Even though the U.S. payments industry's regulatory environment can be difficult for startups, there is plenty of investment being made in the market for new disruptive technologies.
Financial technology investment in general is on the rise, says Patricia Kemp, a partner at Oak Investment Partners. Since 2011, investment in the financial technology sector has risen about 20% to $2.3 billion this year, she says.
And in payments, 56% of investment is in electronic payments, which Kemp says will likely increase in the coming years.
In payments technology, "I don't know that there's been a busier time," says Jeff Haughton, managing director at Financial Technology Partners LP, an investment banking firm.
Kemp, Haughton and other experts presented their thoughts during the Money2020 event this week in Las Vegas.
The five big regulatory issues startups face are licensing and registration, consumer protection, privacy, anti-money laundering and other compliance needs, says David Stein, director of Promontory Financial Group LLC.
While regulations can seem antiquated and unnecessarily complex, Stein says, new payments companies need to recognize the broad purposes of the rules and not take a narrow interpretation to take advantage of the gaps.
Regulators "will eventually catch up," he says. And regulators are moving towards a guilt-by-association model.
Previously, regulators were easy on new payment companies because they didn't want to be the ones picking the winners, says David Beam, a partner at K&L Gates, a global law firm. But as the payments industry matured, regulators became more aggressive in enforcing the rules, he says.
Independent sales organizations have recently been under pressure as the Federal Trade Commission takes action against them for working with companies that it accuses of breaking telemarketing rules. Usually the merchant would be held responsible for deceptive practices and face the fines and other consequences. But the FTC has recently alleged that several ISOs knew their clients were in violation of the Telemarketing Sales Rule and yet continued to work with them.
The industry "is moving more towards these principle-based regulations," says Stein.
Bitcoin businesses, categorized as money services businesses by the Financial Crimes Enforcement Network in March, are also dealing with the uncertainty that comes with a changing regulatory perspective. Several Bitcoin businesses, including Bitfloor and Tradehill, have seen their bank accounts closed or had to preemptively cut ties.
Many banks refuse to work with virtual currency businesses. Buttercoin, which sells its virtual currency exchange as a service, spoke with 76 financial institutions that either outright rejected the business or wouldn't allow it the type of account it wanted.
And plenty of international payments companies say they are avoiding the U.S. because of the country's splintered state-by-state regulatory environment.