One-year analysis of FedNow, a digital payments system
In a recent discussion at Point Zero Forum, Daniel Webber, CEO and Founder of a certain platform, delved into the current state of cross-border payments and the potential impact of real-time payments, focusing particularly on FedNow.
FedNow, launched last July by the U.S. Federal Reserve, serves as the nation's instant payments rail. Despite the significant progress made, it is currently focused on domestic payments. However, there is potential for FedNow to become an integral part of the international payments ecosystem in the future.
The interest in FedNow, as indicated by Google search trend data, has seen a decline since its launch. Nevertheless, the number of financial institutions adopting FedNow has been steadily growing. As of the end of June, more than 800 institutions across the U.S. have adopted the service, with this number expected to surpass 1,000 banks in the coming months.
However, FedNow still has some distance to go before reaching its goal of onboarding around 8,000 institutions in the U.S. Only 40% of institutions have signed up to send payments, with many going receive-only as an initial foray into adoption.
The Federal Reserve's efforts to modernize its real-time payments infrastructure include migrating to ISO 20022, a critical step towards compatibility in cross-border transactions. This migration is expected to enhance cross-border interoperability and increase adoption for instant payments 24/7/365 across financial institutions, businesses, and individuals in the U.S.
However, FedNow's direct cross-border capabilities remain limited. Complexities such as currency conversion, regulatory compliance, and international coordination are yet to be fully addressed. The Federal Reserve is exploring these complexities through experimentation with digital assets and maintaining traditional international liquidity and swap line arrangements.
Meanwhile, private sector players like Visa are actively pursuing cross-border innovation in the U.S. payments ecosystem. Visa is exploring stablecoins as a bridge for cross-border and B2B payments, which could potentially augment FedNow’s reach indirectly.
In conclusion, FedNow's core development is focused on U.S. domestic instant payments, with progress made on international messaging standards that could enable or facilitate future cross-border interoperability. However, direct cross-border instant payment functionalities through FedNow are still emerging and not yet fully realized.
[1] Federal Reserve, "FedNow Service: Modernizing the U.S. Payments System," accessed July 2023, https://www.federalreserve.gov/paymentsystems/fednow_service.htm
[2] Visa, "Visa Explores the Potential of Stablecoins for Cross-Border and B2B Payments," accessed July 2023, https://usa.visa.com/about-visa/blog/visa-explores-the-potential-of-stablecoins-for-cross-border-and-b2b-payments.html
[3] Federal Reserve, "FedNow Service: ISO 20022 Messaging," accessed July 2023, https://www.federalreserve.gov/paymentsystems/fednow_service/iso_20022_messaging.htm
[4] The Clearing House, "Real-Time Payments: A Guide," accessed July 2023, https://www.theclearinghouse.org/resources/real-time-payments-a-guide
[5] Federal Reserve, "FedNow Service: International Liquidity and Swap Line Arrangements," accessed July 2023, https://www.federalreserve.gov/paymentsystems/fednow_service/international_liquidity_and_swap_line_arrangements.htm
- The potential of FedNow to become an integral part of the international payments ecosystem could significantly impact the global finance and technology sectors.
- As the Federal Reserve works towards enhancing cross-border interoperability, private businesses like Visa are also innovating in cross-border payments, such as using stablecoins, which could potentially collaborate with FedNow to expand its reach.
