Payment firms and fintech associations are applauding the Federal Reserve’s proposal to amend FedNow, urging the board to swiftly pass the changes to help speed cross-border transactions and advance instant payments globally.

In April, the board issued a proposal to allow U.S. banks and credit unions to use intermediaries when transferring funds through the FedNow service. 

As it stands, transactions through FedNow can include only two U.S. banks or credit unions. The amendment to Regulation J, which governs rules for funds transfers via the FedNow service, would let U.S. banks use FedNow to send money through an intermediary or non-U.S. correspondent bank, with an aim toward speeding cross-border transactions. 

“It basically allows for FedNow to serve a similar purpose as the Fedwire system does today, which allows a lot of the correspondent banking transactions to clear and settle on the last leg of the rail” but without the time constraints of Fedwire, said Steven Hansen, a managing director at FTI Consulting focused on payments strategy. 

In total, 37 businesses and individuals submitted comments on the proposal, with the payments sector largely in support. 

Jonah Crane, payments processor Stripe’s head of global regulatory and policy strategy, called the proposal a “sound policy” and urged the board to finalize it promptly. Stripe noted the challenges of Fedwire and same-day ACH transactions being unavailable on weekends. While FedNow operates 24x7x365, that ‘always-on’ capability isn’t available for cross-border transactions.

“That gap is among the factors driving demand toward alternative settlement mechanisms, including payment stablecoins,” Crane wrote in the company’s comment. “The Board has a direct and legitimate interest in ensuring that its own payment systems keep pace.”

The Fed opened its proposal for comments from April 10 through June 9. A spokesperson for the central bank said there are no updates at this time on next steps or a timeline for potential implementation.

Mihail Duta, director and global solutions consultant of payments at financial software company Finastra, sees the proposal as “a normal next step in the evolution of FedNow" — a service that, since its launch in mid-2023, now has 1,800 banks and credit unions onboard. 

That translates to about half of U.S. savings and checking accounts having access to the payment rail, even though the count is only about one-fifth of the 8,500 U.S. financial institutions. 

“There's definitely enough financial institutions and credit unions that have a cross-border need, which this FedNow proposal would help with,” Duta said in a July interview.

Keeping the U.S. competitive internationally

Alongside Stripe, private companies such as U.K. money transfer company Wise and card network giant Visa urged the board to quickly pass the FedNow proposal. 

“These changes will help expand cross-border payments activity across a wider set of use cases, and provide payment providers additional choice with how and where they can route payments reliably, efficiently and more cost effectively,” Visa executive Andrew Neeson wrote in response to the board’s proposal. He noted that businesses and consumers are “increasingly engaged in global commerce and demand seamless, interoperable payment experiences.”

Major fintech associations and payments councils similarly viewed the FedNow change as enabling their U.S. member companies to compete on the world stage.

“The U.S. financial services industry historically has been the envy of the world,” Ian Moloney, chief policy officer at the American Fintech Council, said in an interview last month. He said the expansion of FedNow to permit intermediaries would allow “U.S.-based companies to really have a leg up on their international competition.”

One recommendation Moloney submitted was for the board to emphasize standardized data formatting and “payment messaging harmonization,” per its comments submitted on the proposal.

“The more entities and the more countries that get involved, the higher the need for coordination and good technical standards,” Moloney said.

Several organizations supporting the proposal recommended clearer identifications throughout the payment process. The U.S. Faster Payments Council’s CEO, Reed Luhtanen, advocated for the Fed establishing a “registry of intermediaries whose compliance practices are documented and transparent,” which would lower the burden on community banks to conduct their own due-dilligence. 

The Electronic Transactions Association’s vice president of government affairs, Patrick Russell, asked for clarification on which entities qualify as intermediaries and urged the board to establish a mechanism that identifies the last leg of an international transfer. 

The Financial Technology Association suggested a provider-neutral field to identify the final piece of cross-border transactions, allowing better risk screening for the last leg of a payment.

Another recommendation from the FTA was to alter the on-behalf-of, or OBO, residency restriction. FedNow rules require the end customer in an OBO flow be U.S. domiciled. The change would allow regulated payment service providers to process real-time payments on behalf of non-U.S. users.

Angelena Bradfield, the FTA’s head of policy, said the association’s members have been “very supportive” of FedNow since its inception, and the proposal is “a great first step of getting us to a cross-border, real-time payments framework,” she said in a July interview. “We're excited to see where the Fed goes with this proposal and whatever comes next.”

Even The Clearing House — a bank-owned company that launched a private-sector instant-payment rail in 2017, the RTP network — voiced support for expanding always-on payments rails for cross-border transactions via the FedNow proposal. 

TCH and the Bank Policy Institute recommended a FedNow message code to designate cross-border transfers, as well as adjustments to the payment timeout clock. “If bound by the required five second response timeframe, some beneficiary banks may be inclined to reply ‘accept without posting’ to every cross-border payment,” the executives for the organizations wrote in a joint comment, noting that it may lead to overuse of that acceptance feature.

The Merchant Advisory Group advocated for the board to require transparent pricing models and fee disclosures for all participants in cross-border payments. If intermediaries imposed fees that were only apparent post-transaction, it could undermine “merchants’ and consumers’ ability to choose the lowest-cost payment option,” wrote the group’s CEO, John Drechny.

Among major payments organizations, Nacha was an outlier in that it didn’t outright state a position on whether the Fed should adopt the proposed rule. It suggested the board conduct more industry surveys on the receiving institutions’ risk management abilities before finalizing the rule.

Roadblocks to FedNow adoption

FedNow’s proposal is one piece in the broader puzzle of instant payments, according to FTI’s Hansen. Payments firms are increasingly thinking about their strategies for a world in which instant payments are the reality — and what that means for adoption of FedNow, fraud control and operating models that support 24x7x365 payments.

One consideration is that the proposal “can make the U.S. leg instant, but we can't make every leg of the payment instant,” Hansen said. Speed on the international leg depends on the payment rails another country is using.

Finastra’s Duta said prioritizing connecting to countries with instant payment rails, such as UPI in India or Pix in Brazil, could enable truly instant cross-border payments.

Advancing FedNow, along with U.S. instant payments more broadly, will require overcoming a few hurdles. Many institutions are hesitant to send via FedNow, given the potentially irrevocable nature of sending money, leaving them in receive-only mode. 

In comments on the board’s proposal, TCH and BPI suggested a two-phased implementation plan. During the first part, depository institutions would be able to opt in to receive and send cross-border transactions over FedNow. Then in the second phase, all FedNow participants could be required to accept cross-border transactions. This two-part plan would give depository institutions “sufficient time to upgrade their capabilities,” the organizations wrote.

Receive-only is less risky than sending funds, Hansen said. Unlike the credit card space, unanswered questions remain in the instant payment industry around disputes and chargebacks. There’s also a perception that faster payments means faster fraud, although the data doesn’t support that notion, he added. 

The ETA suggested the board clarify how responsibility for fraud and unauthorized transfers is allocated between originating banks, receiving banks and intermediaries.

In the end, if an institution doesn’t have the ability to participate in a 24x7x365 FedNow transaction but a competitor does, customers might jump ship. Duta said potentially losing a customer is not a risk financial institutions should be willing to take.

“We're in a period in the payment space where changes happen very often,” Duta said. “Having a future-proof solution is key to be ready for what's coming next.”