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 statechartered 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,
Policy Considerations,