Author: Ryan Kenny, Associate Member, University of Cincinnati Law Review
The past several years have seen the development of the revolutionary financial technology industry (FinTech), including the peer-to-peer payments industry (P2P), which transfers fund though an internet connection, rather than a bank transfer. However, variances in law and high costs at the state level have harmed the innovation in this industry. Since the Dodd-Frank Act’s enactment in 2010, several federal agencies started to make rules for consumer financial products and services. The framework of this regulation, particularly between the Office of the Comptroller of the Currency(OCC) and the Consumer Financial Protection Bureau (CFPB), will depend largely on how the CFPB defines “large participants” in the market are in accordance with the Federal Trade Commission (FTC) per 12 U.S.C. §5514(a)(1)(B). If “large participant” is defined broadly by the CFPB to include risky companies, companies that are still not as profitable as larger P2P companies will be more vulnerable to fines from the CFPB. This scenario would require, per 12 U.S.C. §5514(a)(2), the OCC to have a greater say in regulations along with the CFPB and FTC. A less-inclusive definition from the CFPB would exempt many small P2P payment companies from federal consumer law oversight, then the OCC would be better adept at trying to creating more uniformity and lower costs with state regulations.
I. The Hurdles of Regulation for P2P Companies at the State Level.
The focus of federal regulation has been primarily anti-money laundering, covered by the Bank Secrecy Act and the Financial Crimes Enforcement Network, while state regulation is more complex and fragmented. This has created issues for P2P companies. Some states, such as Texas and Illinois, have remained relatively silent on the issue, while others, such as New York, have enacted a multitude or regulations. Because of the variations that exist state-to-state, there exists confusion for P2P companies attempting to comply with all of the state laws. Moreover, some of these state laws may be outdated or inept at regulating P2P companies because they are focused on the traditional method of money transfers, which have become more diversified with the development of P2P platforms. Because the regulations are not fitted for these new products and services, it can be difficult for a P2P company to know whether it is complying with the law.
Additionally, state licensing is expensive. Some states require minimum surety bonds, which for the most populated states, California, Texas, Florida, New York, and Illinois, this would amount to a minimum of $1.2 million, with an annual maintenance cost of $140,000. The upfront cost of nationwide licensing is $180,000. Compared to these costs, the average seed funding for P2P startups in 2014 was just over $1 million. P2P companies face enormous regulatory and financial hurdles at the state level. Large P2P companies can absorb these costs. Startups do not have that luxury. This places startups in a precarious position, where even a minor infraction of a state law with relatively modest fines can be crippling, or even fatal.
II. Given that P2P Companies Face Great Challenges at the State Level, Federal Regulators Need to Minimize the Burden at the Federal Level to Keep Innovation Going.
In May of 2012, the CFPB and the OCC, along with other agencies, signed a Memorandum of Understanding (MOU), addressing how the agencies would move forward in regulating consumer financial companies, both depository and non-depository, under federal consumer protection laws. The MOU gave the objectives of the agencies going forward, including examining these companies, coordinating and synergizing their efforts, minimizing regulatory burdens, avoiding duplicate and conflicting regulations, and allow agencies to operate efficiently.
In regulating nondepository businesses, governed under 12 U.S.C. §5514(a)(1)(B), the CFPB and the FTC can negotiate agreements on how to define “large participants” of the consumer financial services and products market. It is imperative for P2P companies that these regulations be as minimally burdensome as possible, as agreed upon in the MOU, given the challenges at the state level. However, the CFPB does not have a track record of being as minimally burdensome as possible, leveeing $10.1 billion in fines since its inception. Fifteen million dollars alone was directed at PayPal, a P2P payment company.
Given the CFPB’s tendency for hefty regulations and fines, the OCC needs to play a critical role in regulating P2P companies in the future. In a white paper released in March of this year, the OCC outlined its goal to foster responsible innovation in the banking industry, and one can assume this goal will extend to non-depository companies in the P2P payments industry. One of the best suggestions by the OCC was the creation of a centralized office on innovation to help answer non-bank companies’ questions about new products and innovations before introducing them to the market. Due to challenges of multiple contact points amongst the states and federal government, having a central contact point for P2P companies can help compliance standards and avoid infractions of the law by avoiding conflicting statements and more personalized attention for each company.
III. The OCC’s Role in the Federal Regulation of P2P Payment Companies Will Depend on How a “Large Participant” in the P2P Payment Industry is Defined.
The OCC’s role in improving and developing state and federal regulations of P2P payment companies will largely be determined by how the CFPB chooses to define a “large participant” in the P2P payments market, as it is authorized to do by §5514(a)(1)(B) of the Dodd-Frank Act. The CFPB’s definition could depend simply on a company’s size in the market, or could consider the risks the company poses to consumers, which the CFPB can consider per §5514(b)(2). The CFPB defines a risky enterprise based upon the company’s asset size, the number of transactions it handles, the risk to consumers, extent of state regulations already in place, and whatever else the CFPB considers relevant. The subsections most likely to be used to determine a large market participant are 12 U.S.C. §5514(b)(2)(A) (asset size) and (B) (transaction volume).
