The real-time payments system FedNow has rapidly gained from over 1,600 financial institutions across the United States. However, these participants have so far been restricted to using only Reserve Banks as intermediaries.
This limitation has prevented banks and credit unions from leveraging the network for cross-border payments. The U.S. Federal Reserve, which operates FedNow, is now considering lifting this restriction. This change would align FedNow more closely with the Fedwire model, which has been in place for decades.
Under the proposed plan, a U.S. institution could use FedNow to send funds to a correspondent bank, which would then facilitate the international leg of the transaction. This functionality could broaden the use cases for a system that has already experienced substantial growth in both transaction volume and value over the two years since its inception.
“A move to cross-border via FedNow is the logical next step in the evolution of real-time payments in the U.S.,” said Hugh Thomas, Lead Commercial and Enterprise Analyst at Javelin Strategy & Research. “By moving to real-time, you’re synching up with the speed of domestic funds movements in big cross-border markets like the EU and the UK. With ISO 20022 standards in the mix in all three markets, you open up a lot of possibilities for cross-border payments solutions. This isn’t to say they’ve gotten there with this move, but it’s certainly a step in that direction.”
Stopped at the Border
While using FedNow for cross-border payments could streamline the domestic payments experience, the network’s real-time settlement would not extend beyond U.S. borders. Once the funds reach an overseas correspondent bank, the transaction would follow the same processes as conventional cross-border payments.
The complex correspondent banking system is likely to continue subjecting these payments to transaction fees, currency conversions, settlement delays, and limited transparency—challenges that have long plagued cross-border payments.
These issues have persisted despite ongoing efforts by industry stakeholders and world leaders. For example, leaders from the Group of 20 countries established a roadmap to improve international transactions. Yet, a recent review highlighted that legacy payments infrastructure and cross-country coordination challenges have hindered meaningful progress.
Weighing the Challenges
Such hurdles are why many experts advocate for sweeping changes to the cross-border payments landscape, potentially involving a shift toward new rails like stablecoins or global networks operated by Visa and Mastercard.
The SWIFT messaging system has also played a key role in modernizing the correspondent banking model, and it is working on a framework specifically for retail cross-border payments.
While expanding FedNow’s cross-border capabilities would likely be welcomed by many institutions, the service would still operate within an increasingly fragmented and complex global market. These are key considerations the Federal Reserve will likely weigh as it reviews public comments and decides whether to move forward with the proposal.
