Fintechs, Novel Charters, And Fed Master Accounts—Of Elephants And Mouseholes

A U.S. District Court recently rejected arguments that banks and institutions with novel charters have a statutory right to obtain a Federal Reserve master account. Master accounts let institutions access key parts of the Federal Reserve's payments system. Entities that do not have master accounts generally need to have banking relationships with institutions that do have them, adding cost, friction, and other complexity to transactions. The court's decision stemmed from a lawsuit filed by Custodia Bank (Custodia), which applied for a master account in October 2020 but was denied by the Federal Reserve Board of Kansas City (FRBKC). The court agreed with the Federal Reserve Board (Fed) that the Fed has the discretion to grant or deny master accounts.