FedNow: The Ultimate Guide

What is the FedNow program, and what are the benefits of using the FedNow payment processing system? Unlock the power of FedNow with Swipesum!

After getting released in 2023, FedNow has quickly been adopted by many financial institutions. In the coming years, FedNow is going to gradually replace a large portion of ACH and wire transfers. This process will begin with banks, but it will eventually encompass all industries that rely on ACH and wire transfers.

Over time, FedNow will impact B2B payments and rent payments. Many companies will eventually incorporate it as a payment option, like credit cards and ACH payments are used today. Thanks to its speed, flexibility, low cost, and security, FedNow’s instant transfers are going to become a popular form of payment processing. 

With Swipesum, you can get a free consultation about your payment processing options. You can think of Swipesum as your chief payment officer because we can help you reduce the fees you pay for processing payments. We can manage chargebacks, optimize your payment system, navigate software integrations, and automate your statement audits. 

Table of Contents

  1. What is the FedNow Program?
    1. The History of FedNow
    2. How FedNow Works
  2. The Benefits of Using FedNow
    1. Financial Flexibility
    2. Instantaneous Payments 
    3. 24/7 Access 
    4. Paycheck Access 
    5. Lower Payment Processing Costs 
    6. Top-Notch Security 
    7. Liquidity Management 
  3. How FedNow Compares to Other Payment Processing Systems
    1. ACH 
    2. Wire Transfers 
    3. RTP
    4. Alternative Real-Time Payment Systems
  4. Do I Have to Participate in FedNow? 
  5. How Do I Participate in FedNow? 
  6. How Does FedNow Compare to Payment Apps? 
  7. Will FedNow Replace Cash? 
  8. How Are End-of-Cycle Activities Handled? 
  9. How a FedNow Payment Flow Works
  10. Can FedNow Freeze Your Account? 
  11. How Swipesum Helps With FedNow Consultations

What Is the FedNow Program?

FedNow services are a part of a new program that was created by the United States Federal Reserve Bank. With the FedNow program, the Federal Reserve is trying to create faster end-to-end payment services. 

Basically, it is a new payment infrastructure that the Fed is offering to institutions in the United States. It’s targeted at companies of many sizes, so everyone can take part. Through the program, you can access instant payment services. 

This means that customers and businesses can send payments in real time. Your instant payments can take place at any time of the day and on any day of the year. As soon as the payment has been sent, the recipient can immediately access their funds. This helps to improve the flexibility involved in receiving and sending time-sensitive payments. Even though FedNow provides faster payment processing, it actually charges less than wire transfers and other real-time options.  

The History of FedNow 

FedNow first began certifying participants in April of 2023. By July of 2023, FedNow was able to officially start its operations. Since then, it has grown to include many financial institutions and banks. 

The program’s initial development began in 2020. It was originally designed as an alternative to the TIPS instant payment system that was created by the European Central Bank. Through its creation, FedNow will lower payment processing costs for households and businesses. Because of the added competition, the rest of the payment processing industry will likely need to decrease how much they charge for these services. 

For businesses, this represents an opportunity. You can transfer money for a lower cost, receive payments instantly, and enjoy better payment security. Additionally, FedNow boosts liquidity management because you can easily send and receive funds in different business accounts. 

How FedNow Works 

FedNow is designed to help businesses, financial institutions, and individuals with their payment processing services. For financial institutions, this program helps them meet the needs of their customers and remain competitive. Meanwhile, individuals can instantly transfer money with confidence. Because the money arrives instantaneously, FedNow reduces the chances of overdrafts and late fees. 

Businesses can enjoy enhanced cash flow management and payment efficiency when they use FedNow to send and receive funds. Plus, this program can streamline the reconciliation process if there is a problem. 

Whether you use it as an individual or a financial institution, FedNow allows you to instantly connect to participating banks and credit unions. When you initiate a payment, FedNow is able to process it in real time. 

First, your bank sends a message to the recipient’s financial institution with the transaction details. Within seconds, the recipient’s bank confirms the transaction details and processes the transaction. As soon as this is done, the payment is complete. 

This kind of instant payment isn’t just useful for individuals and businesses. It is also effective for government organizations. When a natural disaster occurs, governments can send out emergency funds with a simple click of a button. Businesses can also give their workers on-demand pay.

Because of the strict security measures put in place by the Federal Reserve, you don’t have to worry about how safe your money is. Each transfer is fully encrypted, and this system is monitored for any suspicious activity. 

The Benefits of Using FedNow 

When you take part in FedNow, you can enjoy a number of benefits. Swipesum offers consultations about how this payment program works and what you need to do in order to take part. We can also help you with contract redlining, interchange optimization, automated statement audits, software integrations, account monitoring, and hardware programming. 

Financial Flexibility

By using FedNow, you don’t have to wait to use your money. As soon as an instant payment has been sent, the funds are available in the recipient's account. This is ideal if you need to receive a payment to start working on a new project or to buy inventory. Unlike other payment options, the funds are ready almost as soon as they are sent.

