No comment. Really — at least right now — now comment.
Today remarks the end of a public commentary period on proposed changes to how companies — particularly FinTechs — can apply for and be granted master accounts with the Federal Reserve. As we spotlighted yesterday, the commentary period is closing quietly, without any comments on the slightly-tweaked proposal (the original draft, last year, garnered a few hundred comments).
And though some of the mechanics and the procedures may be a bit Capitol Hill “inside baseball,” the potential impact is clear and even seismic in scope. FinTechs would be able to go head to head with traditional financial institutions (FIs), coming to market with new payments innovations more quickly — and cheaply, too.
FinTechs, and ostensibly any firm seeking to offer digital payments, would be able to access Fed services more easily, cheaply, and perhaps compete with marquee financial services firms more effectively.
Being granted a master account means that these smaller, tech-nimble firms can bypass the traditional “way its always been done,” where they’ve had to have intermediary banking relationships in place. Those stutter-step relationships, which in turn give the FinTechs the ability to offer traditional banking services and products. Those offerings run the gamut, including deposit accounts and various payment types.
By getting master accounts in place, these companies would get direct access to Fed rails, without the need for partnerships.
Now, the framework mentioned above would simply lay out the way the FinTechs would be considered for master accounts by the 12 banks that make up the Federal Reserve system. Those banks have the ability to provide master accounts — but granting them? Well, that’s no sure thing.
Generally speaking, the guidelines proposed and currently under consideration would entail a look at the applicant firm’s liquidity, capital and cyber defenses. In return, the FinTech would get access to electronic and paper payment processing services, can borrow from the Fed’s discount window to tap liquidity and so on.
We contend that access to the wide range of Fed functions gives the digital firms some more legitimacy (and a central banking “backstop”) that had not been there before.
Drilling down a bit, the guidelines offer a half dozen principles. And among the principles that may change the game for FinTechs and the competition vs. traditional banks: The framework states that only institutions “legally eligible” for Fed accounts and services should have Fed access.
That eligibility remains somewhat open to interpretation. That may open the door, so to speak, for non-banking and FinTech firms to be included.
There’s at least some precedent here. As has been widely reported, the banking arm of cryptocurrency exchange Kraken — Kraken Bank — is one step closer to gaining full access to the global payments system
The American Bankers Association (ABA) has given Kraken Bank (which has a special depository institution charter) a routing number. That routing number helps bring Kraken more fully into the traditional payments system.
The road from commentary period to final framework may be long, but for FinTechs seeking a competitive boost vs. traditional peers, worth the wait.