Federal Reserve Proposes Skinny Master Accounts

The Federal Reserve Board has requested public input on establishing a prototype "Payment Account." The account would be an alternative, special-purpose Master Account designed solely to clear and settle an institution's own payments. The proposal aims to support payments innovators while mitigating risk to the Reserve Banks and the broader U.S. payments system. Unlike a full-service Master Account, the Payment Account would not pay interest or provide access to the discount window or intraday credit and would be subject to overnight balance caps.

Key Takeaways

• Payment Accounts would enable participants to move funds over central-bank payment rails, functioning as a settlement inbox and outbox at the Fed.
• By removing key Master Account advantages, uninsured entities could use payment rails but would not earn interest on their holdings at Reserve Banks.
• The Payment Account would strike a balance between the interests of new entrants and incumbent insured depository institutions.

Payment Accounts' Scope

At its core, the Payment Account would be a dedicated tool for clearing and settlement activity across specified Fed services. End-of-day balances would be tightly controlled: the Federal Reserve Board is considering an overnight limit set at the lesser of $500 million or 10% of the holder's total assets, with Reserve Banks able to adjust limits on a case-by-case basis.

• To reinforce liquidity discipline, balances would earn no interest, and access to the discount window would be prohibited.
• Because Payment Accounts could not use intraday credit, transactions would be prefunded, and any outgoing payment that would cause an overdraft would be automatically rejected.

The scope of services available reflects this risk posture and the emphasis on automated overdraft controls. Institutions could use:

• Fedwire Funds Service
• National Settlement Service
• FedNow Service
• Fedwire Securities Service for free transfers only

Services that lack automated rejection of daylight overdrafts would be excluded, such as: FedACH, Check Services, FedCash, and transfer against payment on Fedwire Securities.

Payment Accounts would also carry usage restrictions: they could not be used for correspondent banking and could not settle transactions for respondent institutions. Consistent with current practice for Master Accounts, Reserve Banks would not recognize third-party interests in Payment Account balances. All balances would be treated solely as obligations to the account holder.

Eligibility

Legal eligibility for access to accounts and services under the Federal Reserve Act would not change under this prototype. Access and review would follow the Federal Reserve's current three-tier eligibility framework and guidelines, but the Federal Reserve Board anticipates a streamlined process reflective of the prototype's limited-risk design.

Eligible institutions would request Payment Accounts from the relevant Reserve Bank (where they are located), which would retain discretion to approve, deny, or impose additional controls. Reviews for Payment Account requests would generally target completion within 90 calendar days after the Reserve Bank receives all required documentation, again subject to Reserve Bank judgment and potential Federal Reserve Board consultation in individual cases.

Controls

The proposal also contemplates a suite of risk controls tailored to operational, cyber, and illicit-finance concerns. Beyond automated overdraft rejection and prefunding, the Federal Reserve Board is exploring account agreement conditions, attestations, consent to reviews, and periodic reporting requirements, including measures that address AML/CFT risks in highspeed payments contexts. Governor Michael Barr dissented from the RFI, citing insufficient specificity on anti-money laundering safeguards, while expressing general support for the concept of a Payment Account prototype.

Why this works for the Fed

The Payment Account would provide a payments utility license, without monetary policy exposure and balance-sheet risk to the Fed.

By removing key Master Account advantages, uninsured entities could use payment rails but not earn interest on their holdings at Reserve Banks. Full master-account access would still be limited to insured depository institutions because FDIC deposit insurance and prudential supervision are what allow the Federal Reserve to treat all balances on its books as risk-free, fungible sovereign money without assuming credit, insolvency, or fiscal risk itself.

Why this works for fintechs and tradfi

The Payment Account would strike a balance between fintech and related new entrants' desire to innovate without the friction of using bank partners, while also responding to concerns of incumbent insured depository institutions.

The link between expanded services and insured deposits remains intact because when an entity holds funds in a master account, it holds central bank money, not commercial bank money. It is the base of the money supply and does not default. The entity can effectively settle obligations in central bank money without the help of an intermediary (another bank). To safeguard this money, the policy has been to make sure the entity is fully supervised, resolvable, accountable, and backstopped against failure.

An insured depository institution fits the bill. Without FDIC deposit insurance to backstop IDIs, the Fed would become the de facto insurer of Master Accounts (or decide which creditors are paid and when). That could cross into fiscal policy, which is not the Fed's role. The Payment Account would preserve the banking franchise of traditional finance by which banks take deposits, earn interest on reserves, and create credit. This would permit new entrants' desire to innovate in the payments space without encroaching on banks' traditional territory.

We anticipate that granting access to Payment Accounts would not be tied to the Fed's opinion on any particular business model which played a part in some of the Fed's prior decisions regarding Master Accounts. In the case of the new Payment Accounts, the Fed would try to make the account itself low-risk by construction, which would make such consideration unnecessary.

While a Payment Account may remove some friction, partnerships between banks and fintechs would still be important. Because payments access is not a replacement for the full banking system, the economic, legal, and regulatory functions that make money usable in the real economy still sit inside banks.

Max Bonici, Stephen Gannon, Andrew Lorentz, and Paige Knight have extensive experience spanning financial compliance, regulatory counsel, and enforcement matters, providing insights to help clients navigate complex challenges in the financial services sector. For more insights, contact Max, Steve, Andrew, Paige, or another member of Davis Wright Tremaine's financial services team or sign up for our alerts.