States modernize licensing system as more fintechs eye bank charter

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WASHINGTON — State regulators are modernizing their common licensing platform for nonbank financial institutions, hoping the update will help convince wary fintechs that they don’t need to pursue a national charter being developed by federal regulators.

“We're trying to remove the friction from the system for both the regulators and the industry,” William Matthews, executive vice president with the Conference of State Bank Supervisors, said in an interview with American Banker.

The end result will be that the “approval process goes faster,” and the industry “can get their applications processed more quickly and more efficiently,” he added.

The state regulatory trade group intends to make a number of changes to its National Multistate Licensing System, a platform that was originally developed for mortgage originators and then extended to companies like payments processors and online lenders.

First, the new platform will be customized for the different types of companies applying online. The consumer-facing website that presents licensing and other types of information on companies will also become more user-friendly.

To make the application process more efficient for state regulators, the licensing system will use data analytics tools to flag riskier companies, based on various data points such as criminal records, credit scores and enforcement action history.

“The data analytics allows the regulators to triage applications, both in terms of the level of risk that they may have as well as the type of risk that they may have,” Matthews said.

With these changes made, what the state regulators have called “NMLS 2.0” will launch in late 2018.

But the states also hope to turn the platform into a new tool for coordinating examination between states. It will allow examiners to plug in the data and share it automatically with other regulators.

This could help smooth out joint examinations (with both state and federal regulators) and avoid redundant efforts, Matthews said. “It allows for a more uniform gathering of information and it allows for a targeting of the focus of the exam to areas of interest to regulators,” he said.

The examination functionality is expected to be launched in the first quarter of 2019.

Though these changes have been in the works for years, they are being billed by CSBS as an effort demonstrate that states can also be open to innovation — especially in light of the Office of the Comptroller of the Currency’s attempts to create a special-purpose national charter targeted at fintechs. (The state banking supervisor group is currently challenging the OCC's charter in court.)

State regulators believe that improving coordination through that platform will help get them on the same page, and could in the long run help them coordinate their underlying regulations — particularly for industries that are well represented on the licensing system.

“When you have that many state agencies on NMLS licensing money transmitters, then that information sharing among the majority of the state regulators,” said Matthews, “that creates a uniformity and a convergence of regulation and supervision for that industry as that information gets shared among the state agencies.”

Fintech observers acknowledged the states’ efforts to better coordinate state-by-state licensing — a clunky process that has prompted an interest in bank charters for many fintech companies. But they said the changes would do little to address major obstacles, such as varying state-by-state regulatory requirements and licensing fees.

“It all sounds like a step in the right direction,” said Brian Knight, a senior research fellow at the Mercatus Center. But “whether this will be as effective at providing true harmonization as they want, I doubt that it will get as far as they hope it will.”

It is also unclear whether the changes will convince firms to seek new state licenses, particularly if they already partner with banks.

“For folks like us that are already working with an FDIC-chartered institution,” said Kathryn Petralia, the COO and co-founder at the online lender Kabbage, “it doesn't remove a lot of hurdles for us.”

“Our goal,” she added, “is to operate as efficiently as possible. But you can’t do that if you're trying to follow the licensing requirements of 48 states.”

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