Fed proposes fintech access guidelines

The US Federal Reserve has proposed new guidelines on granting fintechs access to its payment system – as the banking industry raises concerns over access for “uninsured and lightly regulated” entrants.

The Fed released the proposed guidelines for public comment on 5 May.

The Federal Reserve said the guidelines were its response to new forms of banking that use technology in unorthodox ways, it said, “including from institutions with novel types of banking charters designed to support such innovation”.

It said that a recent “uptick” in novel charters being issued, and an increased rate of account requests made to the Federal Reserve by fintech firms, called for a more consistent approach across the bank.

The account access guidelines it issued on Wednesday were, it said, to help apply “a transparent and consistent process for all access requests, as well as considering the ramifications for the broader financial system”.

It added that decisions on access for novel institutions could have implications for the wider Federal Reserve System policies. It warned that allowing fintech companies access to accounts and services, it said, created risks to its network of reserve banks, to the payment system, the financial system, and implementation of policy.

Eligibility, risk, and forum-shopping

The guidelines set out six principles for the Reserve Banks to use, beginning with a requirement that the request must come from an institution eligible for an account under the Federal Reserve Act, the 1913 statute which founded the Federal Reserve.

Four of the principles focus on forms of risk –  to the Reserve Bank, to the overall payment system, to the stability of the US financial system, or to the overall economy via criminal activities.

The final principle states that the request should not impact the Federal Reserve’s ability to implement monetary policy.

The Fed said that using this approach would help prevent fintechs and other account-seekers from “forum shopping” by exploiting different standards between various regional reserve banks.

The Fed will also incorporate assessments made by state or federal supervisors into its evaluations, according to the guidelines, and could impose obligations, conditions or limits on accounts to minimise risks.

It said the six principles are commonly used in regulation and that as such, the application of the guidelines would be “straightforward” in most cases. However, it noted that requests from non-federally insured institutions could need more extensive checking.

The account guidelines come in the context of ongoing litigation seeking to halt a so-called “fintech charter” proposed by the Office of the Comptroller of the Currency in 2016, with state-level regulators arguing the concept is beyond the federal regulator’s statutory authority. The OCC has recently instead provided conditional national charters to crypto companies such as Anchorage in January, and Paxos last month.

It also comes in the context of increasing attention from the Fed on account access in recent years, including a real-time payment service it announced in 2019 that it said would help smaller banks access the Fed’s services.

In a response to the Fed’s request for comment Greg Baer, president of research and lobbying group the Bank Policy Institute (BPI), said questions of access to the Fed’s payment system carried implications for fintechs’ responsibilities.

“Historically, only regulated and supervised banks have been permitted access, and if big tech and fintech firms seek that right, the question is whether they ought to shoulder the traditionally associated responsibilities and whether further protections are warranted given that they are uninsured and lightly regulated, and therefore inherently riskier to the system.”

The Republican leader of the House Financial Services Committee Patrick McHenry said that he was glad that the Fed had asked for insight on how to incorporate fintech firms into their system.

He called the guidelines “a welcome step that recognizes the important role innovation is playing in the way Americans access, utilize, and interact with the financial system”, saying they play a role in equalising access to capital for marginalised communities.

McHenry added that the guidelines would “ensure our regulatory structure continues to support this kind of growth, rather than suppresses it”.

Federal Reserve Board governor Lael Brainard said the proposed guidelines would ensure that requests from non-traditional institutions were treated with consistency and transparency, and would promote “a safe, efficient, inclusive, and innovative payment system, consumer protection, and the safety and soundness of the banking system".

Feeding the Kraken

Wyoming senator Cynthia Lummis said the account access guidelines would have particular ramifications for her state, which in 2019 the created a new regulatory vehicle for crypto-focused fintechs in the form of special purpose depository institutions (SPDIs) as a new form of bank charter  focused on digital assets such as virtual currencies, digital securities and digital consumer assets.  

Wyoming’s state Banking Board has approved two SPDI charters since then – the first, in September,  for crypto exchange Kraken, named for the legendary Scandinavian sea monster, and the second in November for Avanti, which has no mythological or zoological associations and is focused on offering tokenised products to institutional investors.

“Today’s announcement from the Federal Reserve is a major step toward promoting responsible innovation in our banking system,” Lummis said. In a statement on her website, Lummis said the guidelines recognised that access to the payment system was “a privilege, not a right” and that all financial institutions, including banks and SPDIs, would need to meet basic standards. “Wyoming has developed the United States’ best regulatory framework for digital assets and others are beginning to recognize this fact too,” she said.

The Federal Reserve has asked for public comment on its account access guidelines. Comment will be accepted for 60 days from the guidelines’ publication.


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