Tiering system introduced for US payment system access

What is changing in the Federal Reserve payment system access?

Application processes for the Federal Reserve account access have largely been a procedural formality without significant public attention or scrutiny. However, those days now appear to be over. The proposed tiering system aims to revamp the Federal Reserve payment system. But the recent events including high-profile applications for the US payment system by non-IDIs have the Federal Reserve System (FRB) seeking public comment before finalizing the guidelines. The financial stakeholders shared their concerns and recommendations via public comment.

Who will or will not get access?

An expansion of who can establish accounts could open the door to new benefits and capabilities for a number of entities that may have otherwise previously been ineligible for the Federal Reserve account access. This expansion could, however, pose risk to the US payment system if applicants are not effectively managed. And some of the questions that the financial stakeholders raise include:

• Who gets a master account?
• Will the future Federal Reserve account access continue to be limited to state and Federal Deposit Insurance Corporation (FDIC)-insured depository institutions (IDIs), non-IDI national “banks,” and US branches and agencies of foreign banks?
• If others will potentially have the US payment system access, who sets the approval criteria and decides who is “in” and who is “out”—the Federal Reserve Banks, the Board of Governors of the Federal Reserve System, or some combination of those bodies?

The proposed tiering system

The guidelines reflect six evaluation principles to be applied across all applicants and introduce a tiering system that divides applicants into three tiers. As it stands, the tiering system would place the most scrutiny on tier 3 applicants, with the least amount of scrutiny placed on tier 1 applicants and tier 2 applicants being left somewhere in between. The proposal implies that the higher the applicant tier, the harder–and possibly longer–the application process.

Observations and recommendations

As of June 10, 2022, the FRB website reflected a total of 24 comment letters from a combination of 32 commenters. Two comment letters reflect the perspectives of multiple organizations, with one of those comment letters submitted by a group of six trade associations and the other submitted by a group of three nonprofit organizations. The comment letters identified several areas of concern and potential solutions for consideration. Download our report to explore the proposed guidelines, and the key observations and recommendations.

What to expect

Going forward, entities planning to request access to master accounts will need to carefully consider their charter, legal entity structure, and business model as drivers for determining the nature and extent of the access request review process. The proposed tiering system would impose enhanced scrutiny on those entities that are not federally insured or supervised under the current legal and regulatory framework. For those entities that are not currently supervised by a federal banking agency, there is a high likelihood that any approval for access will be accompanied by potentially significant “supervisory” conditions. Explore more in our report.