Fintech Groups Urge Fed to Allow Direct Payment Rail Access

• The proposal will limit overnight balances, pay no interest, limit access to the discount window, and restrict use to final-settlement systems.
• The proposal shows a fundamental policy change by permitting uninsured or lightly supervised institutions to link directly to the balance sheet of the Fed. 

The financial technology trade groups, headed by the American Fintech Council, have requested the Federal Reserve to proceed with a plan that would provide some non-bank financial companies direct access to U.S. payment rails. 

The Chief Executive Officer of the American Fintech Council, Phil Goldfeder, gave a statement on February 9, stating that a well-designed payment account can broaden competition and responsible revolution in payments without any new risk.  

A payment account is a defined Federal Reserve account that permits some financial companies to send and settle payments directly, without giving them complete banking privileges. 

The force comes amid reviewing responses by the Fed to its Request for Information on whether to test a restricted-purpose Reserve Bank account made for payments activity. At issue remains whether the Fed should provide a barely scoped account that permits capable institutions to clear and settle payments directly on the central bank’s balance sheet without offering a full master account. 

The Restrictions of The Proposal 

The proposal will limit overnight balances, pay no interest, limit access to the discount window, and restrict use to final-settlement systems like Fedwire and possibly FedNow. Fintech groups supporting the proposal state the recent system needs payment companies to depend on sponsor banks, which they claim surges costs, reduces settlement, and concentrates operational dependencies. 

These groups are seeing the payment account as a way to offer direct settlement access without expanding lending authority or deposit-taking functions. Bank trade groups, though, look at it in a different way. 

The Bank Policy Institute, The Clearing House Association, and the Financial Services Forum issued a warning in a joint submission filed last week, mentioning that the proposal shows a fundamental policy change by permitting uninsured or lightly supervised institutions to link directly to the balance sheet of the Fed. 

The banks also claim that even with balance caps and other restrictions, payment accounts could still run the risk of surges and financial instability by backing deposit-like activity outside the federal safety net. 

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