Federal Reserve: Master Accounts and the Payment System
INSIGHTi
Federal Reserve: Master Accounts and the
Payment System
Updated December 8, 2022
Financial technology (fintech) has led to innovation in retail payments by both traditional banks and
fintech firms. Although these fintech firms do not provide traditional banking services, some have
sought—and some have been granted—state or federal bank charters. For payment firms, a major
motivation for seeking a bank charter is to obtain a Federal Reserve (Fed) “master account” to access
wholesale payment systems and related Fed payment services (but not the Fed’s discount window)
without needing a bank to act as an intermediary. More recently, cryptocurrency firms with state bank
charters have applied for master accounts in order to more seamlessly transact between crypto and official
currency.
Banks hold most of their reserves in master accounts at the Fed. Reserves are assets held as liquid cash
balances, as opposed to funds invested in loans or securities. Banks were subject to minimum reserve
requirements until 2020, when the Fed removed them. All types of payments between end users (such as
customers and merchants) with different banks using different payment systems can be completed
because master accounts are connected to each other at the Fed. Customer payments are aggregated and
netted by banks, which can then debit and credit each other’s master accounts through wholesale payment
systems, where they are cleared and settled.
Institutions must apply to the Fed to receive master accounts. These applications have typically been
approved quickly for traditional banks, but some nontraditional applicants have reportedly faced delays,
causing consternation. The growing number of nontraditional applicants has raised policy questions about
who is and who should be eligible for master accounts (under existing law or through legislation), how
transparent the application process should be, and what safeguards the Fed should impose on firms with
master accounts.
Emblematic of this debate, two recent examples have attracted policy interest. First, the master account
application of Reserve Trust, a fintech payment company with a state trust bank charter, was raised at the
confirmation hearing for Fed nominee Sarah Bloom Raskin, who had previously served on Reserve
Trust’s board of directors. Second, Custodia Bank, a Wyoming state-chartered special purpose bank
specializing in cryptocurrency services, has sued the Fed for delaying a decision on its October 2020
master account application. Other examples of controversial applications include a public bank, a “narrow
bank,” and a bank to provide services to cannabis businesses.
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Guidance and Legislation
The Fed issued final guidance in August 2022 through the notice-and-comment process explaining how it
would evaluate master account applications. According to the Fed, the guidance would make the
application process more transparent and ensure that applications from nontraditional institutions were
treated consistently among the 12 regional Federal Reserve banks that decide on applications in their
districts.
According to the final guidance, by law, the Fed may grant master accounts only to firms that meet the
statutory definition of member bank or depository institution, designated financial market utilities, certain
government-sponsored enterprises, the U.S. Treasury, and certain official international organizations. For
eligible institutions, applicants must be in compliance with relevant laws and regulatory requirements
related to payments, anti-money-laundering, sanctions, and risk management, among others; be
financially healthy; and not pose risk to the Fed or financial stability.
Assuming an applicant is legally eligible, the final guidance separates applicants into three tiers, with
each tier receiving progressively more scrutiny before approval. Applicants that are federally insured
depository institutions will receive the least scrutiny, institutions that are not federally insured but are
subject to prudential supervision by federal banking agencies or have holding companies that are
supervised by the Fed will receive more scrutiny, and eligible institutions that are not federally insured
and do not have holding companies supervised by the Fed but have state or federal charters will receive
the most scrutiny. The Fed’s rationale for this tiered application process is based on how closely regulated
the institution is and how much information is available to the Fed about the institution.
In November 2022, the Fed proposed to begin publicly disclosing institutions with master accounts on a
quarterly basis.
Policy Considerations
In the context of fintech and crypto applicants, there is a policy tradeoff between the desire to foster
innovation and mitigate risks—which may be poorly understood—to the Fed and financial stability posed
by innovation. Master accounts for innovative payment firms may deliver lower costs and new product
options for consumers and merchants. Meanwhile, the lack of an explicit, comprehensive federal
regulatory system for payments leaves the Fed reliant on rules within the payment systems it operates and
federal regulation of banks to manage payment risks. (There are a limited number of federal laws
pertaining to payments generally, most dealing with consumer protection or preventing illicit activity.) At
the same time, the dual state-federal banking system can result in limited federal oversight when a state-
chartered institution does not have federal deposit insurance. (State-chartered depository institutions with
federal insurance are subject to federal regulation comparable to federally chartered institutions.) 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. 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). Compared to non-crypto fintech
payment firms, crypto firms pose additional risk given the extreme volatility in cryptocurrency prices,
widespread scams and fraud, regulatory uncertainty, and several high-profile, abrupt failures of crypto
firms.
It is unclear whether the Fed has processed nontraditional applications more quickly since the guidance
was released. Some observers have called for legislation to provide greater clarity on whom should be
granted master accounts and force the Fed to act more quickly on applications. Title LVIII, Subtitle F, of
the National Defense and Authorization Act for FY2023 (as published in
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House Rules Committee Print 117-70) requires the Fed to publicly release a quarterly list of institutions
(excluding official institutions) that have requested, been rejected for, or been granted master accounts. S.
4356 would require the Fed to provide master accounts to all depository institutions. Other observers have
called for more strictly limiting master accounts to traditional banks.
Author Information
Marc Labonte
Specialist in Macroeconomic Policy
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