Drew Breakspear, Florida's banking commissioner, comes across as more banker than regulator, which makes sense given his background.

As a former bank executive with stints at State Street (STT), First Nationwide Bank and Citibank (NYSE: C), he often interacted with regulators. So Breakspear, who became Florida's top bank regulator in 2012, has tried to make his office more effective and efficient and to speak out for regulation that doesn't stifle innovation or hurt smaller banks.

Breakspear is bullish on the prospects of virtual currencies, such as Bitcoin, and he expects to see the payments sector go through a large transformation. But he is less enthusiastic about regulatory guidance that might limit the availability of credit, especially to those who are largely unbanked.

The following is an edited excerpt from a recent interview.

How is Florida's banking industry?

BREAKSPEAR: It is improving. Our unemployment rate is down from just over 11% to 6.1%. We've gone from a very large budget deficit to a budget surplus. The banking system is improving, but there are still challenges. Some areas in the state haven't recovered. If a community bank is located within that area it is a little more challenging for them to get turned around.

There had been some turnover before you became commissioner. How have you addressed that instability?

There had been a downsizing and closing of offices. The commissioner who started that left and then there was an interim commissioner. I walked in and one of the first things I did was say we are not going to take any more drastic steps.

It gave me a good opportunity to bring some of my private-sector skills to the public sector, such as a focus on measurement and metrics. Initially, it was a little bit of a shock to people. However, I think people are very comfortable now in having targets and seeing we are making real progress. For example, the time it takes to get a license has dropped from 22 days to four days.

What are some of the concerns you hear from Florida bankers?

There's a lot of discussion and focus on compliance. The mortgage rules came out and were very extensive. While it provides some flexibility for community banks, when you have a 200-page rule dropped on you it takes a while to figure out what your options are. I think there is an additional concern that, I'm told, we're less than 50% through the Dodd-Frank rulemaking. That creates a level of uncertainty.

There's a concern that while banks want to comply with the regulations there is an innate cost of having to hire more people. If you're a community bank, you have to find the people with the right qualifications and experience then pay that additional cost. You add that on top of a bank that is recovering and has concerns about where they will make their money because of the qualified-mortgage rule.

You sound sympathetic to bankers.

I dealt with the first Basel rule when I was working in the banking industry, then that was followed up by Sarbanes-Oxley. I have a degree for sympathy for the mountain of paper you have to go through. I had to do all of that. Are there too many rules? I think we had some weaknesses we needed to plug. I think there is always a tendency of overreaction. We have to be careful we don't damage an industry.

A lot of people don't have a good understanding about community banks. They literally serve in the communities. They do a lot of character lending. They have knowledge of the local economy. They can make those adjustments. That is a little different than taking in thousands and thousands of applications and processing them based on a standard.

Should more regulators come from banks?

You need a mix. One of the areas I've been a little outspoken on is the makeup of the Board of Governors of the Federal Reserve. We have on the board primarily academics and economists. I don't believe we have people serving on the board that have real in-depth knowledge of banking, which becomes very important when regulation and supervision is being enacted.

You can be a wonderful economist from a policy perspective, but understanding the nuts and bolts of banking operations is much harder if you haven't been there and had practical experience. Someone who has walked around inside a bank, been through operations, understands lending, reviewed lending, understands the trading desk, been involved in foreign trading. If you've been involved in those things, you do better regulation.

Banks that offered deposit advance exited after new guidance came out. Is there a way for banks to offer short-term small-dollar loans?

If you look at the Pew Research numbers, 12 million people use a payday loan. For a lot of them, it is the only source of credit that they have. I tell a story about a conversation I had with someone. We were chatting and for some reason payday loans were mentioned. The person said, 'I used a payday loan once.' I said, 'For how much?' '$300.' 'How long?' '30 days.' 'How much did you pay?' '$42.' I said, 'Didn't you feel that was a lot?' And the response was, 'It was the only way I could feed my family next week. I would have paid $100.'

Getting rid of deposit-advance products may have been damaging. I'm always concerned about eliminating a pool of credit that may be the only source of credit for a segment of the population if you don't have something better to replace it.

I constantly hear about how expensive it is. I don't think people always understand the fixed-cost element. If you are doing payday lending, you have to have a storefront, utilities, staff. You have to fill out paperwork. When someone walks in for a $300 loan, there is a certain fixed cost. Let's say it costs $20 to make a loan. I'm not saying that is the actual number. But let's just say $20 on $300 is 6.6%. If it was a $3,000 loan, $20 is 0.6%. It's the same fixed cost.

Your office issued a consumer alert on virtual currencies, such as Bitcoin. What are your thoughts on Bitcoin?

I am one of those who would say virtual currencies are going to grow and become a bigger part of our payments system. We need to be thinking about it. I thought it was important to get out to consumers in our state an alert that said if you're going to deal in this, be aware. It is not an insured product. It is not a regulated product. There are consequences of cybersecurity and other forms of security. Plus at the time there was no taxation. The IRS has since opined on it. It is property now, and that has some very interesting implications.

We've heard that more M&A is expected in Florida. How would it affect banking there?

I worry that it removes some community banks. You end up with a branch in the community rather than a bank in the community. I believe we will see consolidation within the banking industry. Part of it is how do you make money? Every bank has to have an infrastructure, which is getting more complex. At some point if two banks merge they can get overhead costs down by sharing it. Over the next five years I'd be surprised if we didn't see a significant consolidation, not just in Florida but nationally.

Foreign investors are buying Miami banks and the pricing has been quite high. Is that worrisome?

If we have a bank that is doing a good job of serving our communities, then I view that as a good thing. If it provides a little competition and new products and better service, then that is wonderful. I don't view it as a huge concern, though you always worry about your entire banking system being taken over by another country. But we are nowhere near that.

Do you have any predictions for the banking industry?

In three to five years, the number of banks will shrink, maybe down to 5,000 from 6,800. Secondly, we've got a task force at the [Conference of State Bank Supervisors] on emerging payments, which covers things like Bitcoin, which is just one of about 10 or 11 virtual currencies.

We're going to see a sea change in the payments system. I can visualize having totally new and separate payments system that sits outside of banking. The traditional one is very much situated in banking given the clearing houses, the credit card businesses. It may be a parallel payment system with a different regulatory structure and oversight.