Sarah Bloom Raskin’s nomination to the U.S. Federal Reserve board has propelled a small payments company — Reserve Trust — into the spotlight. Lost in the debate over Reserve Trust’s access to a master account is the reality that a bipartisan mix of policymakers, from Raskin herself to Senator Cynthia Lummis (R-WY), appear to agree that facilitating fintech firms’ access to Fed services is a good thing, and, ultimately, that this access will benefit consumers and small- and medium-sized businesses.
The Financial Technology Association, the trade group that I lead, supports this effort. Currently, the regional Federal Reserve Banks determine whether a state or federally chartered entity can access a Fed account and Fed services. This access allows the entity to use direct-payments clearing and settlement services at the Fed instead of going through another bank — an additional layer of complexity that adds significant fees and delays.
Put simply: Fed access is the most seamless and frictionless way for a provider to offer payments services. Yet, in the U.S., direct access to these accounts is out of reach for leading players in the industry. Under the status quo, only depository institutions can obtain a master account. Payments companies willing and eager to satisfy additional regulatory and operational security requirements to ensure the safety of the payments system must partner with a third-party bank.
Many technology-driven financial companies are laser-focused on improving payments services in the U.S. and worldwide by offering consumers faster, more accessible, more transparent and lower-cost payments services. Many of these companies are not traditional banks and instead focus on what they do best: payments innovation.
Indeed, consumers benefit from expanded access to Fed services. For example, when the United Kingdom first gave nonbanks direct access to its payments system in 2018, it enabled global payments technology company Wise to drop prices for U.K. customers by 20%. Other jurisdictions are following suit because access will result in more innovation, competition, regulatory visibility, and lower costs for consumers.
Yet, the U.S. system forces non-depository entities to undergo another layer of complexity and cost by working through a bank, saddling consumers with the additional expense, and reducing competition in the financial services sector. Moreover, it makes little sense to force payments companies to become lenders and take insured deposits — something many do not specialize in — just to gain access to the payments systems.
There are several different ways to modernize the Fed payments system while ensuring safety and soundness.
First, we urge the Fed to grant a broader set of chartered entities access to the payments system, as it did with Reserve Trust. The Fed should recognize tailored, special purpose state- and federal banking charters, as these entities are subject to oversight by the same regulators overseeing traditional charters. It can do this through Fed Master Accounts or simply by expanding access to Fed services.
Second, Congress should work with the Fed to create a new framework for access that incorporates the existing state-level money transmitter licensing regime. This hybrid solution would allow payments companies with at least 40 state licenses to gain limited access to the Fed payments system, subject to satisfying appropriate Fed safety and security requirements.
Lastly, Congress should create a new Federal Payments Charter, as Under Secretary of the Treasury for Domestic Finance, Nellie Liang, recently indicated should be explored. This new charter would subject the entity to oversight by the OCC and permit access to the national payments system.
Financial technology innovation drives competition and expands access to financial services and products, with massive benefits for consumers, businesses and the economy overall. Consumers are using fintech because it saves time and money while giving them more control over their finances. Imagine how much more value financial technology could bring to consumers if we leveled the playing field in payments, modernized access to crucial Fed services, and embraced responsible innovation in financial services.
Penny Lee is CEO of the Financial Technology Association.