FedNow
Definition
FedNow is a real-time payment and settlement service developed by the Federal Reserve to enable instant, around-the-clock transfer of funds between financial institutions in the United States.
Launched in 2023, FedNow processes payments in seconds, providing immediate clearing and settlement capabilities.
Within AML/CFT frameworks, FedNow represents a significant evolution in payment infrastructure, introducing new operational efficiencies while also presenting new compliance expectations related to speed, monitoring, and risk mitigation.
Explanation
FedNow is designed to modernize the U.S. payments ecosystem by providing 24/7/365 instant fund transfers between participating institutions.
Unlike traditional payment rails such as ACH, which operate in batches and can take one or more business days for settlement, FedNow enables near-immediate availability of funds.
This technological advancement is intended to support financial inclusion, enhance liquidity management, reduce settlement risk, and improve operational efficiency for banks, fintechs, and consumers.
For AML/CFT teams, FedNow introduces a paradigm shift. Instant payments eliminate the buffer time historically used to conduct pre-transaction risk checks, fraud screening, and anomaly detection.
Compliance processes must therefore adapt to real-time or near-real-time operations to ensure that institutions maintain robust controls without compromising transaction speed.
As more institutions adopt FedNow, the ability to detect suspicious patterns within compressed timeframes becomes critical.
FedNow is not a retail product but a payment infrastructure.
Financial institutions integrate their services and customer-facing platforms with FedNow’s rails to support use cases such as payroll disbursements, bill payments, business-to-business payments, and emergency transfers.
As adoption expands, AML/CFT teams must ensure that associated risks, such as instant fraud, mule accounts, and synthetic identity abuse, are carefully managed through enhanced controls, data analytics, and real-time detection capabilities.
FedNow in AML/CFT Frameworks
The introduction of real-time payment systems adds both opportunities and risks to AML/CFT operations.
FedNow interacts with AML/CFT frameworks in several core domains:
Real-Time Transaction Monitoring
Traditional monitoring models rely on post-transaction reviews and periodic batch analysis.
With FedNow, institutions must shift toward real-time or near-real-time monitoring. Suspicious transaction detection must align with the speed of settlement, measured in seconds.
Customer Due Diligence (CDD) Integration
Since FedNow allows instant movement of funds, weak onboarding processes or insufficient verification can lead to rapid funds movement by illicit actors.
Strong identification, authentication, and risk scoring become foundational before granting access to instant payments.
Fraud and Mule Account Detection
FedNow heightens the risk of scams, authorized push payment (APP) fraud, and mule account networks.
AML and anti-fraud teams must collaborate using shared intelligence, behavioral analytics, and device-level monitoring.
Enhanced Data Requirements
Regulators expect institutions participating in instant payments to maintain high-quality, structured, and timely data.
Accurate beneficiary information, transaction metadata, and digital identity controls are essential for managing AML/CFT risk.
Regulatory Oversight Expectations
While FedNow itself is not a regulator, institutions must comply with existing U.S. AML/CFT regulations, such as the Bank Secrecy Act (BSA) and FinCEN guidelines, while operating in an instant payments environment.
Regulators may scrutinize the adequacy of real-time detection systems during supervisory examinations.
The FedNow Process
Transaction Initiation
A customer initiates a payment through a bank or fintech application integrated with FedNow. The institution validates customer identity, account status, and available balance.
Pre-Transaction Screening
Although time is limited, certain risk controls occur before submission: account validation, basic fraud checks, behavioral scoring, and velocity monitoring. Institutions must optimize these controls for speed.
Submission to FedNow
The sending institution submits the payment message to the FedNow Service. FedNow validates format, settlement availability, and institutional credentials.
Real-Time Clearing and Settlement
FedNow instantly clears and settles the transaction by debiting the sender’s institution and crediting the receiver’s institution. Both institutions receive immediate confirmation.
Funds Availability
The receiver’s institution must make funds available instantly. This requirement differs from traditional payment systems, where availability may be delayed.
Post-Transaction Monitoring
Advanced monitoring engines review patterns, detect anomalies, and escalate alerts as necessary. Institutions may use layered controls, including behavioral analytics, historical comparisons, device intelligence, and velocity checks.
Examples of FedNow AML/CFT Scenarios
- Mule Account Networks: Real-time payments can be exploited by mule accounts used to move criminal proceeds rapidly. Institutions detect suspicious patterns such as multiple incoming payments followed by instant outgoing transfers.
