Payment System Access

An efficient, secure, and safe payment system is vital to our economy. The current payment system is facilitated by banks and overseen by federal regulators like the FDIC, U.S. Treasury, and Federal Reserve. Banks are heavily regulated by the federal government to ensure the safety and soundness of the system and to protect consumers and their money. When novel charters with lighter-touch regulatory frameworks attempt to gain direct access to the payments system, they introduce fraud and security risks, as well as raise consumer protection issues.

What’s the issue?

Collectively, the 12 Federal Reserve Banks operate payment services. These services allow us to quickly access and move our money electronically. Federal Reserve Bank payment services are the backbone of our payment system, providing stability, instilling confidence in economic transactions, and facilitating the nation’s commerce. Banks act as payment intermediaries and are supervised in that function by the Federal Reserve and other government bodies.

Over the past few years, the payments marketplace has transformed quickly, including the introduction of exciting new technology and nonbank financial companies. New special purpose bank charters are attempting to gain direct access to the Federal Reserve Banks’ payment services in order to facilitate new types of payment products, such as digital currencies. For example, recently, nonbank service providers have acquired special limited-purpose bank charters from Wyoming, and a bank taking uninsured deposits has applied for a charter from the Office of the Comptroller of the Currency in a bid to gain direct access to the Federal Reserve Banks’ payments system without the complex framework of regulatory oversight that accompanies a traditional bank charter.

How does it affect consumers?

Our payments system is strong because direct access to that payments system infrastructure is limited to financial institutions that are subject to high regulatory and supervisory requirements and standards. Those standards are rightly in place to limit fraud and money laundering risk and to ensure consistent regulatory and supervisory standards across every endpoint in the payments network. To ensure that safety net operates properly, any direct access to this secure payments system should be limited to banks and other depository institutions that are subject to strict oversight.

While these nonbank companies may be called “banks,” they are not subject to the same level of supervision by the Federal Reserve or oversight by the FDIC that banks are, and as a result would create a weak spot in the otherwise uniform protective armor of our payments system. Requiring these organizations to access Federal Reserve Bank payment services through qualifying depository institutions which are subject to full federal supervision and regulation, would mitigate the risks such organizations pose to the U.S. payment system.

What can policymakers do?

Consumers and businesses should feel confident that they can send money or perform transactions with financial institutions that are not only responsible with their money but also committed to maintaining the integrity of the payment system and complying with the law.

Congress should protect consumers, financial institutions and the payment system by clarifying that the Federal Reserve Banks are only authorized to provide master accounts to insured depository institutions and certain other entities authorized by law. We also recommend the Federal Reserve develop a uniform process for evaluating applications for payment access by these non-traditional charters using a transparent public comment process.