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Education

ISOs have already spent decades performing the sales,
solicitation and service functions of banks much better
than banks themselves. The contemporary generation of
ISO does the same but does even more by making use of
Legal ease: better technology integrations than the banks themselves.

There is nothing new about this kind of outsourcing other
than the banks themselves being pushed just a little more
into the background. Once upon a time, an ISO was proud
to boast of a large national bank brand behind them. Now,
some of those brands are tarnished, and the ISOs prefer to
play up their own brands and technology as being more
2019: Back to trustworthy, efficient and reliable than the banks. Banks,
therefore, are on the retreat into being highly regulated
and important girders in the architecture of contemporary
payments basics financial services.

The main question here is how far the Office of the
By Adam Atlas Comptroller of Currency, being the regulator of banks, will
Attorney at Law allow banks to go in plugging in third-party services that
use bank licenses. There is a long history of banks pushing
t could be 2018 and 2019 will play out like the fable the window on engaging with third-party services and the
of the ant and the grasshopper. In this version, the OCC frowning on banks that "rent out" their licenses. For
grasshopper went all-in with cryptocurrencies and now, however, the pendulum is swinging toward greater
I initial coin offerings (ICOs), while the ant worked use of bank rails by innovative third parties.
diligently in the less glamorous traditional payments sys- Regulation stalled virtual currency
tems. With the epic rise and fall of cryptocurrency, it looks
like the staid business of soliciting merchant accounts and Traditional ISOs do not often encounter the need for
servicing merchants is the ant in the story.
federal registration with the Financial Crimes Enforcement
Network (FinCEN) or licensure from state banking
From a legal perspective, we've learned a lot in payments departments. Ever since our firm obtained clarification for
during the past year, and these lessons can help inform us a client from FinCEN, back in 2014 (FIN-2014-R009, Aug.
for the coming year.
27, 2014), that ISOs do not need to register with FinCEN,
Traditional networks held strong a number of U.S. states have followed FinCEN's guidance
and implemented similar rules exempting ISOs from the
Between 2014 and 2018, the number of entities registered need for state money transmitter licensure.
with Visa as service providers increased from 4,583 to
5,313, or 16 percent. Registrations include ISOs, payfacs, The same is not true of virtual currency businesses. The
MSPs, TPPs and others. These are the same four years in need for multistate licensure of virtual currency exchanges
which virtual currency and blockchain were predicted to that involve the exchange of crypto-to-fiat, where the user
rise and supplant traditional networks. maintains a balance at the exchange, has resulted in only
a handful of legal U.S. exchanges in operation, including
Traditional networks, like Visa, Mastercard and American Coinbase and Gemini.
Express, all showed strong growth at a time when their
very existence was said to be up for grabs. Traditional Non-US entities, like LocalBitcoins, serve U.S. people, but
payment networks are where ISOs earn their living – the long-term viability of serving the U.S. market without
assisting merchants in getting paid by good old credit and getting local registrations and licenses is questionable.
debit cards (which may be presented as digital tokens or in
old fashioned plastic form). Non-fungible tokens (NFTs) and the art and games around
them are less prone to being designated as regulated
Some traditional banks became APIs virtual currency. Example of NFTs are the very popular
Cryptokitties; each one is unique and therefore not capable
Whether you call it fintech or neo-banking, a lot of
contemporary payment services are simply traditional of being characterized as a virtual currency, like bitcoin or
ethereum, which are each fungible.
banking or card issuing programs with much better user
interfaces and APIs. We observed a number of banks Stablecoin gained a foothold
retreating from the front lines of soliciting clients (in
acquiring or issuing) and delegating that role to hungrier Stablecoin is a virtual currency backed by real currency.
and, critically, more technically savvy entrepreneurs. Examples include Gemini Dollar, Paxos, TrueUSD,
USDCoin and Tether. Theoretically, stablecoins have the
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