A Smart Solution to Advance Consumer-Centric Payments Innovation in America

In recent years, there have been several debates over how best to regulate and facilitate financial technology innovation in the United States. These debates frequently pit federal regulations against state-based regulation, and banks against nonbanks, in unfortunate zero-sum contests, resulting in legal challenges and increasingly tense congressional hearings that risk losing the forest for the trees in terms of what’s best for the country. At the same time, the Federal Reserve is considering whether certain kinds of banks — but only banks — can directly access federal payment systems. 

When it comes to consumer-centric payments innovation, there is a way to preserve state-based regulation of payments companies and allow them to participate directly in our national payments systems, without requiring that they have full banking powers. 

Our idea for a hybrid federal/state payments oversight model is rooted in the “unbundling” of financial services brought about by financial technology companies competing in discrete markets. These entities do not resemble the full-service, brick-and-mortar banks of decades past. Some payments innovators, for example, are focused on using modern technology to provide faster, lower-cost, transparent and more convenient payments for their customers — not on taking deposits or making loans.  

In recognition of this changing industry landscape, many other high-income countries have recently implemented modern regulatory frameworks that account for the new business models. Companies focused narrowly on payments can access critical payments infrastructure and are subject to tailored regulation focused on their unique risks. 

That hasn’t happened in the United States, where licensing regimes are decades — and, in some cases, centuries — old, and largely limit access to payment rails to “banks” as traditionally understood. Bank regulation, however, is designed for banks that collect deposits and lend them out — not for payments companies. Payment providers are regulated by each of the 50 states under money transmission frameworks and cannot directly access payment systems. 

As a result, some companies have increasingly sought out regulatory regimes that would enable them to operate nationwide and to access central bank services. These applications prompted the Federal Reserve Board to propose guidelines for deciding which banks can obtain Federal Reserve accounts and thereby access Federal Reserve payments systems. 

These applications will likely increase in the months and years ahead. Why? There’s still a cohort of payments companies that are not able to compete on a level playing field, because they must use banks as middlemen to access critical financial infrastructure such as Federal Reserve payments systems. Unlike in many other countries, only banks — as traditionally defined — can originate and settle payments directly on behalf of their customers.  

It is important to ensure that companies permitted to directly access critical payment systems are well-regulated, but it makes little sense to require a payments company to become a full-service bank, or to be regulated like one. They have entirely different business models and present different risks. Traditional banks raise deposits and lend them out, engaging in maturity transformation and taking on interest rate and credit risk, as well as operational and liquidity risk. Payments companies, on the other hand, move money between end users and pose principally liquidity and operational risk. There’s a gaping square peg/round hole problem. 

A solution may be found in a hybrid of the U.S. state-based regulatory regime for “money transmitters” and the regulatory frameworks implemented or in the works in the United Kingdom, Canada, European Union, and Singapore. Congress could create a national “payments passport” by allowing money transmitters with at least 40 state licenses to obtain limited access to the payments system, provided they are subject to Federal Reserve regulatory standards and supervision tailored to payments services. 

This hybrid solution should appeal to a broad set of stakeholders, including state bank supervisors and the Federal Reserve system. 

State-based licensing and supervisory authority would remain in place, while the Federal Reserve would be empowered to ensure the safety, soundness, and integrity of its own payments system. This framework could also include tailored parent company oversight to protect safety and soundness and be limited to firms whose activities are predominantly financial in nature. 

The threshold of 40 state licenses mirrors the existing threshold used by the Conference of State Bank Supervisors for its forward-leaning “one company, one examination” process. And limited payments access means payments companies would directly originate, clear, and settle payments, but lack access to broader Fed services. 

Payments companies would not be granted full banking powers, limiting the threat to community banks, while the preservation of state-based consumer protections would ease consumer advocates’ concerns. 

A payments passport isn’t a panacea — much more is needed to modernize our regulatory frameworks. But it is a sensible step in the right direction. It would create a more level playing field, foster payments innovation and provide a sensible regulatory option for payments-focused companies. 

It might also be just what Washington needs to lower tensions in the fight over whether and how to regulate emerging business models. 


Nick Catino is global head of policy at Wise and a former staff director of a U.S. Senate Banking subcommittee. 

Jonah Crane is a partner at Klaros Group and former deputy assistant secretary for the Financial Stability Oversight Council at the U.S. Treasury Department. 

Daniel Gorfine is the CEO of Gattaca Horizons LLC, adjunct professor at the Georgetown University Law Center and former chief innovation officer of the U.S. Commodity Futures Trading Commission. 

Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.

Morning Consult