In March 2020, the West Virginia Legislature passed House Bill 4621, establishing a regulatory sandbox to enable companies normally requiring licensure to test their financial product or service for up to 24 months.
If the test is declared successful after that period, the entity can continue operating in West Virginia, subject to any licensure requirements at that time.
“Fintech” is shorthand for this type of innovative program that blends financial services with emerging technology. The term can refer to anything from Bitcoin currency to phone apps that let you tap your smartphone to pay for that morning latte.
Benefits of a fintech sandbox include allowing companies to manage their risk during the testing period and facilitating partnerships between startup and legacy companies.
In West Virginia, the benefits are — and can be — myriad, says fintech entrepreneur Sarah Biller, executive director of Vantage Ventures in Morgantown and a linchpin of the state’s fintech sandbox outreach and development endeavors.
Before returning to Morgantown, where she had earned a finance degree from West Virginia University, she taught the first-ever graduate program in fintech at Brandeis University.
“I told my students people always get nervous when they apply technology to the financial industry, but fintech actually shows up in the Old Testament. Most modern tools of the day always been prevalent in the financial industry,” she said.
Biller said fintech’s evolution over the past decade has been seen predominantly in the payment sector, lending, investing, insurance (instech) and blockchain.
“The banking industry is also evolving quickly because of technology, from the banks on Main Street all the way through major regional banks, like Huntington Bank. With an emphasis on adopting the fintech technology, it strengthens them, makes them a strong competitor and improves their ability to help their customers,” Biller said.
“Just think what would have happened during COVID-19 if people didn’t have the digital means to check their finances. Technology enables us to do that,” she said.
“What we wanted to do for West Virginia was to encourage innovators and entrepreneurs who are committed to our community banks to introduce new technology. There’s a desire in fintech to increase deposit gathering, and we want to help our community banks with the means to create more financial security for their customers.”
In short, banks are shifting their retail strategies.
“We’ve taken the step forward. We welcome innovators within West Virginia to create better financial services that meet the culture of Middle America; the needs of West Virginians are different from from others like New York City,” Biller said.
Bringing W.Va. fintech to the forefront
Fintech is already putting West Virginia startups and staples alike prominently into national and global markets, Biller said.
She cited VEEPIO, a startup founded in 2018 by former WVU football players Grant Wiley, Najee Goode and Jonathan Ohliger.
“They have an application that can take a name or a likeness of an athlete and follow that athlete,” Biller explained. “Users can click through the mobile app if they want to buy the athlete’s jersey. They actually conduct commerce through that application seamlessly. Sports Illustrated wrote an article about them, and VEEPIO has become the mobile app for the NFL Alumni Association.”
SI.com reported last month the WVU Department of Intercollegiate Athletics has partnered with VEEPIO to provide digital agency services to create and oversee NIL sponsorship opportunities for more than 450 Mountaineer student-athletes.
NIL, an acronym for Name, Image, Likeness, applies to the recently enacted NCAA policy permitting college athletes to make money from the commercial use of their image or name.
The federal government is also a major fintech player in the Mountain State, Biller said, mentioning the U.S. Treasury Department and Bureau of Public Debt offices in Parkersburg and the national security agencies in Clarksburg as prime examples.
“There’s an amazing kind of thing happening in our state around fintech; that’s why we pushed so hard to bring it to West Virginia,” she said.
“We can attract Fortune 500-type companies here in the fintech area, but we have to attract talented people, such as those at Core10 in Huntington. Some of the biggest financial services firms in the country have their work coded or recoded by the Core10 software development team.”
“The decision to serve our national client base from West Virginia has benefited from a pipeline of talented developers in an area with a significantly lower cost of living,” Core10 President and Co-Founder Lee Farabaugh said in a May 19 Accesswire.com article.
In June, Morgantown digital asset management platform FreedomTrust became the first fintech company to be approved through West Virginia’s new fintech regulatory sandbox.
“We are honored to be the first company admitted into the West Virginia fintech regulatory sandbox,” FreedomTrust partner and digital asset adviser Joshua Bryant said in a release. “It feels like West Virginia wants us to be here. It is very exciting to see the state encourage entrepreneurship — especially companies in the digital asset and cryptocurrency industry, which we believe will revolutionize finance.”
“We’re probably the biggest secret in the country for innovation and talent,” Biller said.
The ability to regulate fintech sandboxes has spurred consumer safety concerns, however.
The first regulatory sandboxes were created five years ago, allowing fintech startups to conduct live experiments in a controlled environment under a regulator’s supervision.
On the Stanford University PACS research center’s website, Dan Quan, an adjunct scholar for the Cato Institute’s Center for Monetary and Financial Alternatives, said a sandbox is defined as a “’safe space’ for businesses to test products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences.”
According to Quan, the Consumer Financial Protection Bureau was the first regulatory agency to establish a dedicated office to study fintech and provide assistance to promote consumer-friendly innovation in the United States.
“With innovation taking place at a breakneck speed, regulatory agencies need to actively seek to understand the benefits and risks of innovation, while developing appropriate policies, guidance, and/or regulations to reap those benefits, protect consumers and safeguard the financial system,” Quon wrote.
“Without a solid understanding of the fast-paced fintech market, regulatory sandboxes will not function properly. Regulatory agencies should use sandboxes to keep up to date with fast-paced innovation and promote market competition without sacrificing consumer protection. Real innovation-minded regulatory agencies see sandboxes as means, not ends.”
In a 2017 Gazette-Mail guest editorial, Texas A&M associate law professor William Magnuson detailed three major risk factors he sees. He said fintech companies are more vulnerable to rapid, adverse economic shocks than their brick-and-mortar Wall Street counterparts. Secondly, they are more difficult to monitor than conventional financial firms; their computer-based operations may fall outside traditional regulatory structures. Thirdly, emerging fintech companies “have little incentive to cooperate for the greater good. Instead, they prioritize aggressive growth and reckless behavior,” Magnuson said.
The state Division of Financial Institutions has the responsibility for regulatory management in West Virginia, under the FinTech Regulatory Sandbox Act. The Act enables the DFI to consult and collaborate with the West Virginia Development Office, the Consumer Financial Protection Bureau and other state agencies or governing boards. The DFI oversees the application approval process as well.
The Act also recommends — although it doesn’t require — candidates attempt to partner with West Virginia-licensed banks or financial institutions before applying, according to a September 2020 West Virginia Banker Magazine article.
Biller believes interagency collaboration will eliminate or at least ameliorate many of the oversight concerns.
“Under the leadership of [Delegate] Moore Capito and his colleagues in 2020, West Virginia became the fourth state in the country to pass the framework for a regulatory fintech sandbox,” she said. “It positions all of these innovators to become partners with the regulators and to talk with them to understand their products and services and their responsibilities to use them safely.
“The regulators are proactive. Unlike other regions, what it does for us is create a collaborative movement for the innovator and regulator.
“The foresight of our elected officials to create this environment also has dramatically altered our ability to work with some of the greatest people in the world who want to increase the financial mobility and security of West Virginians and help them thrive.
“Innovators and regulators sitting side by side is a catalyst, not a hindrance. It shows West Virginia is open to these new and emerging technologies. In West Virginia, we always punch above our weight, because we work together,” Biller said.