GLOBAL PAYMENTS KNOWLEDGEISO 20022 / SWIFT / SEPA / MT / MX
PAYMENTSSIGNAL

The interactive academy for the standards, messages, and rails that move money.

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FEDNOW (US INSTANT)

Not prefunded: a FedNow payment rejected for lack of cover

Trigger: Bank Alfa's Federal Reserve master account does not hold enough prefunded balance to cover an instant FedNow payment.

Contributor Shubham Mathure

What operations sees first: An instant payment is rejected up front rather than settled, because the sending bank has not prefunded enough.

WHERE IS THE MONEY?

Never left the customer's account — the payment was rejected before any debit or settlement.

DID SETTLEMENT HAPPEN?

No settlement; prefunding in the master account is what removes credit risk, and here it was not in place.

WHO ACTS NEXT?

Bank Alfa (sending bank) Bank Alfa keeps its master account funded 24/7 and the payment can be retried once cover is restored.

PLAY THE EXCEPTION

Trigger: At the moment the payment arrives, Bank Alfa's Federal Reserve master account does not hold enough prefunded balance to cover USD 300.00.

STEP 1 / 5MESSAGE

Riya instructs an instant payment

Riya (customer) → Bank Alfa (sending bank)

Riya asks Bank Alfa to send USD 300.00 to Arjun on a public holiday. FedNow runs 24/7/365, so there is no cut-off or waiting for a business day — but nothing has moved yet, this is only a request.

Step 1 of 5: Riya instructs an instant payment

  1. 01Message
    Riya instructs an instant paymentRiya (customer) → Bank Alfa (sending bank)
  2. 02Processing
    Bank Alfa checks its master account and screensBank Alfa (sending bank)
  3. 03Message
    Bank Alfa submits the payment to FedNowBank Alfa (sending bank) → FedNow (Federal Reserve)
  4. 04 · EXCEPTION PATHMessage
    FedNow cannot settle the paymentFedNow (Federal Reserve) → Bank Alfa (sending bank)
  5. 05 · EXCEPTION PATHProcessing
    Bank Alfa restores its prefunded balanceBank Alfa (sending bank)
  6. OUTCOME
    Funds
    Never left Riya's account — the payment was rejected before any debit or settlement.
    Settlement
    No settlement; prefunding in the master account is what removes credit risk, and here it was not in place.
    Who acts next
    Bank Alfa (sending bank) — Bank Alfa keeps its master account funded 24/7 and Riya's payment can be retried once cover is restored.
Full step-by-step text (works without JavaScript)
  1. 01Message
    Riya instructs an instant paymentRiya (customer) → Bank Alfa (sending bank)

    Riya asks Bank Alfa to send USD 300.00 to Arjun on a public holiday. FedNow runs 24/7/365, so there is no cut-off or waiting for a business day — but nothing has moved yet, this is only a request.

  2. 02Processing
    Bank Alfa checks its master account and screensBank Alfa (sending bank)

    Bank Alfa validates the payment, screens it for sanctions in real time, and confirms it holds enough prefunded balance in its Federal Reserve master account to cover the outgoing amount. On an instant rail these checks must finish in seconds.

    Screening checkpoint: Real-time outbound screening — An instant payment settles with finality and cannot be recalled, so screening happens before the payment is submitted — there is no batch window to catch it later.

  3. 03Message
    Bank Alfa submits the payment to FedNowBank Alfa (sending bank) → FedNow (Federal Reserve)

    The sending bank sends the payment message to the FedNow Service, which processes it the instant it arrives rather than batching it. The message asks for settlement; it does not itself carry the money.

  4. 04 · EXCEPTION PATHMessage
    FedNow cannot settle the paymentFedNow (Federal Reserve) → Bank Alfa (sending bank)

    An RTGS instant system will not create money a bank has not funded. Without a sufficient prefunded balance, the payment is rejected rather than settled — the receiver is never left waiting on unfunded value.

  5. 05 · EXCEPTION PATHProcessing
    Bank Alfa restores its prefunded balanceBank Alfa (sending bank)

    The bank manages its liquidity so the master account holds enough to cover instant outgoing payments around the clock, since FedNow never closes for a settlement cycle.

  6. OUTCOME
    Funds
    Never left Riya's account — the payment was rejected before any debit or settlement.
    Settlement
    No settlement; prefunding in the master account is what removes credit risk, and here it was not in place.
    Who acts next
    Bank Alfa (sending bank) — Bank Alfa keeps its master account funded 24/7 and Riya's payment can be retried once cover is restored.

THE TIMELINE

  1. 01Bank Alfa (sending bank)
    Submits a FedNow payment, but its Federal Reserve master account lacks the prefunded balance to cover it.
  2. 02FedNow (Federal Reserve)
    Will not create money a bank has not funded, so it rejects the payment rather than settling it.

    Prefunding in the master account is what removes credit risk on an instant rail; without it the payment cannot settle.

  3. 03Bank Alfa
    Restores its prefunded balance so its master account can cover instant outgoing payments around the clock.

Resolution: FedNow settles individually and finally in central bank money, so it requires the sending bank to prefund its master account. Without cover the payment is rejected up front; the receiver is never left waiting on unfunded value.

LEARN THE CONCEPTS

Sources for this scenario2
  1. Official requirement

    FedNow Service ↗ — Federal Reserve Financial Services · prefunding

    Describes the FedNow Service, the US instant-payments infrastructure operated by the Federal Reserve: 24/7/365 real-time gross settlement of individual credit transfers in central bank money, immediate and irrevocable, with prefunding in the institution s Federal Reserve master account. Live since 20 July 2023. · Checked 2026-07-14

    FedNow settles each payment individually and finally in central bank money, unlike the batch, deferred-net ACH network.

  2. Simplified educational illustration

    Payments Signal editorial teaching models — Payments Signal

    This site's own simplified teaching models. · Checked 2026-07-12

    What this simplifies: Single-cycle teaching model; participant-specific handling and exact timings vary.

    Used wherever diagrams, scenarios, figures, or example values are didactic constructions rather than sourced facts; every such use carries a simplifications disclosure. All people, companies, banks, and list entries in examples are fictional.