- APP Fraud (Authorized Push Payments): Scammers manipulate victims into sending funds instantly through FedNow. Institutions rely on behavioral analytics, geolocation mismatches, and device risk scoring to detect anomalies before irreversible transfers occur.
- Synthetic Identity Fraud: Fraudsters create synthetic identities, onboard through digital channels, and exploit instant payments for rapid fund movement. Enhanced digital identity controls help mitigate this risk.
- Businesses Using Instant Payments for Illicit Trade: Criminal enterprises may use instant settlements to rapidly circulate funds across accounts. Transaction monitoring models evaluate merchant behavior, volume spikes, and discrepancies from industry norms.
- Cross-Institution Laundering Flows: Real-time payments may be used to layer funds quickly. Institutions use machine learning to detect patterns that resemble layering typologies but occur in compressed timeframes.
Impact on Financial Institutions
- Operational Transformation: Institutions must revamp their payment infrastructure, compliance workflows, and customer-facing platforms to support instant processing. Legacy systems may require modernization.
- Risk Model Evolution: AML/CFT risk scoring models must be recalibrated for speed. Real-time monitoring becomes an operational necessity rather than an enhancement.
- Increased Compliance Burdens: While FedNow accelerates legitimate payments, it also accelerates the movement of illicit funds. Institutions must adopt more sophisticated controls, including AI-driven analytics and integrated fraud-AML platforms.
- Higher Regulatory Expectations: Supervisory examinations may focus on institutions’ ability to detect and mitigate risks inherent in instant payments. Deficiencies may lead to remediation orders or regulatory penalties.
- Customer Satisfaction and Competitive Advantage: Institutions offering secure, real-time payments may attract customers seeking faster settlement. Strong AML/CFT controls are foundational for maintaining trust while enabling speed.
Challenges in Managing FedNow AML/CFT Risks
- Speed vs. Control Tension: The need for instant settlement leaves limited time for pre-transaction checks. Compliance teams must innovate without slowing payments.
- Data Integration and System Upgrades: Many institutions lack the real-time data infrastructure needed to run sophisticated or continuous monitoring engines.
- Fraud and AML Silos: FedNow increases the need for integrated fraud and AML detection. Siloed teams may struggle to respond effectively to emerging typologies.
- False Positives: Real-time monitoring models can over-flag transactions unless refined with accurate data, adaptive learning, and contextual intelligence.
- Regulatory Ambiguity: While the BSA remains the governing framework, regulators continue to define expectations for instant payments. Institutions must prepare for evolving guidance.
- Customer Education Gaps: Consumers may be unaware that instant payments cannot be reversed, increasing the risk of scams. Institutions must educate users without discouraging adoption.
Regulatory Oversight & Governance
- Federal Reserve: Operator of FedNow, responsible for technical standards, access rules, and system governance. While it does not directly impose AML/CFT obligations for FedNow, institutions must comply with relevant laws when using the service.
- FinCEN: Primary AML/CFT regulator under the Bank Secrecy Act. FinCEN may issue guidance on typologies or risk management practices related to real-time payments.
- Federal Banking Agencies: The OCC, Federal Reserve Board, and FDIC supervise banks’ AML programs and evaluate the adequacy of controls applied to instant payments.
- NACHA and RTP Networks: Industry bodies and alternative payment networks guide instant payments, fraud prevention, and interoperability standards.
- FATF: Global AML standards influence U.S. expectations. FATF’s emphasis on digital payments, electronic transfers, and speed-based risks supports alignment in supervisory assessments.
Importance of FedNow in AML/CFT Compliance
FedNow marks a transformational shift in the U.S. payments landscape.
Its instant settlement capabilities provide convenience and efficiency, but they also require modernization of AML/CFT systems.
Institutions adopting FedNow must ensure their compliance frameworks can operate at the speed of instant payments.
This includes real-time monitoring, advanced analytics, strong onboarding processes, and continuous risk assessments.
Robust FedNow compliance contributes to broader financial stability by reducing fraud, strengthening oversight, and enhancing trust in fast-payment ecosystems.
Institutions that implement resilient AML/CFT controls will not only meet regulatory expectations but also position themselves as secure participants in the evolving digital payments environment.
Related Terms
Real-Time Payments
ACH
Transaction Monitoring
Customer Due Diligence
Fraud Detection
Instant Settlement
References
Federal Reserve – FedNow Service
Federal Reserve Financial Services
FinCEN – Bank Secrecy Act Regulations
Federal Reserve Board – Supervision and Regulation
FDIC – Supervisory Insights
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