5 Takeaways from Paige Pidano Paridon’s Testimony on Payments

BPI Executive Vice President & Co-Head of Regulatory Affairs Paige Pidano Paridon, testified today before the House Financial Services Committee at a hearing titled "Future of Payments: Promoting Innovation and Fair Markets." Paridon discussed banks' track record of innovation, and the risks of novel bank charters and expanded Federal Reserve master account access, arguing that innovation should strengthen the existing regulatory framework rather than circumvent it.

Here are five key takeaways from the hearing.

1. Banks support payments innovation and stand ready to compete on a level playing field.

Rep. Bryan Steil (R-WI): "I'd love to hear from both of you about your perspective on how Congress and the federal financial regulators can foster that competitive financial ecosystem for private sector payment innovations, while also ensuring financial stability in consumer protection. Maybe we'll start with you, Ms. Paridon."

Paige Pidano Paridon, BPI: "Sure, as I've said, banks welcome competition, and banks want to innovate within the banking sector, and for many years previously, some of the banking regulators were skeptical and prevented banks from using innovative technology to provide services to their customers that they wanted to use. For example, banks were essentially prohibited for several years from experimenting and using distributed ledger technology. So we welcome the ability of banks in the banking sector to innovate. Of course, subject to them being able to demonstrate that they're able to manage the risks, and banks are very expert at managing risks. We welcome innovation and competition within the payment ecosystem itself, and we commend the Federal Reserve for inviting public input into whether it should expand its account access to provide a limited payment account to certain entities that have not traditionally had access to master accounts."

2. Banks' protections support innovation while keeping consumers and small businesses safe. Access to the Fed's infrastructure is a privilege, and the benefits should come with appropriate regulatory responsibilities.

Paige Pidano Paridon, BPI: "Institutions seeking novel charters seek access to the Federal Reserve payment infrastructure and the implicit imprimatur of federal oversight without accepting the full scope of those obligations. That is not a formula for innovation. It is a formula for regulatory arbitrage, and for the gradual erosion of the safety and soundness standards that protect the American public."

3. Bank deposits uniquely support small business lending and community investment.

Rep. Brad Sherman (D-CA): "Ms. [Paridon], some have argued that crypto and stablecoins could divert deposits from the banking system, especially if they're able to maneuver their way around the compromise they agreed to, that there wouldn't be interest paid on these stablecoins. As you know, bank deposits fuel community development. Banks are required to comply with the Community Reinvestment Act, and every small business in my district has a loan from a bank. None of them have a loan from crypto world. Could you discuss the potential loss in ability to finance a small business and the Community Investment Act as a result of stablecoin, or so-called stablecoin, pushing, reducing bank deposits?"

Paige Pidano Paridon, BPI: "Sure, thank you. It's a great question, and we spent a lot of time thinking about and looking at this issue. There is concern, particularly of stablecoin issuers through affiliate and other third parties are able to pay interest, that there could be a flight of deposits out of insured banks to stablecoin issuers, and as you note correctly, bank deposits fund loans to consumers, small businesses, including consumers of all economic levels. And there would be, based on the research we've done, a reduction in loans, or at a minimum increase in the cost of credit and a reduction in the availability of credit, were there to be deposit flight out of the regulated banking system. Banks have spent and continue to invest billions of dollars consistent with their obligations under the Community Reinvestment Act to fund small businesses and home financing in all communities, including low- and moderate-income communities."

4. Expanding Fed master account access to uninsured institutions risks deposit flight, credit and settlement risk to the payment system and new vectors for illicit finance. This warrants a studied approach.

Rep. Dan Meuser (R-PA): "Ms. Paridon, what are the potential risks of expanding Fed master account access to businesses outside of the traditional banking system?"

Paige Pidano Paridon, BPI: "It's something that we have spent a lot of time thinking about, and we do have concerns that, depending on whether the Fed ultimately does open up skinny accounts or payment accounts to entities that have not traditionally had access. Number one, it could potentially fundamentally shift deposits from insured institutions to uninsured institutions. The Fed itself has acknowledged that the institutions most likely to seek payment, a payment account, are going to be uninsured institutions. We have concerns, of course, with uninsured institutions, because they run and would not have the protection of deposit insurance. Beyond that, it's critically important, as the Fed does acknowledge that institutions with access to the Fed payment systems and a master account do not have the ability to present credit risk to the Reserve Bank itself, to present settlement risk to other participants in the payment ecosystem, and that they do not serve as a transmission vector for illicit finance risk into the system. So we would encourage the Fed to proceed slowly if it does in fact move to implement the payment account as it has proposed, and to study this question of whether it would hasten a shift from insured depository institutions to uninsured, and what the implications would be for that, and whether that would fundamentally change the Fed's role in the economy by expanding its balance sheet, for example. In addition, we have encouraged the Fed to require the strictest BSA and AML and illicit finance controls and risk management requirements, as well as cybersecurity risk management requirements and data protection controls to ensure that consumer-sensitive financial data remains secure."

5. AI agents raise new questions around liability and consumer protection.

Rep. Bill Foster (D-IL): "How do you think we should be thinking about the transition to agentic finances, where most transactions happen not between consumers and businesses or business to businesses, but through agents, and the choice of the exact payment rails may be sort of a side issue to these two agents that have already negotiated identity and authorization, and all these other things that you struggle with all the time, that will sort of be built in automatically to the agent to agent interaction? I worry about that, whether we were ready with the legal certainty of what happens when a payment goes off the rails, because an agent has done something unauthorized, and do you see any problems there that Congress should be addressing? The other one is just facing the problem with the super apps. I mean, we probably all saw a couple days ago, Facebook just bought a financial super app with 3 billion customers, like 10 times the population of the United States, that does everything: that does payments, it does loans, it does business loans, the whole thing. And so I'm very worried that we are going to be facing this sort of vertical monopoly in the United States in a way that will really crush competition. Let me just go down the line and sort of tell me your thoughts briefly on those two issues."

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Paige Pidano Paridon, BPI: "Sure. On agentic payments, I'll start with that. I agree. I think the advent of that technology and capability raises a lot of questions that are just beginning to be investigated and considered, and I do think regulators and the Congress should carefully consider all of the possible implications, including, as you note, what happens if an agent executes a transaction or makes a payment that it wasn't authorized to do, and who is a consumer in that situation? Who is the institution serving, and in the investment advisor space, who are the fiduciary duties owed to, etc."