Instantaneous Payments 

One of the reasons why this program is so popular is because of its speed. You don’t have to wait multiple days or weeks for your funds to clear. Once the funds have been sent, they instantly appear in the recipient’s account. No waiting is required. 

More importantly, these instant payments will gradually become accessible to a broader audience. Small banks and community-based banks will be able to access instant payments, which will ensure more equitable access to these types of services. 

24/7 Access 

Banks might not be open on Sunday night, but your company doesn’t have to be closed for business. With FedNow, you can send payments at any time of day or night. These payments can also be sent on any day of the week. Holidays aren’t a problem. 

Paycheck Access 

For individuals, FedNow can make it easier to access paychecks. As soon as someone receives their paycheck or an electronic fund transfer, they can immediately start using it. 

Lower Payment Processing Costs 

Payment processing costs can quickly add up. The average payment processor charges between 1.5 and 3% of the transaction cost. By transitioning to FedNow, you can reduce your financial institution’s payment processing fees and save money.

Top-Notch Security 

FedNow encrypts all data flows for premium data security. It features network-level transaction value limits, which can be configured by financial transaction limits. Plus, there are fraud-fighting tools available as well. As a financial institution or bank, you can reject transactions that come from certain accounts.

Liquidity Management 

Financial institutions are legally required to meet certain reserve amounts. In addition, your institution or business may need liquidity for other reasons. In these cases, having access to instant payments means that you can manage liquidity in different accounts. Other than improving your vendor relationships, this can also help you handle your operational expenses. 

How FedNow Compares to Other Payment Processing Systems 

There are several types of payment processing systems that are commonly used by businesses. Other than ACH, real-time payments (RTP) and wire transfers are two of the most popular methods. Compared to these alternative systems, FedNow offers a number of advantages. 

ACH 

ACH is one of the most common payment processing systems. It uses a batch-based system, so transactions accumulate during the workday. Then, they are processed at set intervals. Because of how the transactions accumulate, payments in this system often take one to two business days to settle.

Because of this settlement timeline, ACH is best for non-urgent transactions that don’t have to be finished right away. If you’re not concerned about when you receive it, ACH is a viable option. 

In comparison, FedNow allows payments to be processed instantly on any day of the year. If you have an urgent or important transaction, FedNow is a better option. Because FedNow offers instant payment confirmation and higher security, it is incredibly useful for valuable transfers. ACH doesn’t offer these options because it processes payments in batches.

Wire Transfers 

Wire transfers occur when funds are transferred electronically between banks and financial institutions. They can take place quickly, but they also tend to be expensive. Because of this, wire transfers are commonly used with high-value transactions. 

FedNow offers the same speed as wire transfers, but it doesn’t involve the same high cost. In addition, FedNow offers its services 24/7. Wire transfers are only available at certain times, so FedNow is a more flexible and convenient method. 

RTP

RTP is another common payment system. Unlike FedNow, RTP isn’t run by a governmental organization. Instead, it is handled by the Clearing House. 

These transactions can be done instantly, but there are some limitations. When it comes to accessibility, you might not be able to use RTP at your bank or financial institution. Many institutions haven’t adopted RTP, so it isn’t an option everywhere. Because FedNow is working toward universal access, it will eventually be available to people at financial institutions of every size.

Alternative Real-Time Payment Systems 

Around the world, there are a range of other real-time payment systems that are in place. These may focus on a specific nation or a regional area. Each one of these systems has specific limitations, such as cost or accessibility. Because FedNow is provided universally at a low cost, it is more convenient for users around the world. The program’s instant transfers occur quickly, so you can send payments in real time. Plus, it has additional credibility because it was created by the Federal Reserve Bank.

Do I Have to Participate in FedNow? 

While FedNow is open to all banks and credit unions, you aren’t required to use it. Consumers and businesses aren’t able to directly access FedNow. However, you are able to use the FedNow program if you work with a participating financial institution. 

How Do I Participate in FedNow? 

In order to participate in FedNow, financial institutions can use one of four main methods. They can choose to send and receive funds or receive only, They can also use FedNow services for liquidity management transfers or settlement services. With the send-and-receive option, you can send and receive payments. This allows you to fully interact with the payment system. 

By choosing to receive only, a financial institution can accept payments. They cannot send any payments through, this is a good option. 

Meanwhile, liquidity management transfers are for financial institutions that need to manage their liquidity. It allows them to transfer funds between their accounts in real time, which helps with maintaining the correct balance in different accounts. 

Finally, settlement services are available in real time through FedNow. When you need to finalize a transaction with another party, this system lets you clear it immediately. 

Beyond the four basic options, there are also other features you can access. For example, FedNow offers fraud prevention tools There’s also a feature where you can turn in a request for payment capability, which allows a customer to ask someone else for a payment. 

