Does a US payment processor need state money transmitter licenses?

Most US payment processors operate without state money transmitter licenses. Some states, however, may require a license for payment processing.

Why would US a payments provider prefer to be a payment processor?

For a majority of payments startups, achieving the status of payment processor is critical because it will reduce, but not necessarily eliminate, the need to obtain state money transmitter licenses. Obtaining state money transmitter licenses across the 47 states that require requires the around USD 8 million in surety bonds, USD 100.000 in application fees and much more in legal and compliance fees and costs. More than money, however, the US state licensing regime takes time. Some applications at the New York Department of Financial Services have been pending for over two years.

Holding one US state money transmitter license enables the licensee to service only residents of that one state, mainly because the US does not have the EU payment institution passporting system. With the exception of a handful of states that operate in part through a coordinated application process, the US money transmitter license application process is a de novo event in each and every state. In parallel, money transmitters are required to register with the Federal anti-money laundering agency, Financial Crimes Enforcement Network (FinCEN).
Note, however, that payment processor status is not an ‘all clear’ for state licensure. Some states will require payment processors to become licensed all the same.

What is a payment processor?

The most recent US Federal legal guidance as to the definition of a payment processor appears in the FinCEN guidance on payment processors, dated August 27, 2014 (FIN-2014-R009). FinCEN sets out four conditions for an entity to be designated as a payment processor:

(a) the entity providing the service must facilitate the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself);
(b) the entity must operate through clearance and settlement systems that admit only BSA [U.S. Bank Secrecy Act]-regulated financial institutions;
(c) the entity must provide the service pursuant to a formal agreement; and
(d) the entity’s agreement must be at a minimum with the seller or creditor that provided the goods or services and receives the funds.

For example, a US payment facilitator using a US bank account, undertakes to receive settlement of customer funds on behalf of a US merchant. The payment facilitator does so pursuant to a contract with the US merchant. Variations on this model are in use by entities like Paypal, Square Stripe, Uber and Etsy; some, however, are moving towards licensure.

Agency lies at the heart of this model. The payment facilitator receives funds as an agent of the merchant. Funds delivered to the agent of a principal are deemed to have been received by the principal. Therefore, when the payment facilitator receives customer funds, at law, those funds are deemed to have been received by the merchant, even though the payment facilitator settles the funds to the merchant at a later time. The customer does not have to rely on the payment facilitator’s honesty to make their payment since their payment obligation is completed on receipt of the funds by the payment facilitator.

Does a payment processor need state money transmitter licenses?

Some states have determined that no money transmitter license is required for payment processors including California, New York, Texas and Illinois. Each model, however, should be analysed under each of the 50 state banking laws and the federal laws applicable to payments models. When put through such analysis, for the moment, most states are likely to conclude that a license is not required for the payment processor model. The consequences of getting this wrong, however, range from substantial fines to prison sentences. It is therefore best to err on the side of caution and seek an interpretation from state regulators prior to operating a new model in the U.S.

This article does not constitute legal advice and should not be relied upon when operating a business in the US.

About Adam Atlas

Adam Atlas is licensed in New York and Quebec where he is based. He has been advising U.S. payments businesses for over 10 years on a wide variety of models, including MSBs, ISOs, virtual currency businesses, prepaid providers, payment facilitators and novel payment systems.

About Adam Atlas Attorney at Law

Adam Atlas Attorney at Law is a law firm that advises principally US businesses on matters of fintech law, real and virtual currency payment processing, credit card acquiring law, payment facilitators, ISO agreements, agent agreements, MSB licensing, AML policies and compliance, mobile payment applications, payment application licensing, prepaid access providers, prepaid access sellers, e-wallets, gift cards, m-commerce, novel form factors, prepaid debit card issuing, check processing, Check21, FinCEN compliance, state licensing of MTL, MFA, ATM, ACH, EFT, RFID, NFC, Bitcoin, virtual currency, digital currency, MATCH and TMF issues. Atlas is licensed in New York and Quebec and is based in Montreal, Canada.