Written by Joshua Kaplan, Partner, Wilson Sonsini
Fintech Day 2023 is returning as the UK’s largest event at the intersection of Legal and Fintech on the 28th of September. This year, we’ll be joined by the team from Wilson Sonsini as one of our event partners.
[Are you an in-house legal professional working in a fintech, bank, financial institution, or investor? Join us for Fintech Day 2023 – the event where the sector gathers for the most relevant conversations. Tickets are still available to buy.]
Ahead of the session on “Global scaling, global stability” that he’ll be chairing, we asked Wilson Sonsini’s Joshua Kaplan: What are the key considerations for UK or European Fintechs seeking to expand to the US? Keep reading to find out what he had to say.
Financial technology companies engage in a broad range of activities, therefore certain fintechs will find access to the US market simpler than others. A traditional fintech that provides technology services exclusively to financial institutions will generally find that serving the US market is not dissimilar from serving the UK and EU market with adjustments to commercial terms and data protection policies being the primary considerations, as well as an understanding of the regulatory obligations of US financial institutions related to outsourcing and the use of third-party technology providers.
However, for fintechs that provide digitally native financial services directly to businesses or consumers, navigating the regulatory framework of the US is a critical first step in entering the market. That framework often bears little resemblance to the regime that the fintech will be operating under in Europe. Below are several key considerations for European fintechs as they contemplate their US expansion.
European fintechs may be accustomed to purpose-built licenses set out in European legislation that enable passporting of services across an entire continent. There can be some initial disappointment to discover that equivalent licenses do not exist in the US, and furthermore certain licenses are limited to single states as opposed to granting the license-holder national reach.
For companies facilitating transfers of value, the standard license is the money transmission license (MTL). The MTL is a state license originally designed to protect consumers engaged in money remittance. Companies seeking to operate nationally will need to apply for, and maintain, licenses in 49 states and the District of Columbia. Whilst the multi-state application process is challenging in its own right, the ongoing compliance burden of managing 50 licenses can be even more burdensome.
Banks may be licensed at the state or federal level. State banks generally can operate across state lines, however, they do not enjoy federal preemption – this is limited to national banks that are licensed by the Office of the Comptroller of the Currency (OCC). The OCC proposed a limited purpose version of their charter with fintechs in mind, however, legal challenges from state regulators thwarted the development of this charter.
Not all lending is subject to licensing, and lending regulations vary across states. There are no federal licenses for lending businesses, however, consumer lending is subject to regulation at the federal level and the Consumer Financial Protection Bureau administers and enforces these rules.
Principally licensed at the federal level, investment activities licensing will vary by type of activity. Fintechs engaged in investment activities will need to carefully navigate Securities and Exchange Commission (SEC) rules and those engaged in crypto-asset activity need to be mindful of rapidly evolving case-law and SEC actions.
2) Bank Partnerships
Given the limited licensing options for fintechs in the US many choose to partner with banks. There are thousands of banks in the US. In recent years, a number of the smaller regional banks have embraced fintech partnerships and their potential for driving revenue through digital distribution channels. Products that can be offered via these partnerships include payment, lending, saving, and related card issuing or processing. Although there are a number of mutually beneficial reasons for banks and fintechs to enter into such partnerships, they also come with tradeoffs such as less autonomy with respect to product, marketing and risk management, and less attractive unit economics – especially when the bargaining position of the fintech is weaker.
3) Supervision of Third-party Relationships
Banks have long relied on outsourcing aspects of their technology infrastructure to third-party technology providers. With the growth of bank and fintech partnerships, the federal agencies responsible for supervising banks have consolidated guidance on relationships with third parties. Fintechs can expect to see this guidance flow into:
- due diligence the bank will undertake prior to entering into a partnership;
- negotiations of the contractual arrangements governing the partnership;
- iii) ongoing monitoring by the bank during the course of the partnership
4) Data protection
In general, European fintechs with a robust General Data Protection Regulation compliance program in place will be well positioned for compliance with US rules on data protection and privacy. Data protection is regulated at both the state and federal levels in the US, with the federal rules largely limited to financial institutions. Working with US counsel, European fintechs can adapt their GDPR program to address the data and privacy protection obligations which apply to their activities in the US.
5) Financial crime
As with data protection, European fintechs with a robust program that complies with their national version of the European Anti-Money Laundering Directive will find that they are well-positioned with US rules. Certain licensed financial institutions in the US, such as banks, have direct obligations to comply with federal laws aiming to combat money laundering and terrorist financing, as well as ensuring compliance with US economic sanctions programs.
Fintechs engaged in money transmission generally will be required to register as a money services business (MSB) with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). They also need to implement and maintain an anti-money laundering (AML) program. Again, working with US counsel, European fintechs can adapt their program to meet US AML and economic sanctions compliance obligations.
The challenges and complexities of navigating the US financial services market will frequently be outweighed by the commercial opportunity. However, European fintechs should not underestimate the increased legal and compliance costs that accompany entry into the US market.
A distinguishing feature of firms providing financial services in any market is the extent to which regulation can influence business outcomes. By combining technological innovation with a thoughtful approach to regulation, a firm can build meaningful competitive advantages and value for its stakeholders. Therefore, reframing regulatory costs into investments in the future growth and resilience of their business.
Looking to learn more about scaling your Fintech, in the US and beyond? Joshua will lead a panel at Fintech Day 2023 called “Global scaling, global stability” alongside Yara Owayyed (General Counsel, YouLend) and Nick Grafton-Green (Senior Legal Counsel, Checkout.com).