Matt Longacre: 0:12

Alright everybody, welcome back to simply stated, I am Matt Longacre. I am your host today. And today I'm joined by two special guests who work at CSBS. I have Matt Lambert. He is our deputy general counsel of policy. Matt, thanks for joining us.

Matt Lambert: 0:27

Thank you for having me back, Matt. And hopefully this is as successful as our last one, which I think was the leading podcast for CSBS in terms of listeners.

Matt Longacre: 0:35

Alright, so we'll get we'll keep our expectations low here. And then. And then we also have Camille Polson, who works in policy development. She's a manager here at CSBS. Camille, thanks for joining us.

Camille Polson: 0:45

Thanks for having me.

Matt Longacre: 0:46

So today, we're talking about the Money Transmission Modernization Act. And there's a couple pieces that that that I'm really curious about. But very briefly, before we begin, for the uninitiated, what is a money transmitter?

Matt Lambert: 1:02

Thanks, Matt. And that's a really important question. And there's a series of distinctions that go into it. But ultimately, a money transmitter is someone that takes hold or sends money for somebody else, for the purpose of taking, holding or sending money to somebody else. What do I mean by that? Well, if if you go to the store and spend $100, on groceries, you're giving money to the store, right? You're buying goods for services, or you're buying goods or services. Conversely, if you go to the grocery store and go to the special counter, where there's a money transmission, stand or register, you're giving them money to send somewhere else on your behalf. So that position of trust of giving somebody your money, so that they can give it to somebody else or hold it for you is ultimately, what makes a money transmitter. The one key distinction that I'll add here is that a money transmitter is not a bank. A bank is not a money transmitter, they are explicitly exempt from all money transmission laws, because they are banks and subjected to a a slew of chartering and regulatory requirements.

Matt Longacre: 2:14

We have a great podcast if anyone wants to go back and look about what is a license. And we talked about the difference between a license and a charter. And that's a great place to go if you want to learn more about bank charters and why they're so distinct. So back to money transmitters. My understanding is that money transmitters or money services businesses have changed a lot over the last decade or so. Help me understand that, how have they changed.

Matt Lambert: 2:42

So I think you can go back further than the past decade to truly understand the dynamic changes that are underway in this industry. So for 100 years, money transmission was pretty simple. Two ways to do it, I could give you money, and you could take it somewhere, literally taking cash. You know, some of the first money transmission laws were when folks would give cash to steamship operators that would take it across the ocean. The other model was telegraph, basically have two safes at the end of the wire and instructions between the two. So, you know, the telegraph evolved into phone lines and faxes, and God knows what else. But that model stayed the same. Until the 90s, really, when the internet came around and provided various means of sending information. So late 90s, you've got internet wallets popping up on the scene, you also get prepaid cards and magnetic stripes, again, a technology that's not new, but it's now being used to store value on a card as opposed to, you know, two safes at the end of an electronic line. So, you know, that kind of technological change starting in the 90s happened when the laws were written, ultimately for handing cash over and bringing it somewhere or putting instructions into a telegraph. Fast forward 10 years and that technology has exploded, the number of companies that are looking to get into this have multiplied exponentially, year over year. And the different types of business models that are out there range from again, handing cash to somebody and bringing it across an ocean to, you know, the most advanced types of internet-based transactions that you can think of. And that's one of the key things about the Money Transmission Modernization Act and money transmitter laws generally, it doesn't specify what the technology is. It's that key activity of taking, holding or sending money. That way as technology changes, the law doesn't have to adapt.

Matt Longacre: 5:03

So you mentioned money's moving a lot more, there's an exponential use the word exponential number of companies and individuals engaged in this. You're not, you're not exaggerating, when you say exponential increase in the last couple of decades, what does that mean?

Matt Lambert: 5:16

So when we look at the data we have in NMLS, the number of companies that were licensed in 40 or more states, which is to say a national business model, was 37 in 2015. I have not seen the numbers for 2023. But last year, it was over 90, I would expect it to be over 100. And, you know, annually, you just see that number, increasing year over year, eventually, I think it has to plateau. But the number of companies that are trying new ways of servicing this market, just continues to occur.

