States developing single regulatory structure for fintech firms
WASHINGTON — Faced with the prospect of a new federal fintech charter, state agencies are considering drastic new steps to streamline regulation across state lines.
A handful of regulators are discussing ways to create a single regulatory structure for fintech companies that are seeking regional or national business.
“Our goal is uniformity across the United States,” said Bryan Schneider, the head of Illinois’ financial regulator and chairman of a multistate regulatory task force focused on fintech. “It's not exactly creating a new license type or creating a new charter. But it's harmonizing the regulatory requirements while still recognizing the sovereignty of the individual state.”
Fintech companies, ranging from payments processors to online lenders, have long chafed at the uneven sets of rules they face in each state where they must be licensed to operate.
The Office of the Comptroller of the Currency announced last year that it was developing a specialized national bank charter that would allow fintech companies to benefit from federal preemption over state laws.
But state regulators are currently fighting the charter in court, arguing the OCC lacks the legal authority to act.
“The Office of the Comptroller of the Currency has gotten ahead of itself,” Schneider said. “State regulation is more accessible to industry and to consumers and therefore has significant benefits over federal regulators.”
The states have already pushed back with a series of measures to make their licensing system more attractive. Steps include simplifying the quarterly reporting process across states and engaging with fintech companies through roundtable discussions.
But despite these efforts, fintechs have maintained that the biggest change they need is a uniformity of the actual regulatory requirements across states.
“The core problems are the needs for multiple licenses,” said Brian Knight, a senior research fellow at the Mercatus Center. “Having to pay for multiple licenses and having to deal with multiple rule sets in what should be one national market.”
Schneider hopes he will be able to corral a substantive group of states, including large ones like Illinois, California, Texas and New York, to sign on at the outset. Eventually, the group could grow larger until it reaches the whole country.
“If five or 10 states could start aligning their requirements in a meaningful way, industry has told me that would be impactful,” Schneider said. “The first goal is to get a critical mass. Once you've accomplished that, the rest tends to fall into place.”
Once states have agreed on a set of common requirements, they could then begin recognizing each other’s licenses, which would allow companies to apply in only one state or a limited number of them.
“Getting approved in one state gets you approval in another state,” Schneider said. “And I don't view that as challenging any state’s sovereignty. Just because I approve [certain companies] in Illinois, doesn’t mean that they have free range of actions in Illinois.”
Passporting would be one of “a number of mechanisms available to us to make things more efficient” once a common set of standards is agreed upon, Schneider added.
Another critical step would be to unify the examination process, he said. One idea is to “designate a lead state to examine a company for a particular period of time,” he said. “It seems like small stuff, but from the perspective of the company it's much more efficient.”
A similar harmonization effort is currently under way in New England. In a meeting this summer at Boston University, the financial regulators of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont discussed a possible compact of fintech standards.
“New England states have historically worked really well together,” said Cynthia Stuart, the deputy commissioner for the banking division of Vermont’s Department of Financial Regulation, citing reciprocal laws enacted in the 1980s that allowed bank holding companies to purchase banks in other across state lines. “There are similarities in our markets.”
Stuart added that the push toward harmonizing fintech requirements could happen organically, with regions coming together separately at first.
“Typically, when the standardization happens, it happens in areas and then it grows,” she said. “A state like Vermont is an interesting state where we can be nimble and a little bit more innovative because we are smaller.”
In all these initiatives, the states are hoping to make their regions more competitive against a potential OCC charter.
The OCC’s fintech charter, with its preemption privilege, appears to be “a better mousetrap," Schneider said. "Who wouldn’t want it?”
But he warned that it was unlikely to live up to expectations.
“It will be for more mature companies that can flip into the federal system and take advantage of the preemption,” he said. “I don't know how that is going to help the startup companies.”
While states have argued the OCC charter will weaken consumer protections, a charge the agency denies, they say they will ensure the harmonization effort does not dilute those safeguards.
“No one is looking for a race to the bottom,” Schneider said. Companies are “more than willing to accept a high bar in exchange for uniformity across state lines.”
They contend that better coordination could result in better supervision.
“Right now, we license a lot of the activity and then we go in and we examine them. But sometimes we're looking at things that occur after the fact,” Stuart said. “To me, it's a point of being reactive versus being proactive.”
Still, the states have a ways to go to create an agreement that would be large enough to compete with the promise of federal preemption — at least for established players that have a shot at obtaining a charter from the OCC.
There is some precedent for broad, multistate supervisory agreements. States agreed in 1999 to a model law legalizing electronic signatures. And a decades-long effort to coordinate mortgage licensing and examinations was locked down by Congress in a provision of the 2008 Housing and Economic Recovery Act.
“My question is, how long is this going to take?” said Sam Taussig, the head of global policy and community banking at the online lender Kabbage. “If this is going to take over a decade, that's not very helpful.”
Schneider said he expected this initiative to develop over "some period of months, not calendar years."
Still, state regulators acknowledge that it will be tough to unite states around various requirements for capital, business plans, management experience, permissible investments for money transmitters, and particularly usury rates.
“Will there be absolute uniformity? I don’t know," Schneider said. " … What we're suggesting is possible is a significant narrowing of the state-to-state differences.”
In addition, some states will have a harder time implementing changes than others, for political reasons.
“New York is going to be very different than Vermont,” Stuart said. There are variations in “the structure and the amount of support that a state gets from their legislature,” she added. “You have that historical perspective that has to be taken into account.”