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Guest Commentary: Fintech entrepreneurs in the US face many challenges when taking their products to market. They have to contend with outdated regulations that sometimes leave them operating in a legal gray area. Then there is the less-discussed issue of banks denying startups access to essential services, like an account. In most cases, this is due to banks being risk-averse. Startups bringing innovative financial products to the market could exhibit unusual account activities that might prompt the bank’s risk team to close the account.

But for startups funded by top-tier VC firms, banks have created a concierge-type service, assigning them with an account manager that liaisons with other departments to ensure they can operate unimpeded. The unintended consequence of this exclusivity is a rigged market where banks choose the winners and losers in the fintech space. Startups directly competing with the bank’s products, women, and entrepreneurs of color (EoC) that are less likely to be funded by a VC are denied accounts and thus prevented from taking their product to market.

The Right to Be Banked Campaign is seeking to pass a financial inclusion law in Washington State. The law will ensure that individuals and businesses that have the appropriate licenses can get a bank account. Startups that are offering innovative financial products or are deemed to be “high risk” by the banks can request inclusion in a regulatory sandbox. This will allow regulators to monitor the startup in a controlled environment while protecting the bank.

The UK and European Union have been more proactive than the US in promoting innovation in the financial space. The UK’s Financial Conduct Authority (FAC) launched its regulatory sandbox in 2016, and the EU is finalizing the legal framework for theirs. These efforts are evident with how many UK fintech startups have successfully expanded to the US and overtaken their US counterparts. Three out of the four top remittance startups worldwide started in the UK.

Roble Musse

I was the CEO of CoinFling, a fintech startup that had to shut its doors in 2018 because no bank would open an account with us. These same banks, however, were serving our venture-backed competitor, which is also Seattle-based. I recall pleading with an account manager at Wells Fargo to take us through the same due diligence. After all, both companies had been audited and licensed by the same regulator — the Department of Financial Institutions (DFI). My plea fell on deaf ears. So much for fair banking.

The denial of accounts is not limited to fintech startups. Cash-based remittance service providers, which are mostly owned by immigrants, have seen their accounts closed through a process known as bank de-risking. These businesses must then store and transport millions of dollars in cash at great risk to the owners and their employees. This has caused a public safety crisis for immigrant communities in King County and across the US. In 2018, a man received five years in prison for iimpersonating an FBI agent and robbing several remittance businesses in Seattle and SeaTac of hundreds of thousands of dollars.

In the last several weeks, the campaign has gained momentum with the City Councils of Seattle, Burien, and Tukwila unanimously passing resolutions in support of unbanked businesses and the immigrant communities that rely on their services.

We call on Gov. Jay Inslee and the Washington State Legislature to explore actions they can take to promote financial inclusion, including passing a law that will ensure that all Washingtonians have equal access to the banking system.

Bank de-risking also needs to be addressed at the federal level. Federally chartered banks have played a prominent role in redlining fintech startups and businesses owned by women and EoC. With the administering of COVID-19 federal assistance to small businesses through these banks, it is incumbent on Congress to ensure that banks provide equal access to their services.

A financial inclusion law in Washington State will democratize the process of bringing innovative financial products to the market. It can also lower the wealth inequality gap by creating opportunities for black and immigrant entrepreneurs.

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