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May 31, 2023 - Greg Oprendek

How Real-time Payments Became the Epicenter for Scams

Today, things we never imagined could be immediate, actually are. Texts fly across oceans in an instant. Our phones translate speech the moment the sound hits our ears. Stock trades, global headlines, even the latest summer blockbuster—all available in just a few taps.

It’s logical that this demand for immediacy came for banking, too. Real-time payments are the way we transfer money. Unfortunately, the fraud rate for instant payments is dangerously high. Why is it this way? And can we prevent instant scams before they become instant tragedies? To answer those questions, we need to explore how we got here and where fraud prevention is taking us.

A brief history of real-time payments

Based on a looser definition, Western Union’s telegraph-based wire transfers dating to the late 1800s could be considered the first “real-time payments.” These don’t fit the criteria we’re after, though—mainly because wire transfers can take hours, if not days, to settle.

The first true real-time payment rails were developed in Japan in the 1970s. This “direct debit” system allowed account holders to make payments from their bank accounts, electronically and immediately. Fast forward five decades later, more than 50 countries have developed similar real-time rails.

In the years between, Real-Time Gross Settlement (RTGS) systems developed in the 1980s enabled banks to immediately send funds to each other. These transactions settled instantly and were not reversible, just like our real-time payments today.

U.S. consumers didn’t fully join the real-time payment party until 2017 when The Clearing House created its RTP® network. Built on the Automated Clearing House (ACH) system developed in the 1970s, these real-time rails let account holders send money in real-time, any time.

Today, real-time payments are the norm in nearly every region of the globe. The landscape continues to evolve and improve as these international services begin to work together.

But, as we’ll discuss in depth in this article, real-time payments mean real-time fraud.

How scammers exploit real-time payments

Fraudsters’ attraction to real-time payments comes down to three key factors:

  1. Real-time payments are immediate and irreversible
  2. Scammers have already mastered schemes that work
  3. Banks have a tough time tracking real-time fraud and stopping it

Typically, real-time scams rely on some kind of authorized payment fraud. There are two main reasons this is the case. First, banks use powerful payment fraud detection systems that can catch many forms of unauthorized payment quickly. Second, convincing a victim to authorize a payment comes down to strong social engineering skills—something fraudsters have been perfecting for decades.

Real-time scams, at the start, follow the pattern of so many other financial frauds. Sometimes it’s a phishing email a fraudster sends pretending to be from a bank. Other times, they reach out through social media offering an unbelievable job or investment opportunity. In any case, their goal is to gain the victim’s trust, then use it against them.

The third component, banks’ inability to consistently find real-time scams, has just as much to do with verification as it does with payment speed. Real-time payments aren’t just immediate, they also often only require the account holder to approve a payment. That means to catch a scammer, the financial institution needs the customer or their fraud detection system to flag the scam to be able to fingerprint suspicious activity.

illustration of a fraudster committing account takeover fraud

Why real-time scams are hard to detect

We’ve covered how the speed and finality of real-time payments play into instant scams. But the trouble in detecting them goes beyond the nature of the payments themselves.

Scammers constantly adapt their tactics, putting sophisticated new spins on classic frauds to evade detection. Account takeovers and identity theft, two tried and true tactics, can prevent banks from identifying intricate fraud patterns in real time.

Real-time payments also inherently offer less information than traditional payments like checks or wire transfers. Account numbers, amounts, and timestamps alone aren’t always enough to spot fraud.

Additionally, banks need to process and analyze huge volumes of transactions in real time. That amount of data can strain fraud detection systems that aren’t built for real-time detection.

Perhaps the biggest challenge for banks is striking a balance between offering both robust fraud detection and a frictionless real-time user experience. Excessive security measures can inconvenience customers, but lax ones can increase instant scams.

Can real-time fraud be prevented?

Financial institutions count on foundational fraud prevention like two-factor authentication, AML, and crowdsourced abuse reporting. But to catch real-time fraudsters, they need real-time tools. Machine learning, both supervised and unsupervised, gives fraud fighters real-time monitoring capabilities to detect suspicious patterns as they happen. They boost case management by analyzing volumes of transaction data as it happens to spot potential fraud.

Best in class systems can spot transaction velocities, limits, and other warning signs that uncover crime rings. Tools like knowledge graphing aggregate data from millions of relationships to strengthen contextual decisions. Others, like device fingerprinting, collect unique user information to spot fraudsters before they attack.

Together, these powerful data-based tools, combined with a vigilant approach, can help prevent real-time fraud. In the end, prevention depends on how strong an institution’s fraud platform as a whole truly is.

How DataVisor prevents real-time fraud

DataVisor’s AI platform surpasses standard rules engines by using UML that doesn’t rely on historic data for its insights. Investigators can make decisions on alerts of suspicious behaviors that come before transactions are completed.

Modern fraudsters know that time is more critical than ever. DataVisor closes the gap for fraud fighters by catching fraud as soon as that first fake account is created. Real-time detection powers fraud teams to meet fraudsters at the moment they plan to strike, protecting customers and preventing losses.

To see how it works up close, book a personalized demo with one of our fraud experts and find out how much faster your detection and prevention can be.

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about Greg Oprendek
Greg is a passionate digital marketer, avid basketball fan, aspiring fraud expert, and Content Marketing Manager at DataVisor.
about Greg Oprendek
Greg is a passionate digital marketer, avid basketball fan, aspiring fraud expert, and Content Marketing Manager at DataVisor.