UPDATED: Fed moves forward on ‘payment account’ by issuing proposal; aims at ‘supporting innovation’

Clearing and settling of payments is the aim of a proposed “payment account” by the Federal Reserve, which would be used by legally eligible financial institutions, the agency said late Wednesday.

Comments are due July 27.

According to the Fed, under the proposal (which is “substantially similar” to a prototype issued by the agency in December), payment account holders would not have access to intraday credit or the discount window, would not earn interest on balances held at a Reserve Bank, and would only have access to payment services with automated controls to prevent overdrafts.

“The proposal would not expand or otherwise change legal eligibility for access to accounts or payments services from the Federal Reserve, and affirms that Reserve Banks would expect payment account holders to mitigate illicit finance risks,” the proposal states.

However, the proposal would allow for “tailored” payment accounts to “support innovation by serving the clearing and settlement needs of certain eligible institutions while also mitigating material risks to the Reserve Banks and payment system.”

The proposal notes that the law requires that requests for access to Federal Reserve accounts and payment services are decided by Reserve Banks.

Although the proposal is like the prototype from late last year, the Fed acknowledged some changes. Those include, the agency said, closing balance limits would be based on an institution’s expected payment activity. The maximum closing balance was increased, the Fed said.

Also, the agency said, Reserve Banks are encouraged to temporarily pause decisions on access requests from institutions that fall within Tier 3 of the agency’s Account Access Guidelines (that is, legally eligible institutions that are not federally insured and lack prudential federal supervision for both the institution and the holding company). The pause would continued, the agency said, until it has completed its policy development process on the payment account proposal. “The temporary pause will allow the Federal Reserve to solicit and consider public input on payment accounts and to promote consistent implementation,” the agency said.

Federal Register notice

Federal Reserve Board requests public comment on a proposal to establish a “payment account,” which legally eligible financial institutions could use for the specific purpose of clearing and settling their payments