WASHINGTON — Fintech firms and industry watchers hope a new multistate licensing plan will help fix a balkanized chartering system, thus making the U.S. more attractive to digital payments firms. But getting enough states on board to expand the plan's reach could be a challenge.
Seven state regulators — including those representing Georgia, Texas and Illinois — earlier this month announced a pilot program to simplify licensing for money services businesses and better enable firms to operate in all seven states. The effort is seen as providing firms with more options as the Office of the Comptroller of the Currency continues to mull a federal option for fintech chartering.
While just seven states is far from the national platform many companies covet, observers say the pilot program, which will tentatively launch in April, is a step in the right direction. One drawback to state-by-state licensing, they say, is it keeps some global payments companies — used to a more unified framework of other countries — away from the U.S. market. Any streamlining is helpful.
“The seven states actually is a pretty big deal,” said Brion Nazzaro, head of global compliance at WorldRemit, a global digital money transfer service. “These are not small states.”
Washington, Kansas, Massachusetts and Tennessee are also participating in the pilot, which is part of a larger effort by the Conference of State Bank Supervisors to have all states involved by 2020.
Nazzaro said having multiple states participating in a single plan gives approved fintech startups a larger sample population to prove whether their business is viable, especially to other regulators down the road.
“Once they prove they’re commercially viable, getting funding for other licenses isn’t as much of an impediment,” he said.
Jo Ann Barefoot, CEO at Barefoot Innovation Group and a co-founder of Hummingbird Regtech, said any mitigation in licensing requirements for firms that are considering establishing a U.S. presence is noteworthy.
"If you can get a critical mass of leading states to move forward, I think it’s great progress and movement in the right direction. People can lead and then others can follow," Barefoot said. In the initial pilot, "there are some significant states in there and states that have a good reputation with fintech."
Yet others point to limitations of a chartering system for MSBs, or other fintechs, that focuses on state licensing, versus a truly federal option. Seven participating states is a start, but far from what is needed to operate a national platform.
"The seven states makes sense, but are they going to get 50 states or top somewhere at 20, 25?" said Brian Knight, director of the program on financial regulation and senior research fellow at the Mercatus Center at George Mason University. "So I think my suspicion is there are inherent structural problems with state-by-state regulation that streamlining the application process is not going to fix. But they are trying and should be praised for trying."
Even the states participating in a multistate framework could individually vary their approach toward fintechs operating within their borders. The pilot has two phases: The first phase combines the initial licensing requirements and background checks into one process for the participating states, followed by a second phase that would involve additional requirements per state.
"I’d be surprised if this is optimal because you still have some significant differences in regulation," Knight said. "The firms are still going to have to monitor for each and every state."
But the multistate charter will cut down on repetitive paperwork and help make the turnaround windows on licensing approvals more consistent, said Charlie Clark, agency deputy director and director of consumer services at the Washington Department of Financial Institutions.
Clark said he hoped the pilot would attract more states to join.
“Other states are very receptive” to this initiative, he said. “This is something we can do to create efficiencies with these companies, hopefully get them off the ground and not sacrifice consumer protection.”
Global fintech firms have viewed the U.S. market as less attractive for setting up business because of the more cumbersome and repetitive state-by-state licensing process.
The OCC has been developing a limited-purpose fintech charter that could allow companies to go through one federal regulator, but there continues to be uncertainty about the OCC's plan. State regulators have challenged the federal charter idea in court, and it is not clear the agency, which launched the initiative under now-departed Comptroller Thomas Curry, will actually grant charters. At a recent press conference, new Comptroller Joseph Otting, who took office in November, said he was “not sure what” a fintech charter would look like.
In contrast, fintech firms say the overseas market has generally been clearer and more welcoming in terms of regulatory requirements, including more advanced development of so-called "sandboxes" where newer firms can test products without of regulatory enforcement.
“The sandbox experience outside U.S. has been really positive,” said Nazzaro of WorldRemit, which launched in Malaysia in September after being approved for Bank Negara’s Financial Technology Sandbox.
“The regulators are looking at this as way to keep modern banking going,” he added.
Barefoot said that "the U.S. has a disadvantage and we have a big gap to close due to the complexity of our regulatory framework at the federal and state level."
"That’s why we need things like CSBS to work toward uniformity in the United States," she said.