The Fed Opens a Side Door to the Payment System
By: Paul Schaus
June 2, 2026
On May 20, 2026, the Federal Reserve Board requested public comment on a proposal to establish a "payment account" — a constrained, special-purpose alternative to a traditional master account that legally eligible institutions could use solely to clear and settle their own payments. The proposal refines the prototype the Board outlined in its December 19, 2025 request for information and operationalizes the executive order President Trump signed the day before, which directed federal banking regulators to evaluate how uninsured depository institutions and non-bank financial companies access Reserve Bank payment services.
Most trade-press coverage has framed this as a fintech-and-crypto story. That framing misses the point for community and regional bankers. The payment account is a deliberately limited utility license for payment access, not a competitor to your master account — and it arrives paired with a pause on Tier 3 access decisions through December 31, 2026. The competitive implications for insured depository institutions are real, but they are not on the deposit side.
The proposal amends the Account Access Guidelines finalized in 2022, the Board's Policy on Payment System Risk, Regulation D, and Regulation A. The combined effect is a payment-rail utility defined by seven structural constraints, summarized in the proposed standard terms.
As Davis Wright Tremaine put it, the payment account is a "settlement inbox and outbox at the Fed" — a prefunded rail license, not a banking franchise. Governor Michael Barr dissented on the BSA/AML safeguards, calling the protections "inadequate" without provisions for Fed examination of compliance procedures. That dissent flags the most likely area for change between proposal and final rule.
The May proposal did not arrive out of nowhere. On March 4, 2026, the Federal Reserve Bank of Kansas City approved a limited-purpose account for Kraken Financial, a Wyoming Special Purpose Depository Institution — the first time a digital asset firm received direct Federal Reserve account access. Fed Vice Chair Bowman characterized the approval at the ABA Washington Summit as effectively a pilot. Treat the May 20 proposal as the formalization of the Kraken framework into a standing policy that other Tier 3 institutions can apply for.
The payment account now sits alongside the industrial loan company charter as a parallel track to direct Fed payment access. In my February 2026 Consulting Magazine piece on the race for banking charters, I documented the surge in ILC applications driven by companies seeking the "elimination of third-party dependencies" that comes from removing sponsor bank intermediaries. PayPal's December 2025 Utah application explicitly sought to "reduce reliance on third-party sponsor banks" across its $1.68 trillion platform. General Motors, Ford, Affirm, Block, and Edward Jones are pursuing the same logic. The ILC delivers an FDIC-insured deposit franchise and, eventually, a Tier 1 master account. The payment account delivers Fed-direct settlement in 90 days with no insurance and no FedACH. In my 2024 International Banker analysis I noted the alternative to assembling 50 state money transmitter licenses was "becoming a bank." The payment account is now a third option — not becoming a bank, but obtaining the one capability, direct payment access, that previously only banks had.
The Board has encouraged Reserve Banks to pause decisions on Tier 3 access requests — non-federally-insured institutions without a Federal Reserve-regulated holding company — until the policy is finalized, with the pause expected to end on or before December 31, 2026. That channels every pending Tier 3 applicant, including Wyoming SPDIs, OCC-conditionally-approved national trust banks such as Circle, Paxos, Fireblocks, Anchorage Digital, and BitGo, and Custodia Bank, which on May 29 received a SCOTUS filing extension, toward the payment account as the realistic short-term path. The proposal also sets review-time expectations of 90 days for payment account requests and 45 days for any master or payment account request from a Tier 1 institution with complete documentation.
The deposit-disintermediation risk that the Bank Policy Institute primer addresses is meaningfully mitigated by the proposal's structure. A payment account that pays no interest, caps overnight balances, and excludes FedACH is structurally unattractive as a deposit substitute. The real concern is the payment services side. This proposal makes it operationally easier for non-bank fintechs and stablecoin issuers to deliver faster, cheaper payment services to the commercial customers your bank offers today. That extends the dynamic CCG Catalyst analyzed in "Your Deposits Are Going Digital" on tokenized deposits and stablecoins and in "Same Day ACH Just Got Serious" on the Nacha $10 million cap. The aggregate effect compresses the community bank's role in the payment value chain.
Three priorities in the next ninety days. First, file a comment. The 60-day comment window closes in late July, and the Board explicitly invited input on BSA/AML safeguards for uninsured holders. Second, audit which commercial relationships — the high-volume treasury clients, multi-location franchises, and marketplace businesses — are most exposed to a non-bank competitor with direct rail access, and define a retention strategy beyond price-matching. Third, evaluate your integrated payment routing capability — the ability to direct a transaction to the optimal rail across FedNow, Same Day ACH, wire, and tokenized deposit channels based on speed, cost, recipient capability, and dollar amount. The source may be your core provider, your digital banking platform, a dedicated payments hub or middleware layer such as Finzly or AlphaPoint, or a BaaS partner like Stablecore — and the right answer is increasingly a combination rather than any single vendor. Most community banks lack this capability today regardless of where it sits; the payment account raises the cost of leaving that gap open.
Regional banks face a sharper version of the same question, with more wire transfer fee revenue exposed and more sophisticated commercial clients likely to demand integrated payment services. The offensive play is the more interesting one. Regional banks have the scale to productize the sponsor-bank, supervised-holding-company, and credit-availability functions that a payment account holder still cannot provide for itself — and to price them accordingly. The Sullivan & Cromwell analysis confirms Tier 1 institutions get the fastest review track — a planning input rather than a procedural detail.
For the largest banks, payment accounts cannot settle for other institutions under Operating Circular 1, which protects the correspondent banking franchise in the near term. The executive order's broader trajectory suggests this is the opening move. Paired with the March 2026 interagency capital FAQ that I covered in "Your Deposits Are Going Digital," the proposal points toward a regulated environment where tokenized deposits, tokenized securities, and direct non-bank payment access converge on the same infrastructure. The institutions that build first inside the regulated bank perimeter keep the activity there.
The payment account proposal turns the Kraken pilot into a standing framework, channels Tier 3 master account applicants into a constrained alternative through year-end, and delivers the Federal Reserve's first substantive response to the May 19 executive order. The structural mitigants — no interest, no discount window, no FedACH, automated overdraft rejection, calibrated balance caps, and no correspondent role — limit the immediate deposit-side threat. They do not limit the payment services threat.
Community and regional banks that engage now through comment, customer audit, and payments technology investment will compete with a materially different population of payment infrastructure participants in 2027. The institutions that treat this as a fintech-and-crypto story will discover it was a community and regional banking story.
CCG Catalyst advises community and regional banks, credit unions, and fintech companies on payments strategy, regulatory engagement, and technology planning. If your institution is evaluating its payment strategy, reach out to our team at www.ccgcatalyst.com.
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By: Paul Schaus | Founder & Managing Partner, CCG Catalyst Consulting
Disclaimer: The views expressed in this article represent the perspective of CCG Catalyst Consulting based on our direct experience advising financial institutions. This commentary is intended to stimulate industry discussion and does not constitute legal, accounting, or regulatory advice.
