FX International Payments
By Samuel Greengard
MSB payment systems include online money transmission, check cashing, currency exchanges, prepaid cards, mobile wallets with stored value, money orders, and traveler's checks. MSBs (also referred to as non-bank financial institutions) and other third-party payment processors have emerged as a $600 billion industry.1 Many MSBs are financial technology (fintech) companies that use different technologies and different approaches spanning cards, smartphones and other electronic systems, all of which may be subject to different regulations. In addition, new and innovative services continue to appear. For example, some MSBs have begun to use cryptocurrency platforms, such as Bitcoin,2 while others provide low-cost investment advice through robo-advisors that swap algorithms for humans.3
The result is a complex and sometimes byzantine web of laws and regulations, which vary state by state and include federal regulations like the Bank Secrecy Act, the U.S. Patriot Act, and the Office of Foreign Assets Control and International Sanctions Programs.
In fact, a March 2018 U.S. Government Accountability Office (GAO) brief noted how challenging it can be for fintech MSBs to identify which laws and regulations apply to online money transfer services amid the fragmented state requirements.4 According to the GAO brief, "Fintech products pose similar risks as traditional products, but their risks may not always be sufficiently addressed by existing laws and regulations." Yet, the GAO doesn’t suggest more regulation is the answer, pointing out that, "The U.S. regulatory structure poses challenges to fintech firms" already.5
To be sure, licensing is costly and time consuming for prospective MSBs. The GAO says a firm can spend anywhere from $1 million to $30 million to obtain required state licenses, once legal fees, state bonds, and direct regulatory expenses are factored in.6 In addition, states have been unable to agree about how to address specific issues, such as how to resolve consumer online money transfer conflicts and reimbursements and what sums should be offered to consumers who have been wronged by MSBs.
So far, regulators have been reluctant to act, for fear of further complicating things and possibly stifling innovation among fintechs, according to the GAO.7 However, efforts to streamline and simplify licensing requirements for online money transfer systems are gaining momentum. For instance, several countries – and the State of Arizona.8 – have created regulatory sandboxes9 that allow firms to develop and test products on a limited basis for a specified period of time.
In addition, there's growing dialog about how to address the challenge. "Given their mandated consumer protection missions, regulators could act collaboratively to better ensure that consumers avoid financial harm and continue to benefit from these services," the GAO explained.
In February 2018, seven states did exactly that, taking the first steps toward a more streamlined regulatory environment. The Conference of State Bank Supervisors (CSBS), a national organization of bank regulators, announced that the seven entered into a multistate agreement that standardizes key elements of the licensing process for online money transfer businesses.10 The initial group consists of Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas, and Washington.
The compact designates that if one state approves an MSB after reviewing IT standards, cybersecurity, business plan, background check, and compliance with the federal Bank Secrecy Act, other states must accept the result. CSBS hopes to eventually achieve buy-in from all 50 states.
The industry hopes that the seven-state compact is the first step in standardizing and simplifying licensing for MSBs. CSBS also issued a 2020 Vision11 that focuses on six major initiatives to transform state supervision of non-bank and fintech companies. These include: designating a fintech advisory panel; redesigning The Nationwide Multistate Licensing System (NMLS)12 for greater automation; harmonizing multistate supervision through standards, examinations and best practices; assisting state banking requirements through analytics and other tools; enabling banks to service non-banks; and improving third-party supervision through simplified and streamlined state-federal coordination.
Some observers say the initiative could unleash innovative payment systems that introduce new ways to manage and transfer money online. CSBS is now embarking on an IT platform upgrade that would support this effort.13 "Achieving this vision should result in a regulatory system that makes supervision more efficient by recognizing standards across state lines. These actions will better support start-ups and enable national scale while protecting consumers and the financial system," CSBS concluded.
Regulatory change is coming to the fintech space. CSBS considers the seven-state compact a first step in a multi-pronged approach to simplify, streamline, and automate licensing and other regulatory requirements for online money transfer systems providers. The result may be a more robust MSB marketplace with new approaches to money transfer.
Samuel Greengard is a veteran journalist who has contributed to many business and technology publications. He is also the author of two books: The Internet of Things (MIT Press, 2015) and the AARP Crash Course in Finding the Work You Love: The Essential Guide to Reinventing Your Life (Sterling, 2008).
1. Key Trends in the Money Transfer Industry for 2016, Infosys; https://www.infosys.com/industries/cards-and-payments/resources/Documents/money-transfer-industry-2016.pdf
2. “How does Bitcoin work? https://bitcoin.org/en/how-it-works
3. "Is robo investing right for you? Here are the 5 people who are likely to use them,” Business Insider;http://www.businessinsider.com/5-types-of-people-who-use-robo-advisors-2017-1
4. “Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight,” U.S. Government Accounting Office; https://www.gao.gov/assets/700/690802.pdf
6. Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight, U.S Government Accountability Office; https://www.gao.gov/assets/700/690803.pdf
8. “Arizona Becomes First U.S. State To Launch Regulatory Sandbox For Fintech,” Forbes; https://www.forbes.com/sites/astanley/2018/03/23/arizona-becomes-first-u-s-state-to-launch-regulatory-sandbox-for-fintech/#2b7aa9cb1372
9. “What is a regulatory sandbox?,” BBVA; https://www.bbva.com/en/what-is-regulatory-sandbox/
10.“State Regulators Take First Step to Standardize Licensing Practices for Fintech Payments,” Conference of State Bank Supervisors;https://www.csbs.org/state-regulators-take-first-step-standardize-licensing-practices-fintech-payments
11.“Vision 2020 for Fintech and Non-Bank Regulation,” Conference of State Bank Supervisors; https://www.csbs.org/vision2020
12.“Nationwide Multistate Licensing System,” Conference of State Bank Supervisors; https://www.csbs.org/nationwide-multistate-licensing-system
13.“State Regulators Take First Step to Standardize Licensing Practices for Fintech Payments,” Conference of State Bank Supervisors;https://www.csbs.org/state-regulators-take-first-step-standardize-licensing-practices-fintech-payments