Federal Reserve Proposes FedNow Expansion for Cross-Border Payments

WASHINGTON — The Federal Reserve has formally proposed expanding its FedNow instant payment service to accommodate cross-border transactions, a move that could significantly alter how U.S. businesses send and receive international funds. The proposal, which is now drawing detailed feedback from financial industry groups, would allow FedNow’s participating institutions to use intermediaries to process the U.S. leg of a global payment in real time, 24 hours a day.

Launched in July 2023, the FedNow Service is the central bank's first new payment rail in nearly 50 years, designed to provide real-time gross settlement for domestic payments. The new proposal aims to close what payment processor Stripe called a “consequential gap in U.S. payment infrastructure” by extending this always-on capability to international commerce. Currently, businesses relying on systems like Fedwire or same-day ACH for U.S. dollar settlement face operational constraints, as those networks do not operate continuously.

While the promise of instant international payments is significant for U.S. businesses, the operational hurdles are non-trivial. The proposal has been met with broad support from banks and financial technology firms, but it has also highlighted significant technical and compliance challenges that must be addressed before such a system can be widely adopted.

Key among the concerns is the need for real-time sanctions screening. In a joint comment letter, the Bank Policy Institute (BPI) and The Clearing House (TCH) stated that financial institutions would need to develop and implement new technological capabilities to screen transactions for compliance with U.S. sanctions obligations in real time. This is a critical issue because FedNow transactions are irrevocable once processed, meaning a payment sent in error or to a sanctioned entity cannot be easily recalled.

To manage this risk, the industry groups recommended a two-phase implementation. The first phase would be an opt-in pilot program, allowing institutions with advanced capabilities to begin sending and receiving cross-border payments through FedNow. A second phase would see broader, potentially mandatory, adoption across the network once the industry has had sufficient time to upgrade its systems and processes. This approach, they argue, would speed innovative use cases to market while giving domestically focused institutions time to prepare.

In our experience, the speed of real-time payments can amplify financial risks if not managed properly. The irrevocability of these transactions means a single compliance error or fraudulent payment can result in an immediate, unrecoverable loss. This is a different risk profile than legacy systems like ACH, which have built-in windows for reversals and corrections. Small and mid-sized businesses, which often lack the sophisticated, automated compliance infrastructure of large banks, are particularly vulnerable. Upgrading internal controls and payment verification processes before adopting these new rails is not just advisable, it's essential. This is precisely the kind of operational shift where proactive planning is critical. C&S Finance Group LLC at csfinancegroup.com provides expert guidance on financial risk management to help businesses prepare for these changes.

To further aid compliance, BPI and TCH suggested the Federal Reserve create a specific message code within the FedNow system to clearly designate a transaction as cross-border. They also requested that the Fed work with the industry to adjust message response timeframes outlined in its operating circulars, giving banks the necessary seconds to perform complex screening before a payment is irrevocably settled.

The push for faster cross-border payments is driven by clear demand from the business community. A PYMNTS Intelligence report found that 43% of small and mid-sized businesses (SMBs) cite faster settlement as their top priority for improving international payments. For these companies, delays in receiving funds from overseas customers can create significant cash flow challenges, hindering their ability to manage inventory, pay suppliers, and invest in growth.

FedNow was developed to provide a universally accessible real-time payment system, connecting virtually all depository institutions in the nation. While its initial uptake has been gradual—with 606 of approximately 9,000 U.S. banks and credit unions participating as of a recent Harvard Kennedy School report—it was designed to support broad participation from institutions of all sizes. The potential expansion into cross-border payments represents a major evolution for the platform, moving it closer to becoming a foundational piece of modern global financial infrastructure.

The next steps depend on the Federal Reserve’s review of the industry feedback. Financial institutions and businesses will be closely watching for a finalized rule and a potential timeline for the proposed two-phase pilot program. How the Fed chooses to address the technical and regulatory concerns raised by the industry will determine the pace and success of integrating FedNow into the complex world of international payments.