Matt Longacre: 5:54

All right. And so this is a significant point. We're talking about licenses, charters and supervisors. who supervises money transmitters? And once we know who's supervising them, what are they doing about all this rapid change? Does the supervisory supervisory model need to change?

Camille Polson: 6:12

So short answer to that last question is yes. And there's reason that the Money Transmission Modernization Act has come to be so state financial regulators are the primary supervisors that license and regulate all of these companies. And most of the nation's non-bank financial sector, which includes money transmitters. So the regulation of these companies, it ensures you know, that we don't run into illicit finance, that consumer funds are protected, it's very, very important. And the state regulators take it very Currently, as we've talked about, each state has its own seriously. law and its own rules to license and regulate money transmission. And as you know, this industry has exponentially grown and evolved, the state regulators have understood that some changes need to be made as technology advances, to not only continue this protection of consumers, but also to enable innovation and allow for this new technology to flourish in this industry. So, you know, in order to achieve this goal, state regulators came together to discuss, you know, what can we do to move forward and they engaged in several different initiatives. So, these initiatives to put it generally is really streamlining approaches to supervision, licensure and examination across all 50 states, and we sort of have grouped it under this greater concept of Networked Supervision. And so the states are working together through a variety of avenues to get us to a point where everything is streamlined, harmonized and easier on the states to reduce regulatory burden and burden on the companies as well as they try to comply with all of these standards.

Matt Longacre: 7:57

So you've led into the Money Transmission Modernization Act here. And that's what I was going to ask about. This is model legislation. And for someone who doesn't really know what that is, it's you create a model, you send it to the states, and, you know, they implement it in the way that best suits, you know, their legislative system. Tell me how this model legislation came to be.

Camille Polson: 8:20

So the long story, a lot of collaboration. But, you know, it really starts with going back to 2018. And that was when the FinTech and Innovation Advisory Council was created. So essentially, this council was tasked with providing state regulators with a number of recommendations aimed at improving the nonbank financial industry sort of tying back to these different initiatives. We talked about earlier of what can the state regulators do to modernize the system and really help it move forward. So among these recommendations was a call for a more streamlined and harmonized supervisory framework for the money transmission industry. And response to this, the Conference of State Bank Supervisors created a group known as the regulatory industry clearing house. And it basically brought together industry experts and key state banking supervisors. And together they drafted what is now known as the Money Transmission Modernization Act. That is a very shortened timeline of a lot of conversations that went back and forth. You know, they spent months discussing not only the pain points of the current system, but what is working, what are the successes and what do we need to keep moving forward.

Matt Longacre: 9:38

So to make clear here, because for some people if you know some things about model legislation, sometimes model legislation is a wish list of a particular group that gets sent around to state legislatures. This sounds more like regulators and industry work together on this idea before it went anywhere else, so it's not really one one advocacy group doing this. It's the regulators speaking to their legislatures Is that correct?

Camille Polson: 10:06

Regulators speaking to the industry experts and their legislators really getting all the perspectives. And because the most important thought on the state regulators mind was, we want to get this right, you want to get this done properly. And we realized that there are multiple perspectives coming in that with these new technologies and companies that we don't quite understand. So it was very important to get everyone involved.

Matt Lambert: 10:30

You know, what to Matt, this is an example of what John Ryan was really focused at the time was good government. We need to sit down with people with varying perspectives, hear from them, work with them, get it on paper, and come to a solution that works for everyone. And that was not an easy process. In fact, it was arduous. It was very time consuming. If you, you know, if you throw a dart at the Money Transmission Modernization Act, which is over 50 pages, chances are there's a story behind that line and a long discussion that was hashed out by a group of regulators and industry representatives in a very professional manner. It just took a long time and a lot of compromise to get to a place where everybody was comfortable. And that's what it takes to be engaged in good government. And the next stage is at the legislatures.

Matt Longacre: 11:26

So you led me right into my next point is that legislation can be really complex, you talk about 50 pages. Can you provide me just a layperson's summary of what's in the MTMA? I mean, you know, if you're a money transmitter, you might understand a lot more. But if you're talking to a broader financial audience, what's in this thing?

