The immediacy at which a payment routes and settles on the RTP® network offers credit unions new opportunities to reimagine their business and serve members in enhanced and different ways. However, these speedy new opportunities raise questions from financial institutions about the potential risk and fraud involved with immediate payment settlement.
Fortunately, the funds-transfer regulations that have been in place in our industry for decades have been extended to encompass real-time payment transactions and their payment systems. This is good news for those of us in the payments business because, although connecting to a real-time payments network may feel like uncharted waters, complying with the rules and regulations governing current payment transactions is familiar territory.
To answer some of the concerns regarding risk and fraud, compliance and regulations, as it relates to real-time payments, this article will explore three topics:
First, let’s look at the level of regulation The Clearing House (TCH) encounters as the operator of the RTP network as explained on their website under “How are TCH and the RTP network regulated?”
TCH’s important role in the U.S. financial system means it’s highly regulated and regularly examined by supervisory staff from the Board of Governors of the Federal Reserve Bank (FRB), Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).
Under the Bank Service Company Act, TCH and the payments systems it operates, including the RTP network, are subject to regulation and examination to the same extent as if the services being provided were being performed by a depository institution that is subject to FRB, OCC or FDIC supervision itself.
Due to an arrangement among the federal financial regulatory agencies through the Federal Financial Institutions Examination Council (FFIEC), the FRB acts as the lead examiner of TCH for examinations conducted under the Bank Service Company Act and its authority over TCH, and its operation of the RTP Network, is extremely broad.
TCH has also been designated by the Financial Stability Oversight Council as a systemically important financial market utility (SIFMU) under Title VIII of the Dodd-Frank Act and is subject to a heightened regulatory and supervisory regime as a result.
Next, let’s briefly look at the real-time payment operating rules, Reg E and UCC4A, and how these rules apply to real-time payments.
As a reminder, if a credit union is interested in offering real-time payments today, they would need to become a Participant on the RTP network, as the RTP network is currently the only network operating that offers real-time payments until the FedNowSM Service launches later this year. As a Participant on the RTP network, the credit union would have the option of selecting what profile they want:
ACH is a familiar payment framework to help understand how these profiles work. Just like your institution can use ACH only to receive or have the capability to receive and originate, you have similar options with the RTP network.
Now, back to the rules: For transactions where the consumer is the sender and/or receiver, Regulation E controls apply, followed by RTP Operating Rules (i.e., P2P via Zelle or A2A transactions). For non-consumer transactions, RTP Operating Rules apply, followed by UCC 4A (i.e., B2B use cases).
The RTP network operating rules require sending participants to follow appropriate risk mitigation and fraud management processes. This means your financial institution should review the risk mitigation processes and tools available from potential real-time payment service providers.
For payments sent by a consumer, the financial institution must provide the sender with the name of the receiver associated with thethe receiving account.
Another important point to keep in mind is settlement finality. The sending institution cannot cancel or amend a payment message once it is sent. You can request a return of funds, but there is no obligation for the receiving institution to return said funds. Ultimately, payments are final once a receiving institution accepts the payment message.
Real-time payments actually relieve a lot of the settlement risk financial institutions face today. Settlement risk is very real in existing payment forms, but by using a credit-push (good funds) model, which verifies money is available before it is sent, the real-time payments model eliminates transaction settlement risk on their network. Though this model doesn’t mitigate fraud, it does eliminate settlement risk.
For those financial institutions that are receive-only on the RTP network, there is no risk because the credit-push model verifies that the funds are good when they are sent. Starting your real-time payments journey as a “receive-only” participant will allow your financial institution to enable RTP network access for your members without bearing the transactional risk and apply the risk mitigation tools as you migrate to “send” use cases, such as enabling business-to-consumer (B2C) and business-to-business (B2B) transaction functionality.
For example, if a business sends money to another business, the sender must have the money available in their account before the payment is sent. The payment settles immediately after it is sent. So, the recipient knows that once they receive the notification of payment, the transaction is final and that the money is good. Both parties in the transaction can feel confident that the money is available, the transaction is settled, and they can move on with their business.
And, of course, although there’s potential for fraud with any payment transaction, there are ways to combat it. A recent article by the Federal Reserve titled “Get ready for instant payments: Fraud edition” emphasizes how stopping fraud “as far upstream as possible is crucial to minimizing the downstream impact. Having a robust account opening process can help mitigate authorized fraud, while strong authentication can help combat unauthorized, fraudulent transactions.”