Federal Reserve Board guidelines on granting financial institutions access to its new payment system provide some clarity — but could discourage innovative fintechs from joining.

The guidelines come as the fintech sector grows and more companies seek access to so-called “master accounts and payments services” offered by the Fed. The accounts allow financial institutions direct payment and access to the Fed. The guidelines were finalized Monday after their proposal first surfaced in May 2021.

“The new guidelines include a tiered review framework to provide additional clarity on the level of due diligence and scrutiny that Reserve Banks will apply to different types of institutions with varying degrees of risk,” the Fed said in a release.

FDIC-insured financial institutions will have an easier path to access. But FIs engaging in novel activities such as cryptocurrency trading — which lawmakers are grappling with how to regulate — would find themselves under stricter review, according to the release.

Stifling innovation

Critics of the guidelines have warned that delays in the application process could stifle financial innovation. In fact, Cheyenne, Wyo.-based crypto-focused Custodia Bank even sued the Fed in June, alleging it had unlawfully delayed a decision on whether to grant the company a master account.

“These guidelines, while not a way to provide greater access necessarily, are at least a step forward in bringing clarity, transparency and order to the process of applying for master accounts and access to the Fed’s payment services,” Kate Drew, director of research at CCG Catalyst Consulting Group, told Bank Automation News.

“Whether or not it will actually speed things up, though, is an open question. Clarity doesn’t always mean speed,” Drew said.

FIs operating under state charters could also face obstacles if applying for master accounts.

Still, the new guidelines are unlikely to significantly impact fintechs, Gareth Lodge, a senior payments analyst at advisory firm Celent, told BAN.

“The largest fintechs will get far more value from their existing banking partner — and at a similar cost — and avoid the cost of joining,” Lodge told BAN. “Indeed, I have spoken to a mega fintech, and they don’t see any immediate reason to join.”

The most innovative companies will come under the greatest scrutiny, and as a result, there will be little interest in joining, he added.

“In most instances, fintechs can go to a big bank or a [banking-as-a-service] provider and achieve much of what they need to do,” Lodge said. “In which case, why would I even bother trying to fix something like speeding up the application process, unless the end result has something I can’t get elsewhere?”

For the Fed, it becomes a question of what its goals are and its view on innovation, Lodge said. “Simple example: should the bar be raised to create a level playing field or lowered to create more competition? They’re similar but quite different objectives.”

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