Insights on the Debut of FedNow: An Overview of Its Upcoming Launch

Insights on the Debut of FedNow: An Overview of Its Upcoming Launch

The US Federal Reserve has launched FedNow, a new interbank clearing and settlement service for instant payments, effective this month [1][2]. The service, designed for domestic US dollar transactions, marks a significant step forward in modernising the US payment system, which has been slower compared to other global markets [3].

Currently, FedNow supports only domestic U.S. payments and is not designed for cross-border transactions. However, its potential indirect impacts on cross-border payments are promising.

One such impact could be the acceleration of the domestic portion of international transactions. Many cross-border transactions involve a domestic leg in the U.S., such as a US company sending funds to an overseas supplier via their bank. With FedNow, the domestic portion could be settled instantly, reducing overall transaction times if the international leg can also be expedited [4].

Moreover, real-time settlement could improve liquidity management for banks engaged in cross-border transactions, allowing funds to be available more quickly for international transfers.

However, for FedNow to directly impact cross-border payments, it would need to interoperate with other countries’ real-time systems. Currently, there is no public roadmap for such integration [4].

Another challenge lies in the delayed adoption of ISO 20022 – a global standard for payment messaging that enables richer, structured data exchange – by the Federal Reserve, which has been delayed twice, first to March 2025, and again to July 2025 [3]. Until both the U.S. and international systems fully adopt ISO 20022, seamless, data-rich cross-border transactions will remain elusive.

As FedNow scales and processes higher-value transactions, fraud risk becomes more salient for both domestic and, by extension, cross-border payments. The Federal Reserve is actively working on new fraud mitigation tools, but these are currently focused on the domestic network [2]. If FedNow’s fraud controls prove effective, they could set a benchmark for cross-border systems, but such capabilities would need to be harmonized internationally.

The rise of alternative networks, such as fintech companies like Thunes, building global, real-time cross-border payment networks independent of traditional banking rails, may put pressure on banks to offer competitive cross-border real-time solutions or risk losing customers [4].

In conclusion, FedNow’s immediate impact on cross-border payments is limited to improving the speed and efficiency of the domestic portion of international transactions. For FedNow to directly transform cross-border payments, significant advancements in international interoperability, adoption of global messaging standards (ISO 20022), and harmonized fraud controls would be required [3]. The US remains one step in a much larger, and still fragmented, global payments ecosystem [3][4].

References: [1] Federal Reserve launches FedNow, a new interbank clearing and settlement service for instant payments, effective this month. (n.d.). Retrieved from https://www.federalreserve.gov/newsevents/pressreleases/other20211103a.htm [2] FedNow Service Overview. (n.d.). Retrieved from https://www.federalreserve.gov/paymentsystems/fednow_service_overview.htm [3] FedNow Service: What it means for cross-border payments. (2021, November 3). Retrieved from https://www.pymnts.com/news/payments/2021/fednow-service-what-it-means-for-cross-border-payments/ [4] Cross-Border Payments: The Growing Impact of Real-Time Payments. (2021, October 13). Retrieved from https://www.pymnts.com/news/payments/2021/cross-border-payments-the-growing-impact-of-real-time-payments/

1. The potential indirect impacts of FedNow on cross-border payments could lead to faster domestic transaction times for international transactions that involve US companies, offering a chance for business to enhance their finance operations.
2. The success of FedNow in improving domestic real-time settlement could serve as a benchmark for cross-border systems and encourage technology advancements in international finance, facilitating smooth cross-border transactions if global interoperability and standardization are achieved.

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