NACHA's adoption of same-day payment, or ACH (Automated Clearing House) payment - allows businesses and customers to benefit from receiving same-day transaction processing, though with security risk.
ACH payment allows for quicker access to payroll, account transactions and faster bill payments. However, banks and other financial institutions will need to review thousands of additional transactions per day, leading to a significant increase in staff and operational costs--not to mention the increased potential for fraudulent activity due to sheer volume and rapidness of review.
NACHA’s new rule, which will go into effect September 2016, will give the US three years to move to faster payments, easing the implementation process and allowing financial institutions the time they need to efficiently scale up to be ready for this new era of payments.
In Phase 1, ACH credit transactions will be eligible for same day processing, supporting use cases such as hourly payroll, person-to-person (P2P) payments and same-day bill pay. In Phase 2, same-day ACH debits will be added, allowing for a wide variety of consumer bill payment use cases like utility, mortgage, loan and credit card payments. In Phase 3, faster ACH credit funds availability requirements will be introduced for Receiving Depository Financial Institution (RDFIs); funds from Same Day ACH credit transactions will need to be available to customers by 5 P.M. RDFI local time.
When the U.K. moved to faster payments in 2008, U.K. banks saw a sharp spike in fraud as criminals took advantage of the reduced time frames for effective risk management, according to Aite Group.
Whereas settling a payment before the new rule would usually require a minimum of one day to a maximum of four days, the new time frame may now be as short as only two hours. It will take existing fraud teams approximately 4.5 hours to review all risky transactions, which means finishing the review a full two hours after the mandated time for processing. The additional cost of labor to check the same number of payments in a far shorter period will be significant – as much as 45% more - resulting in a massive cost on the operational center.While today approximately 20% of sessions are done in the morning hours, sessions are expected to grow to 50% during these early hours since many people will want to take advantage of same day payments and submit just before the deadline. As a result, it is expected that there will be 150% uptick once this rule goes into effect.
There are several ways that banks can prepare for same day payments before the rule goes into full effect.
Ramp Up Fraud Review Teams: As morning sessions are expected to increase, the easiest thing banks can do is hire more people to ramp up their fraud review teams. But that means banks will need to increase their numbers of employees by almost 50% just to meet the deadline. Otherwise, they will need to accept greater risk, and review a smaller portion of the transactions.
Reinforce fraud prevention controls: While moving to faster payments is great news to banking customers, it is, unfortunately, even better for criminals wishing to perpetrate banking fraud. The shorter the time between deed and dough, the less probability of getting caught, meaning that banks can expect more fraud attempts and newly introduced criminal tactics. Banks should therefore beef up their security by putting in place new processes and solutions to address existing and new threats.
Drive efficiency in the transaction review process through behavioral authentication: Hiring more people is not enough - banks need to find ways to validate transactions and authenticate users without negatively impacting end user experience. For example, if 2% of transactions are risky, and half of them could be authenticated using advanced verification through behavioral biometrics, the review team would be able to evaluate more transactions in less time.
Act NOW: The new rule is set to be rolled out in three phases during a three-year period (ending in March 2018). This lengthy timeline may cause banks to think that the true impact of this rule is still too distant to worry about, however, the impact of the ruling on ACH transactions will have it biggest operational impact during the first phase.
Finding a way to authenticate users in a frictionless manner is going to be key as banks search for a way to reduce review time without having to increase staff and operational costs. With the right preparation in place, banks may be able to ease into the era of same-day payments with greater confidence and less fraud.
Oren Kedem is vice president of product management at BioCatch.