Payments Innovation Wars, Part II: U.S. strikes back
Roughly a year ago, I wrote an op-ed that raised concerns about the state of payments innovation here in the U.S. — especially when compared to the United Kingdom.
What a difference a year makes.
As a lawyer who spent the last year working in London, I've seen firsthand what a rollercoaster ride it has been for the fintech industry in the U.K. With the prospect of Brexit in the U.K., some are already questioning the longevity of the London fintech boom. Personally, I am aware of a number of U.K.-based fintechs that are making contingency plans to move to jurisdictions that will allow them to continue to passport their licenses to other countries in the European Union.
At the same time, it has also been a rollercoaster ride in the U.S. Indeed, regulators have surprised many by taking active steps to encourage payment innovation developments. The best innovation champion has been the Office of the Comptroller of the Currency, which announced its plans to establish an office of innovation in October, and more recently, a limited-purpose bank charter for fintechs. The OCC is still finalizing the details of the charter, but such a charter would apparently preempt the need for state money-transmitter and lending licenses, although many other state laws would still apply.
Moreover, the Consumer Financial Protection Bureau has also been taking steps to enlarge and promote its Project Catalyst program, which is "dedicated to promoting consumer-friendly innovation in the marketplace," according to the agency's website. The CFPB has also announced a possible move toward open banking by issuing a request for information regarding consumer access to banking information. The CFPB apparently wants to understand the extent to which consumers can authorize third parties to access and share their digital financial records. Furthermore, CFPB Director Richard Cordray has said that it is "unacceptable" for financial institutions to block third-party access to financial data, especially for purposes of maintaining a competitive advantage. If successful, the CFPB's initiative could result in easier access by nonbanks to customers' bank account records (with the consent of the customers of course), leading to a suite of innovative new financial services.
These recent developments indicate a ray of hope that U.S. regulators will get serious about encouraging payments innovation in the U.S. Additionally, many expect that a new Republican administration may trigger a further reduction in regulatory restrictions, leading to a fintech and payments renaissance in the U.S.
Should the U.K. be worried? Maybe, but it is much too early to write off the U.K. in these payments innovation wars. For one thing, the U.K. still has a huge lead on us when it comes to ease of licensing. Yes, the OCC's fintech national bank charter will be helpful, but only for a small handful of well-heeled companies that can meet the OCC's governance, compliance, capital and liquidity requirements. The vast majority of fintechs will still need to face the burdens of 50-state licensing — a burden that their competitors across the pond won't have to face, even with Brexit. (With a "hard Brexit," a U.K. fintech will need two licenses, in order to passport, rather than just one — a significantly lighter burden than what U.S. fintechs face.)
In the U.S., it really is time to take a look at our state money-transmitter licensing laws. Common-sense provisions include section 203 of the Uniform Money Services Act, which was put forward by the National Conference of Commissioners on Uniform State Laws. But only five states have passed the legislation, which is not nearly enough. (Section 203 permits companies that have obtained a money transmission license under UMSA in one state to operate in other states that have enacted UMSA or similar laws.)
In addition, licensed money transmitters should be given more latitude to appoint third-party authorized delegates — provided they have done full due diligence on each third-party business partner and are fully responsible and liable for all customer funds and for the third party's compliance. Forcing licensed money transmitters to drop their authorized delegates because their business is not tied closely enough to the authorized delegate's business has made American consumers less safe, not more. It has forced the closure of otherwise healthy and beneficial companies and pushed back U.S. payments innovation by years.
Similarly, to the extent it may enhance innovation, the CFPB inquiry the CFPB inquiry into open banking and access to consumer account data is just beginning and is years behind the E.U., which has already passed such a provision under the Second Payment Services Directive to be implemented in 2018. The U.K. has made it clear that it intends to move forward with PSD2 despite Brexit.
Recent trends augur for much stronger growth of payment innovation in the U.S. compared to a year ago. But the payment innovation wars are not over. As global enthusiasm for blockchain and shared ledger technology continues to grow, we need to make sure our payments, banking and fintech laws and regulations provide a welcoming and nurturing environment for fintechs and emerging payments companies — not an obstacle course that only the largest and most entrenched companies can survive.
Judith Rinearson is a partner at K&L Gates. She works out of the firm's London and New York offices.