FATAL FRAGMENTS: THE EFFECT OF MONEY TRANSMISSION REGULATION ON PAYMENTS INNOVATION

Abstract

A revolution in payments technology is taking place, as entrepreneurs develop new and innovative ways to send, receive, and store money. However, payment startups are running headlong into a thicket of federal and state money transmitter regulations, which impose costly registration and reporting requirements to prevent money laundering and protect consumers. The regulatory burden is particularly heavy at the state level, since each state defines "money transmission" differently. Payments startups must deal with highly fragmented regulation across states early in their lives, resulting in large and often redundant compliance costs while offering comparatively less marginal benefit to consumers. However, this does not mean that state money transmitter laws should be forsaken or preempted. Instead, the laws should be harmonized and streamlined to make multi-state compliance easier for payments startups, while providing adequate consumer protection and rigorous financial oversight. This Article examines the above issues by focusing on the fragmented landscape of state money transmitter regulation. It further analyzes the costs and benefits of such regulation on startups and consumers, and proposes several modifications to multistate regulation that could improve the tradeoff between regulatory cost and innovation benefits.