Three Fintechs Try Out Faster Multistate Licensing Project

By Lydia Beyoud

Two fintech companies have gone through the first phase of a multistate pilot streamlined licensing project, with a third nearing completion, a Washington state official told Bloomberg Law on July 9.

The multistate effort to offer reciprocity to fintech companies seeking money services business licenses has grown its ranks to 16 states, said Charlie Clark, deputy director of the Washington State Department of Financial Institutions.

That more than doubles the number of states that initially launched the reciprocal licensing treatment in February. The states are Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, North Dakota, Ohio, Rhode Island, Tennessee, Texas, Utah, Vermont, and Washington.

“We have had kind of a steady progression of bringing additional states on. I continue to be in discussions with other state regulators that are considering joining,” Clark said.

The pilot comes as the state-by-state licensing process for fintechs is increasingly under scrutiny. Industry groups and federal financial regulators have discussed interests in potential preemption of state-level fintech regulation.

Fintech companies and virtual currency exchanges frequently cite the time and cost burdens of the state-by-state licensing process as impediments to growth. It can take one to two years and hundreds of thousands to millions of dollars in application fees and bonding requirements, not including capital requirements, for a fintech company to become licensed in all 50 states.

Meanwhile, members of the Securities and Exchange Commission and the Commodity Futures Trading Commission have expressed support for a single federal licensing structure for cryptocurrency-based companies.

The Office of the Comptroller of the Currency is also expected to issue a decision this month on whether to allow fintech lenders to obtain a “special purpose charter” to avoid state-based banking regulations.

Speedier Process

The pilot initially had nine companies interested in participating, though that number whittled down to three over the course of launching the project, Clark said. State laws prevent regulators from disclosing the names of the applicants, he said.

More companies have expressed an interest in participating in the pilot since it launched, Clark said.

The pilot offers participating companies the prospect of easing some of the main burdens of obtaining licenses and launching new businesses or products nationwide.

That means fintechs applying for licenses within the group of states would only have to explain the details of their plans to one state, rather than all of them.

Companies that complete the Phase 1 application process get an initial certification from one state, which they can take to the other 15 states for faster processing of state-specific application questions during Phase 2.

Partner states accept the findings of other states in the group for key elements of money services business licensing, which can include money transmission. Those elements include business plans, cybersecurity procedures, and compliance with federal anti-money laundering requirements.

The participating states plan to debrief on potential changes and next steps once they complete Phase 2 of the pilot, which is still underway, Clark said.

2020 Target

State regulators are aiming to get all 50 states to harmonize some of their licensing procedures by 2020 in response to changes in the financial services sector, including the growth of new business models such as online lending and virtual currency exchanges.

A few states have put on hold their review of whether to join the streamlined application process, said Clark, who added that he couldn’t speak for any individual state.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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