Fintechs are pushing the Federal Reserve to consider allowing nonbanks access to the new real-time payments network that the central bank plans to launch next year.
The Financial Technology Association, which represents fintechs that include Block, Marqeta, Stripe and Wise, among others, is urging the Fed to make direct access to the new faster payments system, called FedNow, more widely available so fintechs can tap the new service without going through banks.
Generally, only licensed banks have access to the Fed’s master accounts, giving them clearance to use FedNow’s faster payments system when it’s available, but non-bank fintechs argue it’s short-sighted to exclude them from the same direct access to the new public system. While there is also The Clearing House’s rival RTP Network, the new FedNow system may provide more cost-effective services.
FedNow has been in development for years and is scheduled to be available for commercial use by the middle of next year. Rules governing the new system and the entities that will participate in it took effect this month as the next stage of testing in the pilot program moved ahead.
Angelena Bradfield, FTA’s head of policy and government relations, is one of the financial technology company representatives speaking out on behalf of providing those new-generation businesses more access to FedNow.
“Giving a broader set of firms, including technology-based financial companies, access to federal payments infrastructure like FedNow would help lower costs, drive competition, and give consumers greater access to instant payments,” Bradfield said in an emailed statement, reiterating the message the trade group gave in an Oct. 3 press release.
Not only would that allow fintechs to provide faster payments for consumers, whether it’s for bill payments or depositing checks, it would let the fintechs provide those services at lower fees, Bradfield argues.
Fintechs have been lobbying for more bank privileges for years. In the meantime, they’ve tried to make headway by piggy-backing on bank licenses, mainly those held by smaller financial institutions, to provide new digital services to consumers. But they’re still anxious to have more direct access to Fed facilities.
Rina Wulfing, who is the North American policy and campaign manager for cross-border company Wise, noted that other countries that have begun to implement faster payment systems, including Canada, have mainly done so with the intent of making them available to a broader set of financial institutions.
The FedNow approach “is just in such stark contrast to what we're seeing internationally,” Wulfing said in an interview. Canada, which is developing its Real-Time Rail faster payment system, has already taken nonbanks into consideration and there have been efforts to amend the Canadian Payments Act to give nonbanks access to the RTR system, she explained. “Whereas we're not seeing that type of initiative in the United States,” she said.
Wulfing is based in New York, where London-based Wise has one of three offices in the U.S., along with its biggest office in Tampa and a growing presence in Austin, said a spokesperson for the company.
While Wise is supportive of the FedNow project to speed up payments, it was also part of a letter sent last year to the Fed expressing concerns about implementing the program. “While we agree it is crucial for the Board to adopt rules governing FedNow well before the service is commercially available, we believe that the Board should ensure adequate time is taken during the process for thorough development of, and understanding regarding, the rights and obligations of the end users of the FedNow service as well as the parties that will ultimately make the service available to end users, including financial institutions, financial technology companies, service providers, and business end users,” the Sept. 9, 2021 letter said.
Given Wise’s interest in cross-border services, it’s also eager to hear more conversation on FedNow as an international system. It might make sense that the U.S. wants to shore up the domestic infrastructure first, but “the lack of conversations on next steps” doesn’t jibe with how other countries are approaching this, Wulfing said.
She noted that at least one Congress member, Rep. Jake Auchincloss (D-MA), seemed to share Wise’s concern about including nonbanks in the new real-time system when he asked Fed Chair Jerome Powell about it at a June hearing of the House Financial Services Committee.
“That’s something we’re looking at — mainly it’s for the broad sweep of banks and we’ll have to look at going beyond that,” Powell said in response at that hearing, with no commitment to do so.
Bradfield declined to discuss any details of conversations the FTA may have had with the Fed, congressional members or regulators on the issue.
To keep providing more innovative products to consumers, the FTA is more broadly seeking nonbank access to the Fed’s master account system. That’s currently a prerogative that’s generally reserved for banks.
“Having access to a central clearing facility through the Federal Reserve is the most direct way really for nonbank financial institutions to be able to provide services to their customers and it’s something that other countries allow,” Bradfield said in an interview.
Conversations about providing fintechs with more status on a federal basis, and moving them beyond a piecemeal state regime, is an ongoing policy discussion. A recent Congressional Research Service document is continuing debate on that issue, given risks and lack of regulatory experience with some nonbank players.
“Absent statutory changes, the Fed could find itself with limited ability to monitor or mitigate risks after a master account has been granted to an institution with no primary federal regulator,” the Oct. 12 document from the CRS said. “This raises the question of whether a nontraditional firm should benefit from valuable Fed services without bearing the regulatory costs applied to other users to access those services (and other benefits).”
