Yesterday, the Conference of State Bank Supervisors (CSBS) took a step forward to streamline the process of licensing Fintech firms seeking to operate across the US. If you are based outside the US you may be surprised to know that banks and Fintechs must comply to regulation at both the state and federal level. This means compliance across 50 different states and a squadron of federal agencies. This regulatory environment is byzantine at best. For early stage Fintech firms (with limited resources) it makes your head explode. Who loses out in all of this? The consumer, of course.
The Office of the Comptroller of the Currency (OCC), a federal regulator of banks, attempted to mitigate this conondrum with the much debated Fintech Charter. Following the announcement the OCC was investigating a charter for innovative firms, traditional finance went ballistic along with some state regulators.
Via the CSBS, certain state regulators announced a multi-state compact that standardizes key elements of the licensing process for money services businesses (MSB). Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas and Washington joined in the new initiative. Other states are expected to join at some point in the future.
Last year, the CSBS announced the creation of a “Fintech Industry Advisory Panel” and said they were working with the 50 states to “harmonize their licensing and supervisory practices.” This most recent announcement was described by the CSBS as moving towards an integrated, 50-state system of licensing and supervision for Fintechs.
So is this the real deal? Will Fintechs eventually find a path to offer their services without having the kiss the ring of every single state regulator? This is an important question. If states cannot get their act together, Congress must move to provide a path of national acceptance. State based hurdles are harming competition, innovation and improved services for consumers.
Vincent Basulto, a partner with the law firm Richards Kibbe & Orbe LLP, commented on the CSBS announcement indicating it was a helpful move but actions will (always) speak louder than words;
“The multi-state compact is a positive development and is an acknowledgment that the current patchwork system of regulation of Fintech companies needs to be improved. While the OCC continues to consider a possible national charter for fintech companies, the Conference of State Bank Supervisors is seizing the opportunity by supporting initiatives such as this. Nonetheless, until all or a substantial portion of states have agreed to participate in such a standardized licensing process and until there is greater reciprocity, this compact will have limited utility for fintech firms.”
Gregory Hesse, partner at Hunton & Williams LLP, shared his opinion as well. Hesse said it was a current limitation of the federal system where the states have the authority to regulate Fintech firms;
“Non-bank financial services are one area in which the federal government has historically abstained from regulating. As a consequence, the states have stepped in to fill the void by regulating non-bank money service businesses,” said Hesse. “The regulation of the money service business includes the licensing of such business (for example money transmitters, currency exchanges, etc). The effect of this void in federal regulation is that any company that wishes to operate in multiple states is required to (a) obtain licenses from each state that it operates in, (b) comply with the laws in each state, (c) submit to examinations in each state, etc.”
Hesse stated the obvious: “the requirement to obtain licenses and submit to examinations in each state can be burdensome.” But he believes yesterday’s announcement is indicative that some states are trying to be responsive to this reality.
“The application process is the first step. The next steps will be to approach the state legislatures to standardize the statutes – and a model for standard laws already exists, with the most common being the Uniform Commercial Code. The final piece will be to address the examination procedures.”
In many other countries, Fintechs must deal with just a handful of regulators. Some of the most advanced Fintech Hubs have provided a streamlined process for Fintechs to ramp up and test their services – all under the watchful eye of federal regulators.
Fintech, and financial services in general, are unique in the fact they are highly regulated – as they should be. But allowing states to become a hurdle to innovation without cause – is simply wrong.
The following companies are part of the CSBS Fintech Industry Advisory Panel:
- Affirm, Inc.
- Alipay US
- Amazon Payments, Inc.
- BitPay, Inc.
- Circle Internet Financial, Inc.
- The Citizens Bank of Edmond
- Enova International (NetCredit & CashNetUSA)
- Envestnet | Yodlee
- First Data Corporation
- Funding Circle USA, Inc.
- Green Dot Corp
- IOU Financial
- LendUp, Inc.
- Microsoft Payments
- OnDeck Capital LLC
- OneMain Financial
- Oportun, Inc.
- Remitly, Inc.
- Servicio UniTeller, Inc.
- Social Finance, Inc./SoFi Lending Corp.
- Western Union