Matt Lambert: 11:47

So if I'm talking to... I always use my mom as an example, right? So my mom does not know what I do for a living, but she knows that she has apps on her phone where, where they're holding money for her. So I would say to my mom, one, you probably want to make sure that whoever's holding your money, whether it's on an app or a card, or you know, some other mechanism that they are not criminals. So there is a licensing process, which involves a criminal background check. And all sorts of checks on business models, policies, procedures, making sure this company is aboveboard. So that's, that's the licensing process. Next, you want to make sure that they are financially sound, you don't want to give your money to somebody that's about to go bankrupt. So there are what's called the three legged stool. There's a lot of details around it. But basically, you have to have a good net worth, you have to hold customer funds responsibly. And you have to have a bond. And then lastly, exactly how does this company go about their day to day business? How do they ensure that they are transparent? So we've got things like receipt requirements, refund requirements, etc. And all that is to say, one, are they aboveboard, that's licensing to are they financially sound? And three, their day to day operations? Are they clear and obvious for consumers and for regulators when they come in and check on them?

Matt Longacre: 13:19

So, to be clear, state regulators are already looking at these things that you've just mentioned. But you're making changes to how the law works around those things. So how do these changes improve the supervision of money transmission? Do you have any good examples of the changes in the MTMA that make doing that job better for supervisors?

Camille Polson: 13:44

I mean, absolutely. When we talked about earlier, the reduction of regulatory burden, you know, when we look at the money transmission Modernization Act, and we look at state government and state regulators and their resources, their capacity levels, you know, by streamlining and modernizing these standards so that they are the same across the board, we are able to leverage other states that may have more resources in a certain area. For example, when you look at it Department of Banking, such as Texas, they have a lot of examiners especially in certain dedicated fields, that were able to leverage their expertise for some states that are much smaller. So it's really looking at streamlining the process and allowing for sharing of resources across the states.

Matt Lambert: 14:33

If you think about the three giant buckets that I just described, if you're doing a background check on first person, they're only one person, right? But they're subject to 50 state jurisdictions. So you could look at that one person 50 different ways; that doesn't change the fact that they're just one person. So if the 50 states have one way of looking at a person, they can rely on the work one time so if Camille does my background check, and it's going to work for Camille and it's going to work for you, Matt, then why do you need to do it? Same goes for financials, one balance sheet. If it's the same company in multiple states, looking at those financials, there's not necessarily value in assessing them differently if the common standard is very high. And third, this, this is a fun example that that came about, after multiple weeks of discussions. This is one of those areas where, you know, we didn't know there was an issue. And we we found one. So I'll use myself as an example. I live in Maryland. Right now we are in DC, and our internet service provider is probably coming out of Virginia. So if I'm on my phone, and I log on to a payments app and send you money, Matt, who lives in Virginia, whose law applies? Hmm, good question. We put together a definition that makes clear that the money transmitter can make a reasonable assumption based on my account information and not my location, because it turns out GPS location on your phone is not always accurate. So right now on the Wi-Fi, it says I'm in Virginia, I'm not. But the company would know from their CIP, which is, you know, the, the onboarding process for an account that I am from Maryland. And frankly, that's probably where I would issue a complaint and where my personal jurisdiction would lie. So that's one of the it's not overly apparent, if you looked through the MTMA for that example, and how it solved, you're not really going to find it unless you're a nerdy lawyer and you figure out the ins and outs. But that's one of those things that the Money Transmission Modernization Act solves for.

Matt Longacre: 16:53

So I almost don't need to ask this question. Because you've kind of answered it. We'll talk about supervisors why this awesome matters to the industry. But I'll ask it anyways, in case you want anything else in: Why is the industry supportive of this? What's in it for them?

Camille Polson: 17:07

having a company be able to be examined, for example, right now, instead of having to have redundant exams, they could have a group of states go in and that examination be accepted by other states, and then be able to move forward with their business model. You know, industry stakeholders played an integral role in, you know, developing this model legislation and this language, they're very supportive of it, and they brought their pain points to us. And we worked hard to work through all of those. So they're really looking forward to seeing this pass in all 50 states.

