Behavioral Biometrics: Making a Business Case for Same-Day ACH Payments

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1 Behavioral Biometrics: Making a Business Case for Same-Day ACH Payments

2 OVERVIEW May 2015 will be remembered in the financial industry as a revolutionary month. NACHA s announcement of same-day ACH (Automated Clearing House) payments will benefit both businesses and consumers whose payments are eligible for same-day transaction processing. But it will also strain banks that need to operate under the new guidelines and protect vulnerable ACH transactions from fraud. According to NACHA, 99 percent of current ACH Network volume will be eligible for same day payments. The volume and faster time constraints will impact many banks as they prepare for the changes to start in September This paper explains some of the challenges with same-day ACH payments and how banks can prepare to protect against an increase in ACH fraud. The Need for a Speed ACH is used for payments like online bill payments, mortgages, and payroll with most payments getting settled the next business day, MOST COMMON USE FOR ACH PAYMENTS: 1. Bills 2. Mortgage 3. Payroll ACH operates only on banking days so payments must settle at 7PM the night before each banking day. Payments submitted at 7PM on a Thursday are sent for settlement only on Sunday at 7PM (unless Monday is a holiday). The schedule of submission for settlement is strict and the inefficiencies helped contribute to making the change. 2

3 When a study by the Federal Reserve found that 69% of consumer payers and 75% of business payees favored immediate or one-hour payments 1 NACHA came up with a solution to support same-day payments in an efficient and safe way. Same-Day Rule Change 2 1hour The Federal Reserve found that 69% of consumer payers and 75% of business payees favor immediate or 1 hour payments Roughly 75% of businesses expressed willingness to pay a fee for faster payments The most common use cases that consumers and organizations can benefit from sameday payments include: Business-to-business payments faster settlements of invoices Account-to-account transfers enabling faster money movement among various accounts Payroll faster access to pay Person-to-person payments Bill payments enabling consumers to make more on-time bill payments and providing faster crediting for late payments Implementation Schedule In Phase 1, ACH credit transactions will be eligible for same day processing for applications like 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 variety of consumer bill payments 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) and funds from same day ACH credit transactions will be available to customers by 5 P.M. RDFI local time. Phase 1 - effective on September 23, 2016 Phase 2 effective on September 15, 2017 Phase 3 - effective on March 16, Federal Reserve System: Strategies Improving U.S. Payment System 3

4 Highly Abbreviated Review Rate Phase 1 is approaching in less than a year and banks are starting to make the necessary adjustments with their systems and operations team. Whereas settling a payment would usually take one to four days, the new time frame can be as short as two hours. Financial Institutions will need to review thousands of additional transactions per day and they will need to adjust by adding significant staff to the review team. The effect of processing payments in such a short time frame will be felt at the operational level and result in an increase in costs. Examples Graph 1 illustrates the influx of payments submitted (pre ruling) by commercial bank customers (based on data from a US commercial bank). The X-axis represents the time of day and the Y-axis represents the % of payments submitted during each time interval. Graph 1: Influx of payments (%) during a typical day of a commercial bank (Pre-ruling) Pre-ruling - % payments submitted by bank customers Once the ruling comes into effect there will be two clearing windows daily: The first submission deadline is 10:30 A.M. and settlement is at 1:00 P.M., and the second is 3:00 P.M. with settlement at 5:00 P.M. 4

5 Graph 2 shows the expected influx of payments after the same date payment ruling comes into effect. Notice that payment submissions are expected to climb dramatically and then drop right after the payment deadlines at 10:30 and 15:00. Graph 2a: Influx of payments (%) during a typical day of a commercial bank (Post-ruling) Post-ruling - % payments submitted by bank customers The result is that bank fraud teams will have less time to process payments and evaluate suspicious payments. Therefore, banks will need to dedicate more resources and hire additional fraud analysts to manage the spikes. How many more fraud analysts are needed? Let s examine the 2nd clearing window. In Graph 2b, the number of payments that need to be processed by the end of the 2nd clearing windows is depicted in the area colored in blue (65%) and the time available to review these payments is indicated in a black line (4 Hours). 5

6 Graph 2b: Influx of payments (%) during a typical day of a commercial bank with analysis of 2nd clearing window Time to process: 4 hours 65% of daily payments Post-ruling - % payments submitted by bank customers The impact assumes that a fraud team processes all risky payments (100%) during a 9 hour shift. This means that within 4 hours they can process 4/9 (44%) of the daily risky payments. And since the required amount to process the 2nd clearing windows is 65% of the daily risky payments the increase in workload is 65/44=~1.5. Fraud teams will need to grow by about 50% to provide the same level of risk mitigation coverage for risky payments. Faster ACH Payment = Increased Fraud According to a recent Aite Group report 3 on digital-channel fraud mitigation, when the United Kingdom 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. Whereas settling a payment before the new rule would usually require a minimum of one day to four days, the new time frame may be as short as two hours. We expect fraud attempts to increase and fraud teams will need to adjust. This will create a need for additional fraud staff members. 3 EMV: Lessons Learned and the U.S. Outlook JUNE 2014 Julie Conroy uploaded/aite%20report%20-%20emv%20lessons%20learned%20and%20the%20u.s.%20outlook.pdf 6

7 SUMMARY AND BUSINESS CASE The first phase of the same day ACH payments ruling will take effect in September Banks are already taking the necessary technical steps to enable same day payments. Our analysis shows that current staff and the present control will not be able to process the payments on time and banks will need at least 50% more fraud analysts to keep their current risk mitigation levels. Behavioral Biometrics: A Business Case for Same-Day ACH Payments BioCatch TM uses behavioral biometrics to authenticate online users. Once installed, BioCatch collects and analyzes more than 500 cognitive parameters to generate a unique user profile. This profile follows the user whenever he/she goes online and accesses his/her bank. Using behavioral biometrics, BioCatch detects anomalies in realtime and indicates account takeover and malware without friction for the end users. With NACHA s same-day processing new rule, banks will need to adjust to the excessive amount of reviews per day. BioCatch s authentication allows banks to process ACH payments well before the afternoon deadline, find fraudulent transactions, and save on operational costs by reducing the number of payments that require manual review. Contact us today to learn more: info@biocatch.com 7