Fed Draws a Hard Line Between Payments and Banks

Connection to the Federal Reserve has always meant more than mere plumbing.

It is the difference between operating at the edge of the financial system and being wired into its core, where money settles, risk is absorbed, and confidence is enforced.

For decades, that connection has been almost exclusively the domain of banks.

Master accounts at the Federal Reserve allow depository institutions to hold reserve balances and directly access Fedwire, the FedNow® Service and other wholesale payment systems. Those accounts form the connective tissue of payments in the United States, enabling final settlement without intermediaries and anchoring trust across the ecosystem.

Access to the Fed has historically been tied to deposit insurance, federal supervision and balance sheet capacity. Banks do not just move money; they intermediate risk, manage liquidity shocks and absorb losses when things go wrong.

Why Nonbanks Want Closer Access

As payments innovation has accelerated, nonbanks, including FinTechs, payment processors and specialized settlement firms, have pushed closer to that core.

Yet the legal and regulatory boundary has remained firm. The 10th Circuit’s decision late last year in Custodia Bank v. Federal Reserve reaffirmed that reserve banks retain full discretion to deny master account access, even to institutions that meet baseline statutory definitions. That ruling underscored the core principle that access to the Fed is not automatic, and risk considerations outweigh innovation alone.

The Federal Reserve’s Payment Account Proposal

Against that backdrop, the Federal Reserve’s December request for information introduces what might be viewed as a middle ground. The board is seeking comment on a special-purpose “Payment Account” prototype, explicitly designed for institutions focused on payments innovation rather than full-service banking.

Critically, the proposal does not expand legal eligibility. Only institutions already eligible under the Federal Reserve Act could apply. What changes is the scope of access. Payment Accounts would be narrowly tailored for clearing and settlement, not lending, deposit taking or balance sheet intermediation.

What Nonbanks Could and Could Not Do

The limits are explicit. Under the proposal, Payment Account holders could access Fedwire Funds Service, the National Settlement Service, FedNow and limited Fedwire Securities Service transfers. They would be barred from ACH, check services, cash services and correspondent banking activities.

They would face strict overnight balance caps, potentially the lesser of $500 million or 10% of assets, earn no interest on balances, receive no intraday credit and have no access to the discount window. Overdrafts would be technically blocked, and payments would need to be fully prefunded.

In short, these accounts move settlement closer to the Fed without transferring systemic privileges.

Why FinTechs and Payment Providers Want Access

For nonbanks, the appeal is straightforward. Direct settlement reduces latency, dependency risk and reconciliation complexity. PYMNTS reporting has consistently shown that speed, certainty and transparency are becoming competitive differentiators as real-time payments scale.

As for real-time settlement, the central bank said it intends to expand the operating days of the Fedwire Funds Service and the National Settlement Service to run Sunday through Friday, including weekday holidays, with the changeover happening in 2028 or 2029.

A Payment Account could also streamline compliance and operational architecture for firms whose business models are and would be built around payments, rather than full financial intermediation.

The Application Process and Fed Control

Access would still be discretionary. Requests would be reviewed under the Fed’s existing tiered guidelines, with reserve banks retaining authority to approve, deny or impose additional controls. The Fed anticipates a streamlined review, roughly 90 days after complete documentation, but not automatic approval.

Even with expanded access, nonbanks will still need banks. Payment Accounts cannot hold customer deposits, provide Federal Deposit Insurance Corp. insurance, extend credit or act as liquidity backstops.

Banks remain the providers of insured deposits, treasury liquidity, credit facilities and regulatory continuity. Rather than disintermediation, the Fed’s proposal points toward re-intermediation, where nonbanks innovate at the payments layer while banks anchor stability beneath it.