Matt Lambert: 17:44

The non-intuitive fact is that the money transmission Modernization Act, has a lot of increased standards and requirements compared to a lot of older money transmission laws. Why would you be in favor of that if you're the industry? Well, there is a value to doing things once, doing it one time correctly. And that ultimately saves you time on your day to day activities. So if you have a change of control, which is to say, if somebody that's kind of in charge of your company, leaves, for whatever reason, right now, you have to do a 50-state analysis of what you have to do the Money Transmission Modernization Act as more states adopted, they're going to have to do that one time, it's good, everybody's going to know what they have to do. It's one form, it's one compliance system. You can say the same for financials, receipts. Can you imagine programming receipts into different agents that operate in different states? So if you, if your agent is a grocery store that's operating in 28 states, and you're subject to 28, receipt requirements, that cost a lot of money. And it's it's not easy to do. And that problem will go away as the Money Transmission Modernization Act is adopted nationwide.

Matt Longacre: 19:01

So for regulators: a safer and sounder system, easier to supervise, they can trust the expertise of their colleagues and other states. For the industry, just not having to do the same thing over and over again, for 50 different standards. But to get there, this model legislation needs to pass some version of it in each of these states. How is progress on the implementation of this law passage of this law going across the country? Where are we?

Camille Polson: 19:32

So you know, the states have been putting in a lot of work to get this uniformly passed, when it was formally approved by the Board of Directors of CSBS in August of 2021. That wasn't the best timing for 2022 state legislation. Even with that, though, we had one state of passage in full in 2022 with eight states passing significant provisions of the law. Here we are in 2023. We have 20 bills in the 2023. Legislature. across the states, we have two that are fully enacted, we have three that are enacting substantive provisions. So these are already signed by the governor, they have effective dates. We have two bills that are currently at the governor's office, we've got our fingers crossed, but looking very good. And then we have in addition to that, we have about 13 other bills, as I said that are introduced, nine of those are the full MTMA four of those are substantive provisions of MTMA. And when we say these states with substantive provisions, we are in talks with them. And they are have a commitment to full implementation of the law, just the matter of the way that state legislation works and how things need to go about. Sometimes you have to do them in parts. But we've talked about this a lot of times, you know, there are many ways to reach the final destination. Two plus two equals four, three plus one equals four, as long as we all get to the final destination, which is the full implementation of the model law. That's our ultimate goal. Yeah.

Matt Lambert: 21:11

50 states is the goal 50 states is what we will get to, and we'll do it with complete MTMAs. Because, you know, that jurisdiction issue I raised before GPS on phones, if a legislature works in pieces, which is understandable, and they don't have one piece of a strange little definition, because doesn't make sense in isolation, that doesn't make it into their bill, that GPS problem still exists. So there's, I call them hidden benefits. You know, they're they're not obvious on their face, there is no section that says jurisdictional weird stuff with GPS that gets fixed. You know, it's, it's built into the language of the law. So that's why it's so important to have the full MTMA fix, because the sections speak to each other. It is holistic, and it is a complete solution. And when we have 50 states that are using it, it's going to be a safer, stronger money transmission industry, with less regulatory burden and more room for innovation to serve customers and economies across the states.

Matt Longacre: 22:19

That's pretty amazing. It's I'm trying to do the math in the back of my head with your years, we're talking about roughly half of states already have something introduced or something in the pipeline. Is that about, right? Yes. And you've got two states that are all the way across the finish line, a few more states that are pretty close this year. And we're talking about all of this in less than a calendar year. Absolutely. That's pretty incredible. And that is just proof in the pudding that you've put a lot of work into this. And regulators have put a lot of work into this.

Camille Polson: 22:48

That's just 2023. This is going to be a multi-year process. We're still in constant contact with our industry stakeholders, and we get our state regulators together in a forum to discuss, you know, any questions or obstacles that pop up. So it's really collaborative, we've got a lot of great support. And we're just looking forward to what more we can do in the next coming years.

Matt Lambert: Anybody listening: 23:09

If you're interested in the MTMA may reach out to myself, Camille and Mary Pfaff at CSBS, who has been handling our state legislation. I'm on the phone. I'm on emails every day with different states, getting these bills over the line. And we know that we are not done. So let's keep going.

Matt Longacre: 23:28

Yep. And we will include a link to the MTMAand all public documents in our show notes. So Matt, Camille, thank you so much. This was really educational. I learned a lot.

Matt Lambert: 23:39

Thanks, Matt.