Fintech entprepreneurs who sought to go national have faced a daunting compliance task that could take intense effort and years to complete — apply as many as 50 times over for licenses to transmit money, make loans or engage in other financial activities.
In the not-too-distant future, fintech startups seeking state-level OKs to do such things — and who don't want to, say, pursue a partnership with a bank or go through the hassle of getting a bank charter — will have a new alternative. They will be able to go to an online portal, check off the states in which they want to operate and get a quick approval from one state that will lead to approvals from all the rest. Fintechs can already do this with 10 states today.
And instead of having to undergo examinations by field agents of every state regulator in whose jurisdiction they operate, fintechs will be able to go through one exam, the results of which will be shared with the others.
These improvements are the result of two software projects spearheaded by the Conference of State Bank Supervisors and embraced by many state commissioners.
In one project, announced last week, the CSBS’s technology subsidiary and several state bank regulatory agencies have developed examination software called SES that all states can use to evaluate fintechs.
In the second project, which has been underway for over a year, the states have been coordinating and automating their licensing requirements to give fintechs that one portal to all states.
One software for all exams
When Kevin Hagler, commissioner of the Georgia Department of Banking and Finance, started out as a bank examiner in 1997, he used simple software called Genesis.
“We worked on it and we added our comments to it, and then that overrode somebody else's comments, and we got mad at each other and kind of muddled through,” he said. “It gave us a platform that did a lot of number crunching and provided templates and things for report writing and also made that collaborative effort between the states and the federal government that much easier.”
For fintechs, however, nothing like this has existed until recently.
“Folks that are doing exams of mortgage companies, money-service businesses, check cashers or things of that nature, I think they're still operating off of things like spreadsheets and checklists and Word documents,” Hagler said.
The Georgia banking department is one of several state agencies that have been working with the CSBS to standardize exam requirements, practices and procedures and to codify them in software all can use. Exceptions for unusual state requirements are built in. Fintechs have also provided input into the SES.
Gov. Brian Kemp of Georgia has insisted that his government do more with less and use technology.
“A project like this checks all the boxes for us,” Hagler said. “I know that in Georgia, I will never have enough staff. That's just not a possibility. Resources are limited, so we're going to do the best we can with what we have. So SES is a godsend for us. We were excited to volunteer to be part of the pilot group in this initial testing phase.”
Georgia examiners have conducted an exam of a money service business using the software.
“It really enhances our ability to do an exam,” Hagler said. “And instead of relying on just simple spreadsheets and Word documents that we've created in-house, it draws upon the work of other states to prepopulate the documents. And it gives us better access to best practices, so we can see what other states are doing.”
SES provides a portal through which examiners can ask for things and fintechs can upload whatever is needed.
But the killer application for SES, Hagler said, is a scheduling function that is coming soon.
“Ideally in the future, my examiners would would open up SES, say they are going to examine a money-services business, and see if any other states are also planning to examine it at a different date,” he said.
Then the examiners might join the other team or leverage the other team’s work, perhaps asking them to obtain a few more pieces of information to meet a specific Georgia regulation or law. Georgia examiners could accept the exam as their own.
“A world where we can use the work of our fellow states is a huge game changer for us,” Hagler said. “It allows us to leverage our resources and provides some regulatory relief for these companies. And in the end, it's a better exam that's happening. We can touch more entities in a more timely fashion, and spread best practices throughout the industry.”
Many state laws appear similar on the surface but aren't, Hagler said.
“When you start digging into the interpretation side, that's when you realize that, even if they're just slightly different, anytime you do that times 50, it becomes a burden,” he said. “And keep in mind that we wrote all these laws and regulations years ago when companies were in a physical building and they were only operating in one location in one state. Today, some fintechs want to be able to do business in all 50 states on day one.”
The shared examination portal could also help states flag sketchy characters. In the past, for example, some mortgage lenders that were committing fraud would bounce from one regulator to another, Hagler said.
“Information sharing is key to not just accepting glowing exams, which we love to see, but also to make sure that they don't just slip across the state line,” he said.
Washington state has also run an exam on the pilot system.
“The SES will have the greatest impact after a company is licensed and they have to confront how they will be regulated by each of the separate states,” said Charles Clark, director of the Washington State Department of Financial Institutions. “SES holds great promise to make that much better harmonized and efficient so that the states are better communicating; it's easier for the company to participate in the exam; and they will better coordinate the actual exam functions. It’s going to eliminate a lot of the redundancy that we currently see in the system.”
Most states are open to the concept, Clark said.
“There may be legal reasons that states may not be able to initially take full advantage of some of the coordination efforts,” he said. “But I have observed that pretty much every state has been very open to trying to improve the way we work together.”
Clark also sees the greatest benefit in SES’s scheduling tool.
“It will eliminate the amount of time that's needed to schedule and coordinate the examinations," he said, "from the initial steps of assigning examiners to getting required information from the company before we go into the exam, to actually performing the exam.”
The CSBS plans to start rolling SES out in mid-March.
Building a multistate licensing system
The CSBS and the states have put more time into developing a licensing platform that can be shared across states.
“We spent a lot of time on the licensing piece because we want to keep bad actors out to begin with or make sure that people we've run out in the past don't sneak back in,” Hagler said.
Here again, the requirements of all 50 states have to be in sync. So far, 27 states have participated and plan to share one another’s work, with exceptions for unique items.
Forty-one companies have applied for licenses during the course of two pilots. So far, 168 licenses have been granted to 19 companies.
“The multistate licensing agreement holds great promise for streamlining the licensing of money transmitters that want to operate nationwide,” Clark said.
