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10 things you need to know before taking your FinTech startup stateside

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This post, co-authored by Obrea Poindexter, Sean Ruff, and Sue McLean from Morrison & Foerster, discusses everything you need to know if you’re considering on expanding your FinTech startup to the US.

Concerns about the FinTech sector in the U.S. have grown in recent months as a result of some high-profile regulatory investigations and signs that the market has started to mature.

But there can be no doubt that interest and activity remains high in the space. In the first quarter of this year, $1.7bn in venture funding poured into the US FinTech sector, a 70% jump from the previous quarter, according to a report published by KPMG International and CB Insights.

The regulatory and legal complexities in the U.S. market, however, can pose significant challenges for new entrants.

Here are 10 issues that FinTech companies may need to consider before they enter:

1. A crowded, complex regulatory landscape.

Any FinTech company expanding into the U.S. market should be prepared to engage with multiple regulators at the state and federal levels.

Making matters more complicated are regulators’ overlapping jurisdictions and conflicting legal interpretations.

Depending on a particular FinTech’s business, it may be subject to a long list of federal regulators, including the Consumer Financial Protection Bureau, the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., the Treasury Department’s Financial Crimes Enforcement Network, the Securities and Exchange Commission, and the Federal Trade Commission.

There are also 50 state regulators who also may be relevant in a given FinTech vertical.

2. The high cost of non-compliance

In the current US regulatory environment, FinTech companies face heightened scrutiny and can incur fines reaching in the hundreds of millions of dollars for violations of laws covering areas ranging from data privacy to loan disclosure requirements.

The layered approach to regulation in the U.S. means that fines can be imposed by multiple regulators for the same alleged violation.

3. Outdated laws

Because of the incredible speed of innovation in FinTech, it’s probably no surprise that many of the relevant US laws have not kept pace.

But in our digital age it can still be shocking for some to learn about certain rigid and antiquated laws that leave little room for new innovation, like those governing font type and size requirements for lending disclosures.

4. Lack of regulatory differentiation for products and services

FinTech is an umbrella term that covers all kinds of financial products and services.

Just in the area of lending, there are various business models that specialize in small business loans, payday loans, credit cards, and student loans, among others.

US regulators, however, tend to lump vastly different businesses together. Be prepared to help educate regulators about your product and service.

5. Perceived regulatory advantages in the UK over the US

Thanks to various government initiatives and its central regulatory structure, the UK enjoys a reputation for being friendlier to the FinTech community than other countries.

But it remains unclear whether those efforts will result in quicker authorizations to do business given the high demand.

Although the U.S. regulatory scheme is complex and multi-layered, it’s not impossible to navigate with proper guidance. It may be too soon to tell which side of the Atlantic offers a better approach.

6. The bank partnership question

To partner or not to partner with a bank is a critical question facing many FinTech companies, and it’s especially important in the US.

A bank partnership may provide certain regulatory advantages—banks, for example, are exempt from money transfers laws and, under certain circumstances, state usury provisions capping the interest rate that can be charged.

But partnering with a bank often means giving up a significant amount of control with respect to the offering.

7. Uncertainty for online lenders

A decision issued last year by a U.S. federal appeals court (Madden v. Midland) has caused uncertainty in the online lending community.

It appeared to call into question whether online lenders who don’t originate loans—but rather buy them from banks—would be exempt from state laws capping interest rates.

This is an evolving area of law and should be considered by any FinTech company operating in the lending vertical.

8. Money transmission laws

Some FinTech companies are reluctant to consider themselves a part of the money transmission business.

But query: do you receive money, and do you transfer that money? If so, there may be significant regulatory hurdles to face.

Today, 49 states require a money transmission license and the application process is lengthy—sometimes ranging from nine to twelve months (or even longer).

9. Prepaid laws

FinTech players in the payments vertical often overlook laws addressing prepaid payments or stored value products.

These laws apply to any pre-funding of an account or money that will be stored for a period of time, no matter how short. A patchwork of federal and state laws that address disclosure requirements need to be considered.

10. New proposed rules on short-term loans

This month, the Consumer Financial Protection Bureau proposed new rules on short-term loans that carry high interest rates.

The new guidelines, which could go into effect early next year, would require lenders in certain cases to determine the consumer’s ability to repay the loan.

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