, instant payments can reduce fraud risks more effectively than paper checks or legacy electronic transfers.
As financial institutions continue their instant payments journey, embracing modern fraud prevention tools alongside these systems will be key to maximizing security and customer trust.
