The Federal Reserve Banks designed the FedNow Service so credit unions and financial institutions of all sizes could offer members and customers a fast, efficient way to send and receive money around the clock. FedNow supporters envision many ways to use it for more efficient and more accessible business and financial transactions. Examples include:
- A car dealer could quickly finalize a sale by receiving confirmation of the required payment immediately rather than in hours.
- A fast-food worker could get paid at the end of their shift instead of days or weeks later.
- Painters or other small businesses could access funds paid to them immediately when the job is finished to purchase supplies for the next job.
- Plaid has said it’s using FedNow through a partner financial institution for instant payouts for investments, payroll, loan disbursements, and insurance claims. Through FedNow, the fintech also facilitates instant microdeposits, the small-amount transactions used to validate accounts.
FedNow fraud considerations
Given the competitive landscape, credit unions and other financial institutions know they must work toward faster payments. Despite the potential benefits for members and credit unions, the nature of the payment rail creates several important fraud-management considerations.
First, credit transfers using FedNow can clear the core and complete settlement virtually immediately, within seconds. This is much faster than current clearing and settlement timeframes for checks, ACH transactions, and mobile personal payment options like Venmo. While those payment types can provide information confirming the transfer request within minutes, settlement can take hours or days.
A second fraud management and prevention consideration for credit unions is that FedNow will operate around the clock every day of the year. Fraudsters can try to push through fraudulent transactions at any time, so fraud detection, processes, and controls must be in place to act quickly at all times.
Fraud increases at credit unions
Fraud is already a major challenge for credit unions. For example, an ATM scheme that operated through July 2023 targeted credit unions in six states, stealing nearly $6 million. According to news reports, one credit union alone had more than $1.7 million stolen. One study found that the rate of fraudulent calls to credit union call centers jumped 70% in 2022, to 1 in 974 calls.
The near-real-time settlement of FedNow transactions and the ability of payees to withdraw the funds immediately will attract crooks and raise the stakes for credit unions. That's one reason many credit unions are taking a wait-and-see approach and looking to plan now for FedNow fraud prevention before offering real-time transfers through the payment rail.
According to FedNow, 400 of more than 10,000 eligible financial institutions, or 4%, have signed on since the July launch.