Executive Summary: The Federal Reserve is mulling an amendment to the regulations governing FedNow, its instant payments service launched in July 2023. By permitting the use of intermediaries—a model already successful in the Fedwire Funds Service—FedNow could soon settle the U.S. domestic leg of international transactions, dramatically increasing speed and efficiency for global payments.
Breaking the Domestic Barrier
Since its inception, FedNow has been strictly a domestic tool, limited to transfers between two U.S.-based financial institutions. While this has revolutionized 24/7 instant payments within the States, it left a gap in the global market where speed is often hindered by legacy correspondent banking networks.
The Fed’s staff memo notes that since the July 2023 launch, participating banks have consistently requested cross-border functionality to meet the growing demand for instant international liquidity.
How it Works: The Intermediary Model
The proposal doesn't change who can join FedNow, but rather how funds can flow. By allowing intermediaries, FedNow would function similarly to Fedwire:
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The Origin: A payment is initiated outside the U.S.
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The Link: An intermediary bank receives the international funds.
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The FedNow Leg: The intermediary uses FedNow to send the domestic portion of the payment to the final U.S. recipient bank in seconds.
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Settlement: The transaction settles instantly across the Reserve Bank's books.
Luring Smaller Banks to the Network
Currently, approximately 1,700 financial institutions are linked to FedNow. While most major U.S. banks are onboard, the Fed is aggressively trying to lure smaller credit unions and community banks.
By adding cross-border capabilities, the Fed increases the value proposition for these smaller institutions, allowing them to compete with global money center banks in the lucrative international remittance and B2B payment sectors.
Security and Risk Management
One of the primary concerns with instant cross-border payments is the window for money laundering and sanctions evasion. However, the Fed has been quick to emphasize that:
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Proven Framework: The Fedwire Funds Service has used intermediaries successfully for decades without compromising integrity.
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Regulation Consistency: The amendments are not expected to introduce new systemic risks, as the same rigorous AML (Anti-Money Laundering) and KYC (Know Your Customer) protocols currently used for Fedwire would apply.
The Impact on the Payments Industry
For fintechs and B2B payment providers, this move lowers the barrier to entry for cross-border services. Instead of building complex licensing stacks or relying on slow "swaps," they can potentially hook into a regulated, 24/7 U.S. clearing house for the final settlement leg.