A. The CFPB’s Definition of a Large Participant in the International Money Transfers Industry in Proposed Rule 79 F.R. 56631 Provides Insight into How a Large Participant May Be Defined in the Domestic Transfers Market.
In September 2014, the CFPB proposed a rule to define large participants in the international money transfers market. The international money transfers market, which facilitates the outflow of money from the United States to other countries—also known as remittances—and is about fifty billion dollars. There are about three hundred and forty nonbank participants in the market facilitating about one hundred and fifty million transactions per year. There are a total of about twenty five nonbank institutions that transact one to three million transfers annually. The proposed rule took effect on December 1, 2014. The standard for deciding a large participant is a nonbank institution that has one million or more “aggregate annual international money transfers.” Aggregate annual transfers include the company’s transfers and any subsidiaries owned that also provide international transfers. The transfer data from the preceding calendar year determines the aggregate annual transfers. The result of this Rule was the regulation of twenty five nonbank entities, making up less than ten percent of the market, but providing one hundred and forty million transfers at a value of forty billion dollars. Even though these entities made up just over seven percent of all nonbanks providing international transfers (25 of 340 total), their market caps encompassed ninety three percent of all transfers (140m of 150m total) and eighty percent of the market’s total value ($40b of $50b total). The CFPB opted out of using the dollar value due to concerns of economic fluctuations, and because the transfer amounts per transaction might be so small that they may not truly capture the entities real market impact.
It is important to note that the CFPB does not use broad standards to define large participants across markets, but rather defines a large participant on a market-by-market basis. Some of the commenters on the Proposed Rule suggesting including the domestic money transfer market, but the CFPB felt that, while the markets are similar, each warranted its own consideration. Nevertheless, this is a good reference point for how the CFPB might consider defining P2P payment companies that service the domestic United States market.
B. The Conservative Approach: OCC’s Role if the CFPB Applies the Same High Threshold to the Domestic Market for P2P Payment Companies.
The OCC should play a more active role in updating state regulations and bringing licensing fees down should the CFPB’s definition of a large participant in the domestic market apply to as narrow a number of companies as it did regarding international money transfer companies.
By 2020, the domestic P2P payments market is expected to go over two hundred billion dollars. Applying the same percentages from the Proposed Rule regarding large participants in the international money transfer market, this would include: less than 10% of companies in market worth two hundred billion dollars and eighty percent of the market’s value, equal to one hundred and sixty billion dollars. The biggest P2P payment company is PayPal, with a market share of fifty percent. If that remains the same, PayPal would most certainly be considered a large participant. Most of the market is then shared by eight other big P2P payment companies.
It seems likely that applying a similar standard to the domestic P2P payments market would result in focused regulation on these top nine companies. This would benefit smaller P2P payments companies, who are the most burdened by onerous state regulations, because they would be less burdened at the federal level. While the CFPB may develop different criteria for the domestic market, it would be a reasonable inference that the domestic market will be treated relatively the same as the international market given the similarities.
If the CFPB did choose a more targeted approach to regulating the domestic P2P payments market, the OCC should focus its attention on addressing the issues at the state level. One initiative could be trying to get more state compliance with the Uniform Money Services Act (UMSA). The UMSA was created with the purpose of investigating and reporting issues of money transfers in money laundering and terrorism, tax purposes, and regulatory investigations or proceedings, and also to assist with counterintelligence work and to avoid money laundering or funding of terrorist organizations. The UMSA requires money transmitting businesses (MTBs), including nondepository companies that transfer funds, to register with the Secretary of Treasury and submit reports on their operations. However, to date, only Alaska, Arkansas, Iowa, New Mexico, Puerto Rico, Texas, U.S. Virgin Islands, Vermont, and Washington have fully adopted the UMSA. By working with state governments, policy centers, and lobbying groups to get more adoption of UMSA, the OCC can help foster responsible innovation in the P2P payments industry by lowering the licensing costs and bringing clarity and uniformity to state MTB registration. This can help to ensure that P2P payment companies have more funds available for research and development, and more entrepreneurs will enter the market as ease of doing business
C. The Expansive Approach: The OCC’s Role if the CFPB Defines a Large Participant Broadly to Include Many Small- and Medium-Sized P2P Payment Companies.
The CFPB has stated that there will not be a one-size-fits-all definition of a large market participant, but rather the term will be defined based on each market’s characteristics. Moreover, the CFPB can also consider risk to consumers, regulations at the state level, and any other factor the CFPB determines is “relevant.” It is possible that the CFPB could define a large participant for the P2P payments market broadly, this could include small and medium P2P payments companies that are particularly burdened by the state regulations.
