The Conference of State Bank Supervisors (“CSBS”) recently announced that as part of its Vision 2020 plan for Fintech Regulation,1 seven states have agreed to a multi-state compact (“Compact”) that standardizes the licensing process for financial technology (“fintech”) and non-bank companies subject to state money services businesses (“MSB”) laws.2
The implications of the Compact are important for non-bank financial companies engaged in fintech related businesses, as well as financial institutions and other investors that partner with, or otherwise invest in, fintech firms.
II. THE MULTI-STATE COMPACT
The states announcing the Compact are Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas and Washington. The CSBS announcement also stated that “[o]ther states are expected to join this compact.”
The Compact centers on creating uniformity in state licensing for MSBs for fintech companies, mortgage, money transmission services, consumer finance and debt collection, and digital currency exchanges. Collectively, these types of entities comprise an emerging industry that has been described by CSBS and others as firms that leverage technology to create new business models, new delivery channels, automated devices, and partnerships with traditional banks.3 Under the Compact, if any one participating state reviews the “key elements of state licensing” for a single licensed MSB through its initial licensing process, in which such “key elements” include (1) IT, (2) cybersecurity, (3) business plan, (4) background check, and (5) compliance with federal Bank Secrecy Act laws, regulations and policies, then the other participating states agree to accept the findings. CSBS and the participating states expect that the result will significantly streamline the MSB licensing process. Perhaps more significantly, the Compact represents the first step in moving towards an integrated, 50-state system of licensing and regulatory supervision for fintech companies.
The Compact licensing scheme will initially be launched as a pilot program in April 2018, when regulators will begin identifying companies as potential candidates for the streamlined licensing process.
III. VISION 2020
The Compact is part of the CSBS’s overall approach to addressing the fintech industry’s perceived challenges in dealing with MSB licensing and regulation across different state statutes and regulatory regimes. CSBS has noted that, based on feedback from the fintech industry, state regulators have found that fintech companies are looking for “a more streamlined licensing process, more clarity on if and where they need licenses and more freedom to try out new and innovative ideas.”4 Fintech industry members have claimed that the multi-state nature of U.S. MSB regulation has been an obstacle to allowing Fintech firms to innovate in a low-regulation “sandbox,” which certain other jurisdictions have provided.5
In reaction to those concerns, Vision 2020 is a series of initiatives from CSBS designed to modernize state regulation of fintech and non-bank companies, and, by 2020, state regulators will adopt an integrated 50-state licensing and supervisory system. There are six major initiatives to modernize state regulation that make up Vision 2020:
1. The Fintech Industry Advisory Panel provides industry input to help states: modernize regulatory regimes, identify points of friction in licensing and multi-state regulation, and discuss a wide array of solutions. The panel will focus on payments and money transmission, lending, and community banks and innovation.
2. Redesigned Nationwide Multi-state Licensing System (NMLS). On September 17, 2017, the CSBS announced that they were launching a major redesignation of the NMLS, the core technology platform used by state bank regulators.6 CSBS is proposing to transform the licensing process through data/analytics, automate most new applicants, and enable states to focus more on higher-risk cases while streamlining state regulation on a multi-state basis.
3. Harmonize Multi-State Supervision by establishing model approaches enhancing uniformity in examinations, facilitating best practices, and identifying and reporting non-bank violations. CSBS is also building a new technology platform for state exams.
4. Assist State Banking Departments, through education programs, analytics and stronger standards, CSBS asserts it is helping state departments: identify their weaknesses, put expertise where it is most needed, update supervisory processes, compare and learn from other states, and validate higher performance through accreditation.
5. Enable Banks to Service Non-Banks, through “enhanced industry awareness campaigns to address de-risking practices – where banks are cautious about doing business with non-banks” – CSBS is seeking to increase industry awareness that strong regulatory regimes exist for compliance with laws for money laundering, the Bank Secrecy Act, and cybersecurity.
6. Improve Third-Party Supervision through CSBS support of federal legislation to amend the Bank Services Company Act to allow state and federal regulators to better coordinate supervision and, in turn, produce an easier supervisory experience for fintechs and other non-banks.
IV. WHAT DOES THE COMPACT MEAN FOR FINTECH COMPANIES?
The Compact is mainly in response to fintech firms that have long argued that the main route to doing business is by getting a license in each state, which can be a cumbersome and repetitive process. While states will likely retain respective differences in licensing laws, this sets the stage for states to use uniform licensing standards and share exam responsibilities, as has been done with state banks and trust companies, especially if and when new states join the Compact.
Perhaps more importantly, the Compact will streamline licensing by designating one regulator to undertake the primary licensing review. While not stated, it is probable that the primary license review and ongoing regulatory oversight would focus on the state regulator of the applicant’s home state of chartering.7
Further, the Compact can also make a state license more attractive to fintech firms that are debating whether to do business regulated by the states or to seek the OCC’s special purpose national bank (“SPNB”) fintech charter.8 The state alternative may be particularly attractive while the status of the OCC fintech charter remains uncertain, as CSBS continues to pursue its pending lawsuit to block the OCC from chartering any SPNBs under its guidance issued in 2017, arguing it has unclear legal authority to do so, and in any case may not do so without undertaking a formal rulemaking process subject to public notice and comments under the Administrative Procedure Act.