Dive Brief:

• The Federal Reserve Board on Wednesday proposed letting banks that participate in its FedNow real-time payments system use intermediaries, in addition to Reserve Banks, to send money through the service. In a website post about the proposal, the central bank asked for public comment on the idea.
• Allowing U.S. financial institutions the ability to tap such intermediaries, including a non-U.S. correspondent bank, is expected to let FedNow participants complete payments in the U.S. and internationally, the Fed said. In a vote Tuesday, the board unanimously supported the proposal.
• “This additional flexibility would support new private sector use cases for the FedNow Service,” the Fed said in the proposal. “For example, it would allow U.S. banks to use FedNow to transact with correspondent banks to facilitate the international portion of a cross-border payment.”

Dive Insight:

The proposal calls for amending the regulation that activated FedNow in July 2023. The FedNow system allows U.S. financial institutions to send payments within seconds at any time, 365 days per year.

Currently, sending funds through the FedNow service can include only two U.S. banks or credit union participants, in addition to a Reserve Bank. That means FedNow can only be used at this time for domestic payments because FedNow participants can’t transfer funds to banks outside the U.S.

If U.S. financial institutions participating in FedNow could include intermediaries in the payments, they’d be able to potentially move money outside the U.S., the Fed said.

“Since the launch of FedNow, participants have expressed interest in using the service to initiate or receive cross-border instant payments as a means of improving the speed and efficiency of cross-border payments,” the board’s staff said in a memo accompanying the proposal.

The amendments wouldn’t change the flow of payments between FedNow participants, or which entities can link to FedNow. 

The Federal Reserve has been trying to lure more banks, especially smaller ones, to sign up for the FedNow system. There are about 1,700 financial institutions now participating in FedNow, with most of the largest banks linked to the system.

The Fed proposal pointed out that the Fedwire Funds Service, another payments system offered by the central bank, has permitted use by intermediaries for decades. 

“Like the Fedwire Funds Service, the amendments would simply allow additional transfers before and after funds are sent through the FedNow Service, enabling participants to settle the U.S. domestic portion of larger cross-border transactions,” the notice said.

The Fed also emphasized that it didn’t expect altering the regulation would introduce any new risks related to “money laundering, sanctions evasion, or payment system integrity,” noting the Fedwire Funds Service has operated “successfully” with intermediaries.