Fed Deadline Passes as Payment Access Debate Continues

For payments firms, direct access to the Federal Reserve can remove an intermediary from the chain between a transaction and settlement. For banks, expanding that access raises another question: Which firms should be allowed to connect directly to central bank infrastructure, and under what regulatory conditions?

Those questions are now sitting with Washington.

A May 19 executive order asked regulators to examine financial technology innovation, including access to Reserve Bank payment accounts and services by uninsured depository institutions and nonbank financial companies. The order’s sweeping purview included firms involved in digital assets and those participating directly in instant payment networks.

The order asked the Fed to determine what access current law allows, identify legal barriers, consider regulatory or legislative options for extending access and examine how the 12 Reserve Banks make account decisions. It gave the Fed 120 days to submit its findings, options and any recommendations to the president through White House economic adviser Kevin Hassett.

That deadline expired Wednesday (Sept. 16).

As of Thursday, it was not publicly known whether the Fed had submitted a report. The executive order does not require its publication, so the absence of a public report does not indicate whether the Fed met the deadline.

Institutions without their own Reserve Bank accounts can use another institution’s account through an authorized third-party intermediary. Direct access can therefore change where a payments company depends on a bank for settlement, while putting more responsibility on the Fed to assess the financial, operational and compliance risks of the institution seeking access.

The White House specifically asked the Fed to consider both sides of that equation: options for expanding direct access where the law permits and ways to mitigate risks to the payment system and financial stability.

The First Barrier Is Eligibility

Current law already draws a boundary around who can apply.

Reserve Banks generally can provide accounts and services to member banks and depository institutions and to U.S. branches and agencies of foreign banks. An uninsured depository institution can qualify if it is eligible to apply for federal deposit insurance. Nonbank financial companies generally do not.

Fed Gov. Christopher Waller reiterated the Fed’s reading of that boundary in an Aug. 31 letter to Hassett.

“The Federal Reserve does not have the authority to expand legal eligibility for access to accounts and services,” Waller wrote.

He later added that expanding eligibility “would require legislative action by Congress.”

The letter is not identified as the report requested by the executive order, nor does it say what the Fed might recommend on the broader questions posed by the White House. But Waller’s comments give a nod towards the Fed’s existing view of one important constraint: bringing currently ineligible nonbanks directly into the Reserve Bank account system would require Congress.

That still leaves a second access issue for the Fed: What to do with institutions that are already legally eligible?

Eligible Does Not Mean Approved

Legal eligibility does not guarantee an account.

Individual Reserve Banks decide whether to grant or deny requests. The Fed’s Account Access Guidelines vary the scrutiny according to factors including federal insurance and prudential supervision. Uninsured institutions without federal prudential supervision can face the strictest review.

The Fed is separately reconsidering how some of those eligible institutions can connect to its payment services.

Its OP-1878 Payment Account proposal would create a special-purpose account for legally eligible institutions seeking an account specifically to clear and settle payments. The Fed explicitly says the proposal would not expand or otherwise change legal eligibility.

Payment Account holders could use Fedwire Funds, FedNow and the National Settlement Service, among specified services, but not FedACH. They would have no intraday credit or discount-window access, receive no interest on their balances and face controls intended to prevent overdrafts.

The demand for such an account reflects the intermediary issue at the center of the broader access debate.

“Several institutions focused on payments innovation have expressed an interest in direct access to Reserve Bank accounts and services, as opposed to having to rely on third-party intermediaries,” Waller wrote.

Comments Put the Tradeoffs on Paper

OP-1878 is separate from the White House review, but its public comment record provides a look at the arguments the Fed is already hearing about direct payment access.

The Fed has said it received 100 comments before the July 27 deadline.

Among the issues raised: Wood & Huston Bank argued that Payment Accounts could move payment flows and customer relationships away from community and regional banks while exposing them to competition from firms it said aren’t subject to equivalent regulation. The Financial Technology Association, meanwhile, argued that excluding FedACH would leave Payment Account holders reliant on intermediary institutions for ACH payments.

OP-1878 deals with institutions that have already crossed the legal eligibility threshold and asks what kind of Fed access they should receive. The White House review goes further by asking whether direct access can be expanded, what prevents it under current law and what legislative or regulatory changes could alter the existing arrangement.

The deadline for the Fed to answer those broader questions has now passed. What a report might add is the part that OP-1878 cannot resolve: whether the Fed sees a case for extending direct access beyond institutions eligible today, and whether it recommended that Washington change the law to do it.