Kansas City Federal Reserve Bank: Nonbanks in the payment system

An excellent overview (by Terri Bradford, Matt Davies, and Stuart E. Weiner of the Federal Reserve Bank of Kansas City) of the US payment system and the many roles that nonbanks play in the system. PDF format.

Nonbanks have always been a key component of the nation‚s payments system. In recent years, however, nonbanks have become even more prominent. This heightened visibility raises several questions. What payments activities are nonbanks engaged in? What roles do nonbanks play in specific payments types? What types of risk are potentially associated with nonbank participation? This paper begins to address these questions. Preliminary findings include: (1) Nonbanks are involved in a myriad of activities and roles, both in traditional and emerging payments types; (2) Nonbank business relationships with banks and other participants in the payments systems are often highly complex and interrelated; (3) Nonbanks are rarely directly involved in settlement activities and, hence, appear to be associated with limited settlement and systemic risk; (4) Both nonbanks and banks appear to be increasingly susceptible to operational risk factors.