Massachusetts earlier this month joined a cohort of seven states to sign a multistate compact that is expected to significantly streamline the licensing process for fintech money services businesses.
The gist of the agreement, which also includes Georgia, Illinois, Kansas, Tennessee, Texas and Washington, is that some key elements of licensing approved by one state in the agreement will also be accepted by other participating states.
While experts and players in the fintech space know there is still a long and complex journey before ultimately settling on standard fintech regulatory system, they are excited about the prospect of greater innovation and further clarity in the overall process.
“It’s a great thing, because it’s an attempt to remove some bureaucracy,” said Fran Duggan, CEO of Payrailz, a national fintech company that partners with financial institutions to offer customers a “do it for you” payment approach. “Currently you have to get licenses in 50 different states with 50 different cost structures. It becomes very difficult.”
The compact sets up a two-phase process for fintech companies in the money transmitting space, according to a spokesperson from the Conference of State Bank Supervisors, the organization that coordinated the agreement.
In the first phase, one state reviews key elements of state licensing including IT, cybersecurity, the business plan, background check and compliance with the federal Bank Secrecy Act. The other participating states then agree to accept that work as their own.
In the second phase, the prospective licensee works with each state on state-specific requirements.
Despite being scattered throughout the country, state regulators in the agreement operate with similar principles, said Kenneth F. Ehrlich, co-chairman of the banking and financial services practice group at the Boston-based law firm Nutter.
“These are highly professional, like-minded state offices that view themselves as leaders,” he said. “They are also comfortable enough with each other’s decision-making ability. They must be comfortable with each other because they are honoring one approval from one state.”
Bram Berkowitz
Innovation Nation
With this agreement in place, Duggan said the seven states certainly look more attractive for business, and for fintech companies such as Payrailz to start with in the regulatory approval process.
“Wow, these states get it, and they want us. It’s not meant to be a confrontational relationship. We want to do business there and you would think states want us to do business as well,” he said. “This reminds me a lot of the college application process, when colleges came out with the common application. We want states to look at it (the regulatory process) like the common app.”
A clearer and somewhat less complicated regulatory system will make life easier for startups, which currently need to operate in all 50 states to achieve widespread success, said Ben Malka, a partner at Cambridge-based F-Prime Capital who focuses on investing in early stage fintech companies.
“Some believe startups need to first prove customers want their service and then worry about regulation later,” he said. “I think startups should contemplate regulations beforehand. We want them to know what they are up against before they get started. No one wants to be surprised when a company is out of compliance. Fortunately, most startups we come across do a good job of it.”
Navigating the Road Ahead
The Conference of State Bank Supervisors is not the only group looking to harmonize state laws regarding fintech.
The U.S. Office of the Comptroller of the Currency has also proposed granting fintechs a limited purpose national bank charter, which would allow fintech companies to get one license and operate nationwide.
However, after this proposal, the Conference of State Bank Supervisors sued the OCC, claiming the agency overreached its authority. A similar suit, eventually thrown out, was also brought by the New York banking superintendent.
Malka would prefer multiple regulators because he believes that nurturing innovation requires balance; leaving all the power to one entity wouldn’t be good for startups, he said.
All of this activity, said Duggan, is certainly good news and will ultimately allow many fintechs to go to market quicker.
But it has also led Payrailz to step back and examine its regulatory strategy.
“Do we keep moving forward? Should we wait? Things are moving along and then all of a sudden somebody can throw a monkey wrench [in your plans],” he said.