The OCC should take a more active role in coordinating with the CFPB on regulating these entities. The OCC stated in March that its goal is to foster innovation in a responsible way that encourages innovation while also protecting consumers. The CFPB, on the other hand, is primarily concerned with protecting consumers. The CFPB is not concerned with innovation, demonstrated by the Bureau’s leveeing of over ten billion dollars in fines. Moreover, the CFPB receives its funding from the Federal Reserve, not Congress, putting the CFPB outside the oversight of Congress. The OCC therefore must act as a check on the CFPB’s rules for the P2P payments industry. The OCC needs to ensure that federal regulations do not exacerbate regulatory issues faced by P2P payment companies at the state level. The OCC is in the best position to represent P2P payment companies in the federal regulatory field because other agencies, such as the CFPB or the FTC, are more concerned with protecting consumers and market competition than ensuring that P2P payment companies operate in an innovation-friendly environment. While the CFPB retains the ultimate decision-making authority to regulate the P2P payments industry, the OCC, per the MOU signed by the OCC, CFPB, and other agencies, should work closely with the CFPB to make sure that the CFPB understands the innovation impact of any rule, so that innovation in the P2P payments industry can continue.
The OCC’s role in determining federal regulation of the P2P payments industry will depend largely on the CFPB’s scope of covered persons per 12 U.S.C. §5514(a). If vulnerable P2P payment companies fall outside the CFPB’s scope, then the OCC should focus its efforts on creating more uniformity at the state level. If the CFPB determines that a large scope of P2P payment companies will be regulated, the OCC should act as a safe-guard to ensure that CFPB regulations do not stifle innovation by compounding regulatory burden at the federal level with an already complex state regulatory field. If the OCC executes these goals well, it can ensure that consumers are protected and that innovation flourishes in the P2P payments industry.
 Benjamin Lo, Fatal Fragments: The Effect of Money Transmission Regulation on Payments Innovation, 18 Yale J. L. & Tech. 111, 119-20 (2016).
 Id. at 113-18.
 Id. at 117-18.
 Id. at 120.
 Id. at 132.
 Id. at 133.
 Consumer Financial Protection Bureau, Memorandum of Understanding on Supervisory Coordination (May 16, 2012), http://files.consumerfinance.gov/f/201206_CFPB_MOU_Supervisory_Coordination.pdf.
 12 U.S.C. §5514(a)(1)(B) (2016) (LEXIS through Pub. L. No. 114-219).
 Karen Webster, Does the CFPB Really Help Consumers?, PYMNTS (Oct. 12, 2015), http://www.pymnts.com/in-depth/2015/does-the-cfpb-really-help-consumers/.
 Consumer Financial Protection Bureau, Enforcing Consumer Protection Laws (July 15, 2015), http://files.consumerfinance.gov/f/201507_cfpb_enforcing-consumer-protection-laws.pdf.
The Office of the Comptroller of the Currency, Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective (Mar. 31, 2016), http://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-responsible-innovation-banking-system-occ-perspective.pdf.
 12 U.S.C. §5514(b)(2); (A), (B), (C), (D), and (E) (LEXIS through Pub. L. No. 114-219).
 Defining Larger Participants of the International Money Transfer Market, 79 Fed. Reg. 184 (Sept. 23, 2014) (to be codified at 12 C.F.R. pt. 1090) LEXIS.
 Id. at 56635.
 Id. at 56634.
 Id. at 56635.
 12 C.F.R. §1090.107 (2014) LEXIS.
 12 C.F.R. §1090.107(b).
 12 C.F.R. §1090.107(a)(iii).
 12 C.F.R. §1090.107(a)(i).
 Defining Larger Participants of the International Money Transfer Market, 79 Fed. Reg. at 56641.
 Id. at 56635.
 LTP Team, P2P Payments Market in the U.S. is Expected to Cross U.S. $200 Billion by 2020, Let’s Talk Payments (Jan. 19, 2016), https://letstalkpayments.com/p2p-payments-market-in-us-is-expected-to-cross-us-200-billion-mark-by-2020/.
 Aboli, Announcing the Top 9 U.S. Companies in P2P Payments, Let’s Talk Payments (Dec. 9, 2015), https://letstalkpayments.com/announcing-the-top-9-us-companies-in-p2p-payments-ltp9-leaderboard/.
 31 U.S.C. §5311 (LEXIS through Pub. L. No. 114-219).
 31 U.S.C. §5330(b).
 Lo, supra note 1.
 Defining Larger Participants of the International Money Transfer Market 79 Fed. Reg. at 56641, supra note 22.
 12 U.S.C. §5514(b)(2)(C), (D), and (E).
 Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective, Office of the Comptroller of the Currency.
 12 U.S.C. §5511(a).
 Webster, supra note 9.
 12 U.S.C. §5514(d).