U.S. Regulators Losing Out to U.K., EU on Innovation
The United Kingdom has already seen the emergence of mobile-first institutions that have won regulatory approval for a banking charter. It is only a matter of time before they invade the U.S. market.
As U.S. banks wrangle with account-aggregation sites over screen scraping, the U.K. is championing a safer method for sharing data that could transform the way customers interact with financial institutions.
Among other reasons for seeking their own charters, the U.K.'s so-called challenger banks say they need to avoid being beholden to older institutions that can slow down the creative process.
Digital-only Atom Bank in the U.K. recently won a banking license a feat U.S. fintech entrepreneurs have either failed to accomplish or not bothered trying, instead partnering with established institutions.
My biggest surprise after moving to London in September is how far the U.S. has to catch up to the United Kingdom and other European Union countries in the fintech and payments innovation race.
Compared with their U.S. counterparts, U.K. and EU regulators are really trying to encourage payment innovation through licensing regimes. One thoughtful and pragmatic step taken by the U.K.'s payments regulator, the Financial Conduct Authority, was to ask industry for its input on appropriate policy. But the U.K. and EU's bigger advantage is how their "e-money" and payment service licensing processes work compared with U.S. state money transmitter laws.
To begin with the U.K. has four "levels" of licensing for nonbank payments providers to help adapt to the specific characteristics of a given firm, unlike the one-size-fits-all regime for U.S. licensing.
The first level is the "E-Money Institution" — or EMI — license. While closely associated with prepaid cards, the EMI license also allows licensees to provide "current accounts" similar to a bank account. Nonbank EMIs can allow their customers to have Visa or MasterCard branded debit cards linked to a "current account" that does virtually everything that a bank account can do.
The second level is the "small" EMI license, which is much easier to obtain than the full EMI license but is geographically limited to one country.
Third is the Authorised Payment Institution — or API — license. It arose from a 2007 U.K. regulation known as the Payment Services Directive. An API license is slightly easier to obtain than an EMI license. It covers payment companies that receive and move funds, such as remittance and bill payment companies.
Fourth is the "small" API license, which like the small EMI license is substantially easier to obtain but is limited geographically to one jurisdiction.
The process for obtaining both EMI and API licenses is somewhat similar to the money transmitter licensing regimes in the U.S.
In additional to capitalization requirements, you must provide audited financials, details about an anti-money-laundering compliance program and demonstrate that you are operating a "robust" company with a physical presence in the location in which you are applying. But, assuming the application is complete, timing can take anywhere from four to six months, which is much less than the time in many of the larger U.S. states.
The beauty of this hierarchical structure for licensing is that it is designed to be risk-based and not a formulaic solution imposed across the board on all payments companies. The U.K. laws recognize that the level of net worth and oversight needed for a local bill payment service should be very different from a global remittance service.
But there are other more obvious examples illustrating how Europe is light-years ahead in providing licensing options.
A huge difference between the U.S. and the European Union is the EU's "passport" system. Let's say you have either a full EMI or full API license and are based in the U.K. It is relatively simple to passport your business into other EU countries. You do not have to reapply every time you want to do business in a new country. This process protects consumers and the payment system while at the same time encouraging innovation. It also significantly reduces the costs arising out of the dozens of duplicative applications, audits and bureaucratic reporting requirements that exist under U.S. state laws. The funds spent on duplicative licensing in the U.S. could be spent more effectively on truly critical activities such as anti-money-laundering monitoring and data security.
Why is it easier for a payments company to offer services across borders of two different countries — with different languages, governments, cultures and history — than it is to move the same payment service from New Jersey to New York?
Someone here told me recently that the U.S. seems to offer an easier environment for doing business because it is a "single market." I had to laugh out loud. We are not a single market. When it comes to payments, we are 50 silos — more separate than the countries of the EU.
They're going to eat our lunch.
Judith Rinearson is a partner at Bryan Cave LLP who co-chairs the firm's emerging payments and fintech teams. She works out of the firm's London and New York offices and can be reached at Judith.email@example.com.