These participation methods are available to financial institutions only. As a typical business owner or individual, your participation is available through your bank or financial institution. You can check with your bank or payment processor to see if they use FedNow.

How Does FedNow Compare to Payment Apps? 

Many businesses and financial institutions use payment apps to send and receive payments. FedNow is unique because the transactions occur in just a few seconds. Many payment apps require users to keep their account balance in the app instead of sending and receiving it directly from a bank account. 

In other cases, the app lets users send funds from their bank account and allows the funds to be instantly available for the person receiving them. However, this opens up a credit risk because the money actually transfers from one bank to another on a delayed basis. 

One important difference between FedNow and other payment apps is who can send payments. Many payment apps are for consumers who want to pay each other. In comparison, FedNow transfers can be sent between consumers, financial institutions, and businesses. 

Will FedNow Replace Cash? 

FedNow isn’t going to replace cash, and it isn’t a digital currency. Instead, FedNow is simply making it easier for banks, credit unions, and other financial institutions to send money to and from their customers. In this sense, it is similar to FedACH and Fedwire.

How Are End-of-Cycle Activities Handled? 

FedNow processes payments 24/7, which means end-of-cycle activities have to be handled in a certain way when it comes to accounting. As a financial institution or business, you will need to determine if your internal processes work with FedNow’s end-of-cycle management. You can also pick different reporting schedules and account reconciliation options for your unique needs.

In general, FedNow considers its cycle day to be between 7 p.m. and 7 p.m. ET. When you receive reports, it will include the report totals from routing transit numbers and intra-day activity details by transaction. 

Financial institutions will also recessive the following reports. 

  • Daily Statement of Account (Summary)
  • Statement of Account in Spreadsheet Format (Detail)
  • Financial Institution Reconcilement Data (Detail)

The FedNow cycle date will match the Fedwire Funds Service business day. Normally, this business day has a closing time of 7:00:59 p.m. ET. 

When a payment is received after the cutoff, it will still be transferred and received. However, it will be processed on the new cycle date if it is received after 7 p.m. ET. 

How a FedNow Payment Flow Works

The payment flow for FedNow works similarly to instant payments that take place through other mechanisms. It begins with the payer and the payer’s financial institution. Then, the payment flows through the FedNow network until it reaches the recipient and the recipient’s financial institution. 

1. The payer decides to send the payment. They send a payment message to their bank using the institution’s interface. 

2. Then, the payer’s financial institution authorizes the transaction. 

3. The financial institution sends a payment message to the FedNow Service. 

4. At this point, FedNow can validate the institution’s payment message. It sends this message to the recipient’s financial institution. Then, the recipient’s financial institution has the choice to accept or deny the payment message. 

5. The recipient’s financial institution sends a response to accept or reject the payment message. If the message is rejected, FedNow will tell the payer’s financial institution that the payment failed. If the recipient accepts the payment message, FedNow will instantly deduct the payer’s funds and add them to the payee’s account. 

6. Once the funds have been transferred, FedNow notifies every party involved in the transaction. The transaction is officially complete. 

Can FedNow Freeze Your Account? 

No. FedNow does not have the ability to monitor, access, or freeze individual accounts. It also doesn’t give the Federal Reserve the ability to do any of these activities. Individual and business accounts aren’t controlled by FedNow.

Instead, this instant payment service is designed to help banks and credit unions transfer funds to and from their customers. FedNow doesn’t give you an account with a bank. This system was only created to facilitate payment transfers, so it isn’t possible for it to freeze your account. 

How Swipesum Helps With FedNow Consultations 

With Swipesum, you can learn more about how FedNow impacts your payment processing systems. If you are a financial institution, you can start incorporating FedNow’s instant payments into the funds you send and receive. Private individuals and businesses can also use this service if it is adopted by their bank or financial institution.

As a payment processing and merchant services consultant, Swipesum can help you find the best payment processor for your organization. Through our consultations, you can learn ways to eliminate many of your payment processing fees. We offer an consultation for free where we can learn about your current payment processor and what you want from a provider. Then, we will create an analysis of your processing statements that shows how we can help you reach your goals. 

Whether you want to save money on payment processing or improve your company’s payment encryption, Swipesum can help. We can provide you with some of the following services. 

  • Interchange optimization 
  • Processor due diligence 
  • Merchant statement audit
  • Vendor and solutions due diligence
  • Analytics and monitoring 
  • Contract redlining 
  • Chargeback and miscellaneous fee monitoring
  • Account monitoring and customer service 
  • Software integrations 

If you are interested in saving money on your payment processing, we can help. To learn more and schedule your free consultation, reach out to Swipesum today.

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Michael Seaman

Michael Seaman

Michael is the co-founder and CEO of Swipesum. A veteran of the payments industry, Michael and his brother Stephen have led Swipesum since its inception in 2016. In his free time, Michael enjoyes time with his three children.

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