Community banks push back on Fed's 'skinny' account proposal

• Key takeaway: Community banks argue that the proposal could divert deposits and payment activity.
• Expert quote: "If less-supervised payment firms receive direct access without equivalent expectations, those firms could gain operational advantages while shifting risk to receiving banks, customers, and the broader payment ecosystem." —Jenn Bertematti, managing director of bank operations at INTRUST Bank
• What's at stake: The central bank has said it expects to finalize its proposed limited payment account framework before the end of 2026. 

More than two dozen community banks raised concerns about the Federal Reserve's proposed "skinny" payment account framework, arguing that it could give nonbank firms an unfair competitive advantage by providing access to the central bank's payment rails without the same regulatory obligations as banks. 

The banks, including INTRUST Bank, First Option Bank and Metairie Bank, also urged the Fed to explicitly state that the limited payment account would not serve as a pathway to obtaining a master account.

The Federal Reserve published the proposed framework in May after issuing a request for information in December. Comments on the proposal were due July 27, and the Fed is expected to finalize the limited master account framework before the end of 2026.

Nonbank firms, particularly in payments and financial technology, have been rapidly gaining market share, prompting regulators to consider how to bring them into the regulatory framework. 

Under the proposal, approved firms would have access to the Fedwire Funds Service, the National Settlement Service, FedNow and Fedwire Securities to process payments and securities transfers. The framework would not provide access to the Fed's automated clearing house network, or ACH, which processes electronic debits and credits such as payroll, direct deposits, bill payments and certain check conversions.

Many community bank commenters raised similar objections, including that the proposal could give nonbanks an unfair competitive advantage, create uncertainty around Bank Secrecy Act and anti-money laundering compliance requirements, and lack clear mechanisms for revoking payment account access if risks emerge. 

Jenn Bertematti, managing director of bank operations at INTRUST Bank, wrote that banks are required to devote significant resources to risk management, compliance, consumer protection and fraud prevention, investments she said help protect consumers and the broader financial system. 

"If less-supervised payment firms receive direct access without equivalent expectations, those firms could gain operational advantages while shifting risk to receiving banks, customers, and the broader payment ecosystem," Bertematti wrote. "Uneven access standards would weaken confidence in the payment system and place regulated banks at a disadvantage."

Specifically, some community banks argued in their comment letters that granting nonbanks direct access to the Federal Reserve's payment system could erode their deposit bases and weaken their ability to support local economies. 

Amy Potts, chief operating officer at Union State Bank, wrote that the proposal could "divert deposits and payment activity away from community banks like mine that support local economic development."

Fintech companies and their trade groups, meanwhile, urged the Fed to expand the framework by allowing payment account holders to access the automated clearing house network. Without ACH access, the proposal would "not achieve its stated policy objectives," the Financial Technology Association wrote.

"While the proposal represents meaningful progress, the continued exclusion of FedACH substantially limits the utility of the payment account and prevents it from delivering key benefits to end-users, including consumers and small businesses," the association wrote.

Although the proposal does not provide ACH access, the Fed sought to address nonbank concerns by raising the overnight balance limit for payment accounts from the lesser of $500 million or 10% of an institution's total assets to a flat $1 billion cap. Still, several fintech firms argued the proposal remained too restrictive. 

Coinbase and Payward, the parent company of cryptocurrency exchange Kraken, urged the Fed to establish a process for payment account holders to apply for higher closing balance limits. 

The Fed's proposal to create a "skinny" master account comes as the Trump administration issued an executive order in May instructing federal bank regulators and the central bank to review and "streamline" their fintech regulations. The order, titled "Integrating Financial Technology Innovation Into Regulatory Frameworks," also suggested that the Federal Reserve should move toward granting more master payment accounts to nonbank fintechs.

As the central bank works to finalize the framework, market watchers have warned that implementation could face legal challenges from either the banking industry or fintech firms.

Graham Steele, a former assistant secretary for financial institutions at the Treasury Department and faculty member at the University of North Carolina Chapel Hill law school, said in a previous interview that the Fed is likely to face criticism or litigation regardless of how it proceeds.

"They're sort of damned if they do and damned if they don't," he said in a February interview. "If they put in the restrictions the banks want, then fintech firms aren't going to want to use it in this case. If they lighten up and they dial them back, then they could get sued — so they're going to get challenged in either direction."