Payment Innovation and Competition: The Path to a Limited-Purpose Payment Bank Charter
The U.S. payment industry is constrained by outdated rules, preventing digital payment companies from directly using the Federal Reserve payment system and forcing them to rely on bank intermediaries, leading to transaction delays and increased costs. This article recommends that Congress take bipartisan measures to establish a limited-purpose payment bank charter, allowing these companies direct access to systems such as FedNow while maintaining appropriate oversight, to enhance efficiency, promote competition, and benefit consumers and businesses.
Editor's Note: John Muller is an industry consultant who has held senior legal positions at Stripe, Meta, and PayPal, and is now based in New York.
This year, financial regulation has become a focal issue in Washington. Amid debates over "open banking" and "de-banking," as well as cryptocurrency and stablecoin legislation, efforts to modernize the financial system are reshaping the landscape of Wall Street in real time.
However, Congress can now take a simpler and bipartisan step to bring lasting benefits: providing digital payment companies with a path to directly access the Federal Reserve (Fed) system through a limited-purpose payment bank charter.
Such a charter would make money transfers within the United States faster and cheaper. It would also spur competition in a market still dominated by large banks and card networks, lowering costs for households and small businesses while driving innovation across the financial system.
Outdated rules mean digital payment companies cannot directly use the Fed's payment rails or become full members of major credit card networks. Instead, they must partner with banks, which adds cost and delay to every transaction.
A payment bank charter would allow these companies to directly access the aforementioned systems to promote payment competition, while ensuring oversight by banking regulators. The charter would also come with appropriate guardrails: these payment companies cannot lend like traditional banks; they can only transfer or move funds for customers.
The extra handoffs between digital payment companies and banks slow down processing—sometimes delaying by a day or more—because banks operate on their own schedules and often hold funds for a bit longer. Unfortunately for customers, this extra time is not just about safety; it often allows banks to profit through fees or by earning interest on customer funds.
Take the Fed's most commonly used small-value transaction system—the Automated Clearing House (ACH)—where payments are already processed in batches, with settlement taking one to three business days. Unless payment processors pay extra for same-day processing—a service not available for all transactions—customers often have to wait.
The Fed has also introduced a newer instant payment system called FedNow, but many large national banks have not yet adopted it. Even those that have joined FedNow often restrict its use or continue to slow payments according to their own processing schedules. The reality is that banks lack the incentive to speed up settlement because they benefit from the delays.
However, allowing digital payment companies to access FedNow would give banks a strong incentive to fully utilize the system, letting customers enjoy the truly round-the-clock, instant experience the system can offer—benefiting both bank customers and digital payment customers.
While delays or small fees on individual transactions may seem trivial, these costs accumulate and place a significant burden on the economy and all Americans. With faster payments, ordinary Americans would feel less financial strain: wages arrive sooner, bills are settled more promptly, and local businesses can hire with greater flexibility.
For investors, lower transaction costs and faster settlement mean greater efficiency, stronger small business growth, and a more competitive U.S. payment industry globally.
A payment charter is not only economically sound but also politically feasible. Officials from both parties have called for updating regulatory rules. During President Donald Trump's first term,the Office of the Comptroller of the Currency called for"a path for fintech companies to become national banks." Later, during the Biden administration,an official at the Treasury Department also arguedthat such changes would "promote consumer-friendly innovation and fair competition."
The bipartisan momentum and growing interest from businesses and associations indicate that this issue will not disappear soon. If the federal government fails to keep pace, innovation in payments will be hindered.
The need to update payment regulations to create a level playing field for digital payment companies is clear. The technology is ready, competition is necessary, and the political conditions are feasible. Now is the time for Congress to act.