How It Works & How to Stay Compliant

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Modern consumers constantly demand services with better user experiences — they want fast transactions, limited friction, and a seamless user interface.

FedNow’s payment rail empowers financial institutions (FIs) to meet those demands. This new instant payment service allows banks, credit unions, and various other Fintechs to provide near real-time payments to customers.

To find out if FedNow is the right fit for you, we’ll look at what it is, how it works, and how it compares to other payment rails in the United States.

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What is FedNow?

FedNow is a new real-time payment rail service in the United States, introduced by the Federal Reserve. It is available to depository institutions such as banks, credit unions, and other financial institutions.

Who Implements and Manages the FedNow Real-Time Payments Service?

FedNow’s real-time payment service is being implemented and managed by the Federal Reserve.

How Does FedNow Work?

The FedNow Service is an instant payment service that sends and settles transactions in near real-time. While this seems simple enough, there are a lot of small processes happening to make this possible.

In all cases, the customers (both the sender and receiver) of the transaction conduct business as they typically would with their financial institution. The FIs then use the FedNow service to facilitate the transaction in real time.

The financial institutions are responsible for actually debiting and crediting customer accounts. The FedNow Service itself enables real-time payment processing between financial institutions.

Below, we break down exactly how this process works:

  1. The sending customer initiates a payment.
  2. The sender’s FI submits a payment request to the FedNow Service.
  3. The FedNow Service validates the payment request.
  4. The FedNow Service sends the payment request to the receiver’s FI.
  5. The receiver’s FI responds to the FedNow Service, confirming that they intend to receive the payment and that they maintain the receiver’s account.
  6. The FedNow Service debits and credits the master accounts of the sender’s and receiver’s FIs.
  7. The FedNow Service sends messages to both the sender and receiver’s FI to confirm the completed transaction.
  8. The receiver’s FI credits the receiving customer’s account.

The sending and receiving financial institutions are responsible for screening and compliance related to the transaction. For the sending FI, this needs to be done before the payment is processed through FedNow.

Receiving FIs participating in the FedNow service are also required to credit the receiving customer’s account in near real-time, as soon as the payment has been processed through FedNow.

Overall, this system mitigates the number of misdirected payments and creates a secure real-time payment process for all parties involved.

How Does FedNow Compare to Other Payment Systems?

The new system is designed to bring United States businesses up-to-date with the current market demands from consumers.

Two main factors make FedNow’s real-time payment service stand out from the other services available on the market:

  • Real-time Processing: Transactions are processed almost instantaneously, so customers can access funds immediately.
  • 24/7 Availability: Transactions can be processed 24 hours a day, 7 days a week, 365 days a year.

Another main difference is that the FedNow Service is only available in the United States. Other services operate in many countries, complicating the settlement process and compliance requirements. FedNow’s focus on the U.S. market allows it to operate faster, smoother, and more seamlessly for customers than services that facilitate international transactions.

When compared to other payment rails like the Automated Clearing House (ACH) and FedWire, the main difference is adoption. The existing networks have many participants, making them more lucrative for all participating members. While FedNow will take a while to build out its user base, the more participants they gain, the more beneficial it is to users.

FedNow vs Automated Clearing House (ACH)

The Automated Clearing House (ACH) has been operating since 1972, making it a reliable choice for depository institutions. That being said, today’s modern customers are looking for fast, efficient, and seamless transactions — enter FedNow.

Below, we compare the main differences between ACH and FedNow:


Automated Clearing House (ACH)

Transactions are processed individually and immediately.

Transactions are processed in batches throughout the day and take anywhere from a few hours to multiple days.

Transactions are settled in real-time.

Transaction settlements are deferred, and processed at specific intervals throughout the day.

Transactions are final and irreversible since they settle instantly.

Transactions are reversible since they don’t settle instantly.

Transactions can be processed 24 hours, 7 days a week, 365 days a year.

Transactions can only be processed during business hours and is unavailable during the evenings, weekends, and holidays.

Available to participating financial institutions.

Available to all financial institutions in the United States.

Since the Automated Clearing House has been around so long, it has a large pool of users, making ACH a lucrative option for most financial institutions that don’t require instant payments.

Organizations that don’t require instant payment would still benefit from using the ACH, and may not need a real-time service like FedNow. Some examples of this may be Business-To-Business (B2B) or Business-to-Government (B2C) payments.

Certain organizations may offer services that are at higher risk if they use real-time payments. If real-time payments of any kind are too high-risk for an organization, they may be better off sticking with the ACH.

FedNow vs FedWire

Surprisingly, the first iteration of FedWire — the Federal Reserve Wire Network — was started in 1918. At this time, the Federal Reserve created its own proprietary system for processing wire transfers, and only the 12 Reserve Banks could use it. In the 1980s, it was made more readily available to other financial institutions.

Over the years, membership has increased significantly, and it’s currently one of the most widely used payment rails in the United States.

Below, we look at how FedWire compares to the FedNow service.



Transactions are settled in real-time.

Transactions are settled in real-time.

Transactions can be processed 24/7/365.

Transactions can only be processed during business hours (9:00 AM to 7:00 PM), and is unavailable during the evenings, weekends, and holidays.

Only available to financial institutions operating in the United States.

Available to institutions within the United States and internationally.

Available to participating financial institutions.

Available to participating financial institutions.

While FedWire itself can process virtually any transaction amount, most financial institutions using FedWire still impose transaction limits on their customers. While FedNow will likely impose transaction limits lower than FedWire does, customers will be more impacted by the transaction limits imposed by their actual financial institution.

The main difference is availability; FedWire is only available during business hours — meaning it’s unavailable overnight, on weekends, or holidays. Alternatively, FedNow has no downtime, and will be available 24 hours a day, 7 days a week, 365 days a year.

Be Ready for Real-Time Payments with Unit21

FedNow has the chance to revolutionize payment processing in the United States, putting real-time payments within reach of banks, credit unions, Fintechs, other financial institutions, and online retailers. Really, anyone looking for faster transactions can benefit from using this new payment rail.

However, as more people and businesses flock to this new system, so will fraudsters. The fact is, real-time payment systems offer fraudsters quicker access to funds through transactions that are often irreversible. Depository institutions must rely on fraud prevention systems that allow them to identify and stop fraud.

Transaction monitoring will be more valuable than ever, allowing teams to monitor these real-time transactions for potential fraud - ideally stopping it before it happens. With activity monitoring, teams can understand user behavior and better predict when fraud is about to occur.

Learn everything you need to know to stay compliant with applicable regulations. And check out our post addressing some of the concerns about FedNow post-launch.

Schedule a demo today to learn how Unit21 can help your organization reduce fraud and false positives using FedNow.