Fed Proposal Opens Payment Rails to Nonbanks, Raises Concerns

Financial institutions are being invited to rethink their payment strategies as the Federal Reserve's proposal for nonbank access to its payment rails gains momentum. The recent Executive Order 14405 and the Fed's payment account proposal aim to expand access to nonbank institutions, but experts warn that this could shift risk from the Fed to participants.

Larry Pruss, managing director of emerging payment technologies at SRM, advises financial institutions on payment strategy. He warns that as more fintechs gain direct access to the Fed's payment rails, banks need to reassess their relationships and determine where they create value.

The proposed limited-purpose account structure for institutions already eligible for Fed accounts under existing law is designed to reduce risk to the Federal Reserve. However, this design shifts the burden of liquidity management, fraud controls, AML screening, and sanctions screening to the participant.

Pruss emphasizes that banks need to be prepared for a policy tension where easier partnerships and more direct access are not necessarily the same path. He argues that banks should not assume their role in the payment ecosystem is protected simply because they are regulated.