In July, the Federal Reserve unveiled FedNow, a real-time payments system, marking a significant advancement after 50 years. This revolutionary platform has the potential to provide near-instant access to payments, including paychecks, and facilitate swift money transfers between financial accounts, encouraging innovation within the sector.
However, to access FedNow and other key Fed services such as FedWire for same-day money transfers, financial institutions must be granted approval for a “master account” by one of the 12 regional Federal Reserve Banks. This requirement has become a point of contention for fintech, crypto, and other innovative financial startups, resulting in delays, rejections, and subsequent legal battles. The launch of FedNow elevates the stakes in this ongoing struggle.
The significance of securing a master account is clear; it acts as a vital conduit through which a bank can access Fed-operated payment systems, explains Erin Fonte, a partner specializing in banking and fintech regulation at Hunton Andrews Kurth.
For payment companies, fintechs, and crypto firms, having this direct access is crucial for fostering innovation and avoiding the necessity of partnering with traditional banks and sharing transaction fees. However, the Federal Reserve is cautious, aiming to ensure that new entrants and their innovations do not pose a threat to financial stability.
The Federal Reserve recently addressed Congressional pressure for transparency by releasing a public database detailing approved, rejected, and pending master account applications. Notably, Custodia Bank and PayServices, the only two rejections in the database, have filed lawsuits challenging the legality of their rejections. Custodia Bank obtained a Wyoming Special Purpose Depository Institution Bank Charter in 2020 and aims to bridge digital assets with the traditional financial system. PayServices, a fintech with a preliminary Idaho state bank charter, focuses on facilitating international money transfers for small and medium-sized businesses involved in commodity trade.
The database also displays 28 pending applications, including Kraken Financial, affiliated with the world’s third-largest cryptocurrency exchange. Kraken Financial filed for a master account in October 2020, highlighting the challenges fintech and crypto companies face in gaining access to vital financial infrastructures, despite holding state charters.