Monday, May 17, 2021
One of the Fed's many responsibilities is to act as a central payment hub through which banks and credit unions transact business with each other. All federally insured financial institutions maintain accounts at their local Fed Banks to support clearing and settling transactions between each other. As a result, a fintech today that wants to offer payment services needs to partner with a bank or credit union, which adds to complexity and costs.
The Office of the Comptroller of the Currency—the U.S. Treasury Department agency that regulates nationally chartered banks—attempted to address the dilemma by creating a new type of charter, a Special Purpose National Bank charter for fintechs. SPNBs are not new; many credit card banks have SPNB charters from the OCC. The agency's efforts create an SPNB charter course for fintechs, however has been the subject of a long-running legal battle.
While the Fed proposal doesn't mention the OCC, or state regulators that have okayed or are considering fintech charters, it appears to be directed at SPNBs.
"I think this is primarily the type of charter fintechs are going to pursue," said Jack Baldwin, CEO at BHMI. He noted that a fintech has to pass muster with the OCC to get a SPNB charter; once they have that the next steps involve passing muster with the Fed. "They still need approval from the Fed," to access payment and other services, he added.
In its proposal, the Fed wrote that there has been an uptick in these "novel institutions" and that they are approaching the Reserve Banks with requests for access to clearing and settlement accounts. In response, the Fed is proposing a set of six principles Reserve Banks would be expected to consider when reviewing requests from novel institutions for accounts and services. "With technology driving rapid change in the payments landscape, the proposed Account Access Guidelines would ensure requests for access to the Federal Reserve payments system from novel institutions are evaluated in a consistent and transparent manner that promotes safe, efficient, inclusive, and innovative payment system, consumer protection, and the safety and soundness of the banking system," Fed Governor Lael Brainard said in a statement.
The six principles are pretty much the same as those upon which banks and credit unions are evaluated for direct access to the Fed.
"The proposed approach is based on a foundation of risk management and mitigation," the Fed wrote. "It recognizes that risks to the Reserve Banks, to the payment system, to financial stability, and to effective implementation of monetary policy, among others, that may arise when an institution gains access to a Federal Reserve account and services. The proposed guidance to systematically evaluate each major type of risk will promote a level playing field in which legally eligible institutions with similar risk profiles will be treated in similar ways across the Reserve Banks."
The American Bankers Association welcomed the news, adding that fintechs should be held to the same rigorous standards and regulation as banks. "We embrace innovation and new business models, but we believe every entity seeking similar access to the Fed's payment system [as banks], including those with novel charters, should meet the same high standards [as banks]."
But it remains unclear how many fintechs might actually qualify for or want to pursue access to the Fed. The Federal Reserve Act specifies that only depository institutions, and government agencies, can qualify for access to the Federal Reserve Bank System, explained David Walker, president of the consultancy Tiller Endeavors. In other words, fintechs that don't accept deposits are banned from direct access to Fed services.
"Superficially, it makes no sense," said Walker of the Fed proposal. "Unless fintechs want to become regulated like national banks, I fail to see the attraction." The Fed, in its memo, said it is "considering whether it may be useful in the future to clarify the interpretation of eligibility under the Federal Reserve Act for Federal Reserve account[s] and services."
Comments on the Fed's proposal are due by July 12, 2021. 
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