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Key Risks to Consider When Implementing Real-Time Payments

December 18, 2023


Risk Management in Real-Time payments

Facilitating real-time payments exposes your organization to multiple risks, not the least of which is fraud. Learn how to manage such risks.

Real-time payment (RTP) has significantly transformed the way consumers, businesses, and governments conduct financial affairs. And this has fueled large-scale adoption of instant payments. The number of real-time transactions worldwide is projected to reach 511.7 billion, growing at a CAGR of 21.3% between 2022 and 2027. While favorable regulations and concerted industry collaborations are facilitating widespread merchant adoption, strong marketing to enhance visibility is driving revenues.

But the rising sophistication of threats and complexities of the digital ecosystem are leading to a rise in risks for financial institutions that enable RTP. Therefore, risk management needs to be a part of DevOps to bolster risk management while implementing real-time payments. Here’s a look at the various types of risks and the solution.

Risk of Fraud

“The faster that payments are, the faster the fraud.”

~ Paul Tombleson, KPMG

Source: Fenergo

Threats to an industry evolve with the evolution of the industry itself, especially in the digital world where technology is accessible to everyone equally. Fraud is one of the most pronounced risks in the payments industry. The number of confidence tricks is growing while there seems to end to identity and card detail theft. Since the RTP function is operational 24×7, fraud prevention measures need to be reinforced.

Speed is a double-edged sword – it is driving adoption but also making incident detection more difficult. Additionally, over-simplifying user journeys with insufficient authentication methods opens more channels of vulnerability. Finally, increasing randomness of user behavior, due to uncertainty in the financial systems, could fool anomaly detection systems.

Rising Fraud Incidence Rates
Type Global Average
Confidence tricks 26.9%
Identity theft 11.6%
Card details theft 26.3%

The only way to mitigate fraud is to stay a step ahead of the fraudsters. Adopting innovative fraud detection and prevention tools, powered by advanced analytics and Artificial Intelligence, is only the initial step. Conducting regular audits and stress tests is essential to discovering vulnerabilities. Further, payment enablers must refine and test fraud alert mechanisms to identify and bridge any gaps between expected and actual consumer activity across the RTP network. Additionally, educating customers about fraud prevention best practices is critical.

Compliance Risk

Payment systems in America need to comply with the Electronic Fund Transfer Act and the corresponding implementation regulation in the Uniform Commercial Code. ISO 20022 is the latest standard for enabling global digital payments domestically and internationally, and complying with this standard will increasingly become critical as RTP penetration deepens. However, there are many more guidelines that online global systems must comply with. Also, handling cross-border transactions makes the regulatory arena even more complex, adding to the difficulties of payments providers.

Fortified regulatory oversight and reinforced regulations are critical to maintaining the sanctity of the real-time payments ecosystem. Compliance can help avoid fines or penalties while strengthening the organization’s capabilities to mitigate incidents. Embedding compliance checks within processes and consistently updating them to maintain compliance with the help of technology solutions can simplify the task.

Third-Party Risks

Financial institutions form multiple collaborations with diverse providers to deliver RTP services seamlessly to customers across the business landscape. These providers might offer technology, data management, point-of-sale equipment, APIs, and much more. These help FinTechs in integrating transaction processing and settlements for faster turn-around times. Since the third-party facilities permeate the entire ecosystem, they become key points of exploitation for cybercriminals and a primary concern for supervisory teams.

Financial organizations must establish controls and oversight to adequately measure, monitor, and mitigate any risks associated with third-party integrations. Ensuring that they follow the highest standards of compliance, AML (anti-money laundering) measures, and incidence handling processes strengthens the security of the payment network. A financial institution must establish initial, ongoing, and occasional processes to vet all vendors and third-party touchpoints to ensure the highest levels of security and protection.

Liquidity Risk

This is especially important for banks and credit unions. The Federal Reserve discount window (and those of most central banks) is operational for a limited time. But real-time transactions take place 24×7 and are settled individually and continuously. This emphasizes the need for financial organizations to maintain adequate checks and balances to settle transactions even during hours when funds become inaccessible.

Banks and other payment providers planning to offer RTP must create strategies that help them maintain and manage liquidity within their risk appetite. Monitoring transaction volumes and sizes is one way to assess liquidity requirements.

Managing Risks

Sitting at the heart of the ultra-modern FinTech ecosystem, RTP has reached ubiquity, strengthening customer stickiness and competitiveness of the financial sector. Notably, fraud does not begin when a transaction is initiated. It starts when a fraudulent text message is sent, or a call is answered. Therefore, the financial industry lacks end-to-end visibility of a malicious event. FinTech needs to focus on solutions that bring agility in the detection and prevention of incidents before they can do any damage. Further, as cryptocurrencies emerge and overlap with the mainstream, they will make the system more complex and may completely change the threat landscape, multiplying the risks to the financial ecosystem.

Behavioral analysis and transaction data can be used to train machine learning-based anomaly detection algorithms. Using API-based architecture helps eliminate siloes, facilitates information sharing, and helps optimize fraud management through a concentrated decision-making hub. Enabling automated instant fraud blocking for identified threats and maintaining continuity of operations can be a differentiator.

This gigantic task requires experience and expertise for success. Partner with Opus Technologies to streamline technology adoption, risk management, and third-party integration. With 27+ years of experience in the payments industry, we ensure that our clients deliver secure cutting-edge products and services. We support you in building smart payment flows, risk mitigation plans and controls, and administrative oversight across the network. Talk to our experts to make payments more secure and convenient for your organization and its customers.

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