Fintechs and the Bumpy Regulatory Landscape in Iowa

Financial Technology, often shortened to fintech, is a booming industry where technology and innovation compete with traditional financial methods in the delivery of financial services, including virtually any major financial transaction. Due to this boom, fintech companies are growing exponentially around the globe. In 2018 venture capital-backed financial technology companies raised a whopping $39.57 billion, an increase of 120 percent from previous years. In the United States alone, fintechs raised a record of $11.89 billion through a total of 659 investments.

The Potential Yin and Yang

Community banks offer fintechs an opportunity to grow their businesses because community banks are in need of affordable and efficient technologies that they can provide to their customers. Traditionally, community banks have been constrained in the services they can offer by the high cost of those services. Large banks, however, no longer have the edge, because fintech can provide community banks with cost-effective options to provide services historically only provided by large institutions. These include payroll services, money transmission services, mobile banking, blockchain capabilities, and many other services.

However, the highly regulated banking ecosystem at both the state and federal level presents some unique hurdles for fintech companies. Much like fintech companies can be great partners for community banks, community banks can offer the fintech companies the guidance to navigate the highly regulated banking industry. Community banks have a distinct advantage over larger banks because they can better understand what their customers need. This understanding allows community banks the unique opportunity to work with fintechs to create technologies that will serve their specific customers’ needs.

The Bumpy Landscape

Iowa has the fourth largest population of community banks in the country. As of 2019, Iowa had 281 community banks, which is 5.4% of the total community banks in the country. With all the community banks that are located in Iowa, fintechs may be setting their sights on Iowa.

One of the hurdles to this potential partnership is the current regulatory environment in Iowa because it may present a few issues for fintech companies looking to collaborate with community banks. In Iowa, a fintech that engages in money transmission can get a Money Transmission license or become an authorized delegate of a licensee with a Money Transmission license. Banks are not required to obtain a money transmission license because they operate under a Bank Charter. Currently, there is some confusion as to whether Banks, like money transmission licensees, can partner with authorized delegates exempt from attaining a money transmission license. There are no provisions in Iowa Code Chapter 533C or Chapter 524 that prevent an Iowa bank from having an authorized delegate or agent. However, the Uniform Money Services Act does not address whether an authorized delegate of an exempt entity, like a bank, requires a license.

Fintech entrants to the Iowa market should scrutinize Iowa’s money transmission laws as there may be other options for a Fintech company wanting to set up in Iowa. Fintech companies should consider consulting a knowledgeable attorney to understand the current regulatory environment and their options for partnering with community banks in Iowa.