A group representing state-level bank and financial regulators pushed back on the premise of an initiative put forth by Treasury Under Secretary for Domestic Finance Nellie Liang calling for a federal regulatory framework for domestic payments.
"As the payments landscape continues to evolve, with new entrants and new technologies, it is vital that all participants engage in an iterative and thoughtful process to identify and address risks to consumers and financial stability," Conference of State Bank Supervisors President and CEO Brandon Milhorn said Wednesday evening.
"However, the absence of a federal regulator does not, in and of itself, constitute a regulatory gap. Any conversation to address perceived gaps should begin with a comprehensive understanding of the existing, robust state regulatory framework," Milhorn said.
Liang's comments, delivered at the Chicago Payments Symposium earlier in the day Wednesday, called for state and federal regulators to develop an encompassing framework for payments that would create minimum standards for nonbank payment transmitters, including "consistent reserve requirements and being able to intervene immediately in a crisis to ensure trust and continuity of services."
Citing recommendations made in the
"Money transmitters are subject to minimum net worth or surety bond requirements, but these financial requirements are generally not tied to the riskiness of their assets," Liang said. "This means that an e-money issuer that processed 25 billion transactions in 2023 could meet minimum financial requirements with retained earnings of six one-thousandths of one percent of its total assets.
"Money transmitters also may be subject to limits on what they can invest customer funds in. These investment limits are what maintains 1-for-1 value with the dollar. But even the most stringent of these requirements permit a relatively wide range of assets."
Liang said state regulators have developed model legislation to address some of these discrepancies, and a significant portion of the states have adopted at least some parts of that legislation. But the inherently piecemeal nature of state-by-state legislation and regulation means that significant gaps will persist without a minimum federal framework.
"There are practical challenges to establishing the same standards in every state and limits as to how well those standards can address risks of business models that extend well beyond state borders," she said.
The establishment of a federal payments framework would have to take compliance costs into consideration, since banklike capital retention rules would not necessarily be appropriate, Liang said.
"E-money issuers are not banks. Instead, they generally offer a more limited range of payment-related services. The calibration of financial resource requirements should reflect this more limited product offering while credibly backing customer claims 1-for-1 with high-quality and liquid assets," she said. "The calibration and composition of financial resource requirements may also have broader consequences. To the extent that deposits flow to e-money issuers from banks, it could reduce credit provision or raise its costs."
But Liang also said there are opportunities in developing a nationwide framework, namely that firms that have met the minimum federal standards could potentially be granted access to the Federal Reserve's ACH and FedNow payments platforms, which would level the playing field between bank and nonbank money transmitters and spur innovation.
The Financial Technology Association, which represents financial technology firms, welcomed that development, saying with so many Americans using digital payments services, any effort to improve those services would benefit the public.
"Leading payment companies still lack access to the Federal Reserve's payment rails, a missed opportunity to speed up payments and save people valuable time and money," said Penny Lee, president and CEO of the Financial Technology Association. "Today's announcement is a step in the right direction, and we look forward to working with the Treasury Department and Congress to allow for the optionality of accessing FedNow and other Fed services for leading payments companies."
Milhorn of CSBS similarly welcomed the prospect of discussing the matter further with federal officials.
"The United States has the most diverse and consequential money transmission network in the world, and the states welcome the perspective of the United States Department of the Treasury and other federal agencies on this important topic," Milhorn said. "We look forward to working with them to continue to protect consumers and to promote a competitive and innovative payments system."
