Sarah Bloom Raskin's board seat with The Reserve Trust Co., a financial technology company that was granted a Federal Reserve master account, is further complicating what was already expected to be a tight vote on her vice chair for supervision nomination.

Reserve Trust was granted a master account at the Kansas City Fed, which caused some Republican senators — such as Cynthia Lummis, R-Wy., during the nomination hearing and Ranking Member Patrick Toomey, R-Pa., in a letter afterward — to question whether Raskin used her influence as a former Fed official to help secure the approval. Raskin, a Fed governor from 2010 to 2014 and Reserve Trust board member from 2017 to 2019, did not respond to requests for comment.

But White House spokesperson Chris Meagher took issue with the concerns being raised.

"Sarah Bloom Raskin has committed to the strictest ethics requirements in history of any Federal Reserve Board nominee," Meagher said in a statement. "Senator Toomey has waged a baseless smear campaign for weeks against an exceptionally well-qualified nominee without providing a single scrap of evidence to support his false claims."

Reserve Trust did not respond to requests for comment on why it sought a Fed master account. Having a master account allows a financial institution to have direct access to the Fed's payment systems. Without that access, it would have to partner with a bank and pay its fees.

Lawyers agreed that it was rare for a fintech company to be granted access, especially because most are ineligible since they are not depository institutions. The Kansas City Fed said in a Feb. 7 statement that it "did not deviate from its review process in evaluating" Reserve Trust's request. It did not mention Raskin and said the request was approved in mid-2018.

The Kansas City Fed statement also noted that Reserve Trust's initial request for the master account was denied in mid-2017. However, the approval came after Reserve Trust changed its business model and the Colorado Division of Banking "reinterpreted the state's law in a manner that meant RTC met the definition of a depository institution," according to the Kansas City Fed statement.

The Colorado Division of Banking said it is consistent in its analysis of the law, according to a statement the agency provided to S&P Global Market Intelligence. "We consider the statement that the division 'reinterpreted' state law as a misrepresentation of our practice," the statement said.

The Colorado division added that the outcome of its analysis can change based upon the facts provided by an entity, but it could not disclose the information it received from Reserve Trust because of confidentiality laws, according to the statement.

'Super fine' vote margin

Some Senate Republicans were already critical of President Joe Biden's pick for the Fed's vice chair of supervision role due to her position on regulating bank activities related to climate change and associated risks.

"The [confirmation vote] margin is super fine — it's basically zero," said Ian Katz, managing director at Capital Alpha Partners, in an interview.

Currently, it does not appear that the Reserve Trust issue will determine the outcome, but "if it builds some momentum, like these things sometimes do in Washington, that could change," said Katz, who put her confirmation odds at 55% to 60%.

The Senate Committee on Banking, Housing, and Urban Affairs is expected to vote on Raskin's and other nominations on Feb. 15.

The Reserve Trust revelation comes on the heels of the Fed taking a reputational hit after two regional presidents and former Vice Chair Richard Clarida resigned in the wake of reports that raised questions about their trading and financial transactions disclosures during the height of the pandemic.

"The issue will gain traction, especially if combined with [Chair Jerome] Powell's ongoing travails with the trading issues," Derek Tang, economist at Monetary Policy Analytics, said in a report.

It is unclear who would be a replacement nominee if Raskin is not confirmed because the White House "did not seriously prepare the market" for others under consideration, he added.

Fintechs want Fed access

Having a master account can give companies more legitimacy and an opportunity to receive compensation from partnerships.

"All in all, a fintech would rather have its own bank charter," said Scott Talbott, senior vice president of government affairs for the Electronic Transactions Association, a trade group for the payments industry. "However, the current situation brings many benefits to all parties including consumers."

To be eligible for a master account, a company must be eligible to apply for deposit insurance, even if it has not actually applied for deposit insurance, lawyers said.

Banks are regulated intensely, so there needs to be barriers to entry for payment systems, said James Stevens, partner at Troutman Pepper Hamilton Sanders LLP.

"You kind of want the regulated entities to be the ones that have access to this network," he added.

If a company has not been through the bank regulatory process when it was formed and is trying to go through it to get a master account, it is difficult. Stevens, who works on de novo bank formations, said it tends to take a year to form a bank.

"The rigor and the expectations of the federal banking regulators that you go through is one of the hardest business challenges that I think there is out there," Stevens added.

The Fed proposed guidelines in May 2021 on how it would evaluate requests for payment services and accounts at its regional banks.

"Even if it's not finalized, it's very clear what the Fed's thinking is," said Mark Chorazak, partner at Shearman & Sterling LLP. "The release was riddled with references to operational issues and liquidity and financial solvency and safety and soundness."

Those issues will be top-of-mind for the Fed when it considers master account applications, Chorazak added.