The Future of Payments

master accounts at the Federal Reserve. A number of non-depository governmental and quasi-governmental bodies such as the U.S. Treasury Department and the government-sponsored enterprises are eligible to open master accounts and use their accounts to settle payments on their own behalf. Moreover, most of the non-bank payment firms under discussion function as depositories in practice. Some even carry customer-owned asset accounts with third-party payment capabilities as liabilities on their balance sheets. The only functional distinction between such firms and certain nonlending banks is that the “non-banks” lack master accounts. Eligibility criteria for master accounts have evolved over time. With the establishment of the Federal Reserve System in 1913, only Federal Reserve member banks were eligible to open an account and use Federal Reserve services. The Monetary Control Act of 1980 1 subsequently expanded eligibility to all U.S. depository institutions. As recently as 2017, the Federal Reserve articulated principles for opening joint accounts as it granted the application of several participant banks to open an account in support of the new RTP (Real-Time Payments) system, with The Clearing House Payments Company as the joint account’s agent. Although this most recent action did not modify the core eligibility criteria for opening a master account, it demonstrated the Federal Reserve’s continuing responsiveness to the evolving payment landscape. The Bank of England recently carried this policy responsiveness a step further. In May 2017, the Bank of England published a blueprint for allowing non-bank payment service providers to apply for a settlement account in its real-time gross settlement (RTGS) system. 2 In April 2018, the central bank announced it had opened an RTGS settlement account for TransferWise, a non-bank payment firm, and approved TransferWise as a participant in the U.K.’s Faster Payments system. 3 Explaining this change in policy, a 2017 Bank of England publication noted that “enabling a payment system to access settlement in central bank money can have monetary and financial stability benefits. The financial stability benefits can be realized in two different ways: through the mitigation of risk for the users of the system; and also through supporting greater innovation and competition in the provision of payment services, which encourages diversification and the development of new, risk reducing technologies, and thus supports the Bank’s objective to promote financial stability in the longer term.” ACCESSIBILITY AND EFFICIENCY In articulating its own objectives with respect to payment system policy, the Federal Reserve has stated that it seeks to “foster the integrity, efficiency, and accessibility of U.S. payment and settlement systems.” It is reasonable, therefore, to evaluate the case for non-bank direct access by asking to what extent non-bank firms might contribute to or detract from the integrity, efficiency, and accessibility of U.S. payment systems if they were able to access these systems directly. There are grounds to argue that direct access for non-banks would make the systemmore accessible, both in the strictly literal sense and in terms of broader impact. Non-bank providers have proven their ability to expand payment system access to previously unserved and underserved sectors. At present, however, the degree of that expanded access remains constrained by depository institutions that serve as additional gatekeepers through their third-party oversight activities. Removing one gatekeeper would clearly increase access to the system (whatever other effects it might have). There are also reasons to believe that giving non-banks direct access would increase the efficiency of the payment Given the right legal and policy changes, their is no inherent barrier to granting non-bank payment firms master accounts at the Federal Reserve. 90 BANKING PERSPECTIVES QUARTER 4 2018 Should Non-Bank Payment Firms Be Eligible to Open Federal Reserve Bank Accounts?