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- Almost ten thousand firms have access to the Fed payment system, with 44 requests pending.
- Custodia highlights issues with database amid own master account application row.
A new database published by the Federal Reserve (the Fed) brings long-awaited transparency into which institutions have access to the central payment infrastructure after a scandal suggested the Fed did not treat each application equally.
The master account and services database, published June 16 the Fed site, shows that nearly ten thousand institutions either hold a master account or settle transactions in a Fed master account via a third-party depository institution.
The master account is used to give financial institutions access to Fed-managed payment systems.
The database contains information on the participant and can be searched by the name of the institution, the date its application was approved, its location, which Federal Reserve district it belongs to and what type of federal deposit insurance it has.
It does not, however, reveal information on whether a company is a direct or indirect account holder.
A second list, which includes firms with pending requests as of December 2022, shows when the application was submitted, decided on and approved, rejected or withdrawn.
It also shows whether an institution is considered to be tier 1, tier 2 or tier 3, which determines the level of due diligence and scrutiny that reserve banks will apply to the firm depending on its degree of risk.
Among the 9,274 master account holders is the Dutch acquirer Adyen, the online bank affiliate of American Express, as well as Block’s banking affiliate (Square Financial Services).
Meanwhile, London-based Fnality and several crypto firms are on the list of the 44 firms waiting for the regulator’s approval.
Access to the Fed master accounts was a largely overlooked issue until recent years, when new firms building their business strategy on providing payment services started to mushroom.
Under the current rules, a financial institution must be either insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration to get a master account, or be eligible to make an application to become insured.
However, as per the database, there are 414 uninsured institutions that have access to a master account.
According to Nathan Miller, a spokesperson for Custodia Bank, the list includes “stunning details that suggest Fed leadership has been operating beyond its legal authority.”
Custodia was one of the Wyoming state-chartered crypto banks that sought to create a bridge between traditional finance and the crypto world. After years of consideration, in February, the Fed rejected the bank’s request, citing the lack of federal insurance.
The list, however, includes hundreds of uninsured institutions and a number of non-depository institutions that appear to be ineligible, Miller said in an email statement.
“It is no wonder the Fed fought tooth and nail to keep this database hidden from the public for years.”
VIXIO reached out to the Fed but the regulator declined to comment.
Nevertheless, as mentioned before, the database includes both direct and indirect participants without indicating which type of access an institution has.
Non-bank financial institutions, such as money service businesses (MSBs), payment processors, and non-bank payment providers that need not obtain federal insurance can gain access to the Fed payment system via correspondent banking relationships.
The pending list also reveals that some of the institutions have been waiting five years for their master account decisions, which typically take five to seven business days.
The issue of master accounts got to Congress’ attention last year during the nomination process of former Fed governor Sarah Bloom Raskin, who was suggested by President Joe Biden to return to the Fed as vice chair for supervision.
But during the Congressional hearings, serious concerns emerged that Bloom Raskin had used her connections from the Fed to obtain access to a Fed master account for a non-bank fintech company, while others were denied.
Members of Congress, led by former Senator Pat Toomey, pressed the Fed on the issue, calling for more details about the case and pointing out how little was known about the Fed’s decision process as well as the account holders.
After months of unsuccessful efforts to get more information from the Fed, the previous Congress ended with lawmakers passing legislation that orders the Fed to create and publish an online and searchable database of existing participants and pending applications.
