The rise in FinTech has significantly impacted the traditional banking model in recent years. Despite the banking industry’s initial resistance in embracing these companies, national, regional, and local banks alike have recognized the utility in providing customers with the innovative products and services these FinTech companies can provide. Embracing partnerships with these companies can present customers with innovative solutions to unique problems, increasing revenues and innovation while decreasing costs.
However, many banks are hesitant to dive in and take advantage of the innovation FinTech companies can use to supplement their product portfolio. Much of the hesitancy surrounding the cultivation of these partnerships stems from the difficulty navigating the complex regulatory requirements.
As the financial industry develops, regulators are often slow to react to the ever-changing FinTech landscape. This often results in outdated regulations that prevent FinTech companies from entering the industry and limit a bank’s ability to embrace new and innovative products. Additionally, requiring cash-strapped startups to invest significant capital and energy into obtaining licenses to test new products can create significant delays and scare any potential banking partners from contracting for their services.
West Virginia lawmakers recognized these concerns and have proposed a solution. On the 51st day of the West Virginia Legislature’s 60-day session, lawmakers unanimously voted to pass House Bill 4621. Governor Justice signed the bill, and it will become effective on June 5, 2020. HB 4621 or “the FinTech Regulatory Sandbox Act,” is one of the key pieces of legislation to come from the 2020 legislative session. There was immense support for this legislation from both sides of the aisle, as well as from banking and community leaders alike.
Much like the sandboxes from the physical playgrounds with which most people are familiar, the idea behind a regulatory sandbox is to allow innovative partners the opportunity to test cutting-edge products and services within the confines of a controlled environment. The companies approved under the program are given significant leeway to test new products, while still being required to protect consumer interests due to the Act’s limitations on the freedom of the participating companies. This will give banks an opportunity to enter into partnerships with these FinTech companies at the early stages while still being assured the FinTech partners will follow certain procedures to prevent undue risk.
The Act is to be administered by the West Virginia Division of Financial Institutions (the “Division”), and the Act allows consultation and collaboration between the Division and the West Virginia Development Office, the Consumer Financial Protection Bureau, and other state agencies or governing boards that have implemented similar provisions. The Division is to oversee the application approval process, and the Act gives the Division the ability to promulgate rules to administer the program.
Notably, the Act recommends that applicants attempt to partner with banks or financial institutions licensed in West Virginia before applying. Though this is not a requirement for acceptance into the program, it will certainly spur FinTech companies into attempting to partner with West Virginia banks.
The program is open to businesses with a physical location within West Virginia that wish to test innovative products or services. To apply, the business must go through an application process, which includes providing the Division with information regarding the ability of the applicant to develop, plan and assess the innovative product or service it wishes to implement, as well as show the Division it has the means and expertise to carry out its plan. The applicant must provide the Division with a description of the service or product it wishes to implement. Additionally, there is an application fee for applying for acceptance into the program, which is not to exceed $1,500. Unless agreed to by the applicant, the Division has 90 days from receiving the application to determine whether the applicant is approved to enter the program.
Once approved, the business has two years to implement its products or services. The business will be required to update the Division on the progress of the implementation, and the Division will be required to update the Joint Committee on Government and Finance before December 1 regarding the success of the program overall. At the end of the two years, the business and the Division may agree to extend the business’s participation in the program an additional year, or the business may be removed from the program. If extended, the business must then begin the process of obtaining any licenses or authorizations required by law. Following the extension, the business must update the Division on the process of obtaining these authorizations every three months.
However, an approved business is not given free rein to test its products and services. Notably, the provisions of the West Virginia Consumer Credit and Protection Act and the Collection Agency Act still apply to businesses within the program. Additionally, the Division limits participants to test their products with West Virginia consumers, and the participants must go through a notification process with all potential customers outlining the business’s involvement in the program. The Division may, with written notice, remove any participant from the program at any time, and may require a bond of not less than $5,000 to insure for possible loss caused by the product or service.
West Virginia’s FinTech Regulatory Sandbox Act will forever change the FinTech industry within the Mountain State. While not without its limitations, the Act will certainly give the businesses that choose to utilize this program an opportunity to test new, innovative products without being required to first navigate the complex regulatory system. The rollout of this program on June 5, 2020, will allow banks the unique opportunity to engage in strategic partnerships with FinTech companies like never before, particularly since the Act suggests these partnerships may increase an applicant’s chances for acceptance. It will be important for banks to take advantage of this opportunity to stay abreast of the industry’s ever-changing landscape.
Randall Saunders is a partner in Nelson Mullins Riley & Scarborough LLP’s West Virginia office. He focuses his practice on banking and financial services litigation, class action defense, regulatory compliance, tax lien resolution, real and personal property tax appeals, and real estate. He can be reached at (304) 526-3507 or firstname.lastname@example.org.
Jonah Samples is an associate in Nelson Mullins Riley & Scarborough LLP’s West Virginia office. As a member of the firm’s litigation team, Jonah Samples focuses his practice on commercial litigation and business torts, banking and financial services, and real estate. He can be reached at (304) 526-3504 or