PayPal, having long ago charted the state-by-state regulatory waters for U.S. payments companies, is urging a reform to the rules in an effort that could ultimately help other players in its market.
"There's no question that PayPal wants to lead the discussion about new innovative and better regulatory models," says Brian Bieron, executive director of global public policy at eBay, which owns PayPal.
While "no regulation" is not a real solution, Bieron says, both established companies and startups can work collaboratively to push for regulation that meets their common goals.
In a new paper, PayPal recommends that regulators use data analytics to measure performance of a company and make regulations based on their findings, instead of basing regulations on design standards as happens today.
Data analytics "is something that hasn't been used in the regulatory setting," Bieron says. "Payments offers a great place to explore this because there's so much data and so much innovation going on."
Bieron is presenting the paper, "21st Century Regulation: Innovation and Growth" in Washington D.C. on Oct. 29 during a policy luncheon hosted by the Progressive Policy Institute.
PayPal will present localized versions of the paper in Singapore and Italy. Rohan Mahadevan, vice president of PayPal Asia Pacific and Hanne Melin, policy strategy counsel for Europe, the Middle East and Africa for eBay, will present the papers in their respective regions.
The paper advocates for SMART Governance, a decision-making model based on securing data on performance, using machines to organize databases, creating algorithms to derive insights, reassessing results and targeting insights to improve performance.
"There is a pretty chronic frustration in the technology industry as a whole that regulatory entities are too slow to keep up with the innovation happening," Bieron says. We want regulations "built on results instead of on defining the business model," he says.
For example, Know Your Customer rules could be improved, says Bieron. Design standards suggest that all customers are required to enroll for accounts in-person, but with businesses moving online this can be complicated, he says. Instead, businesses could leverage social networks and other online information sources as better indicators of a consumer's identity, he says.
Some players in the money transmitting market have talked about a single uniform license, similar to the process in the European Union, instead of the state-by-state licensing currently required in the U.S.
The Payment Services Directive in the European Union allows a regulated payment services provider in one country to expand into another country with the same licensing and supervision. The second country's authorities are notified and, if they choose, have 30 days to investigate further and object to the company doing business in their territory.
A dozen or more states have begun participating in the Nationwide Mortgage Licensing System, a portal that allows money transmitter startups to apply for several state licenses altogether, says Adam Atlas, an attorney at his own practice.
Atlas advises emerging payments players on regulatory processes.
"The work that states do in thinking about, reviewing, granting and auditing licensed entities is much more costly than it is profitable," says Atlas. "States stand to gain financially by cooperating at least on the [money transmitter] application."
PayPal currently provides services for 173 million consumers and businesses in 193 markets around the world.
PayPal is looking at SMART governance as a longer-term prospect, Bieron says. He suggests the reform is implemented in a safe harbor kind of environment, where the new model is running parallel to the old model.
This could be a good time for regulatory reform, as many regulators and payments companies are taking steps to understand each other and startups are being pushed to be proactive and pursue relationships with regulators.
The federal government has also been somewhat receptive to learning about new payment systems, such as the Bitcoin digital currency. The Financial Crimes Enforcement Network recently hosted the Bitcoin Foundation, a trade group, to brief representatives from the FBI, IRS, FDIC and others on the nature of the virtual currency.
Bitcoin businesses came into the spotlight after Fincen published guidance in March categorizing exchangers and administrators as money services businesses. Many Bitcoin companies are having trouble getting started in the U.S. due to the cost and complexity of getting licensed in each state.
Plus most banks are hesitant to take on the risk of doing business with certain companies and regions. Recently Barclays, citing risk, dropped Dahabshiil, a Somali money transmitter, while U.S. Bancorp continued pursuing a relationship.