Today, Michigan's "agent of payee" exemption to its money transmitter law is effective and West Virginia also passed an agent of payee exemption earlier this month that will be effective soon. These developments are part of a small-but-growing trend of states determining that certain types of payment processors generally acting on behalf of merchants or other parties to transactions do not need a money transmitter license.

Michigan’s passed exemption (Senate Bill 729) is effective today, March 28, 2019. West Virginia’s exemption (Senate Bill 603) passed on March 9, 2019 and is effective 90 days from passage.

Who Needs a Money Transmitter License?

Money transmission is generally defined as any service that moves money from one party to another.^[1]   Under state laws, money transmitters are broken into two categories: those (a) receiving funds, typically in a bank account titled in their name, for the purpose of transmitting them to another location or (b) sellers or issuers of stored value or “payment instruments,” such as Visa or Mastercard-branded prepaid cards, checks, or drafts. Traditionally, a recognizable party “receiving funds for transmission” would be remittance transfer service providers that accepted cash from customers at kiosks to send them to a recipient elsewhere in the country or overseas. However, with the growing number of ways technology allows for the transfer of money – e.g., person-to-person payments, mobile wallets – who is considered a money transmitter has continued to expand. A group that fits the definition is a number of payment processors that accept funds owed to merchants arising from the merchants’ transactions with their customers, with the obligation to pay those funds to the merchants.^[2]

Every state with the exception of Montana has a money transmitter licensing requirement that typically applies to anyone holding funds that does not already have a license for money transmission or other financial activity, generally excluding entities such as banks or broker-dealers.^[3]   Licensing requirements create both a barrier to entry and a burden on entrants. In Michigan, for example, applicants must have a minimum net worth of $100,000. Then, in addition to substantial documentation and background check requirements for company officers and directors, applicants must have a surety bond of at least $500,000, pay a licensing fee (currently $3,050), and pay an application fee (currently $600). Fees are also due for any additional locations and authorized agents.^[4]   Licensees also have ongoing compliance requirements, among them annual license renewal, maintenance of net worth requirements and permissible investments, recordkeeping requirements, and are subject to state regulatory examinations.

“Agent of Payee” Exemption

At least partly in response to technological developments that have expanded the definition of a money transmitter and the burdens of licensing, particularly for newer or smaller companies, states have taken legislative action providing regulatory relief. Enacting “agent of payee” exemptions such as those in Michigan and West Virginia are part of this trend.

Not all agent of payee exemptions are the same, but generally they exempt from money transmitter licensing a person appointed by a party owed money in a transaction (i.e., a “payee”) to collect and process payments. A payee under Michigan’s law is a “provider of goods or services . . . that is owed payment of money or other monetary value from the person that is paying for the goods or services.”^[5]   In Michigan, agents of payees must show they meet three requirements:^[6]

• A written agreement between the payee and agent directing the agent to collect and process payments on the payee's behalf.
• The payee holds the agent out to the public as accepting payments on the payee's behalf.
• Payment is treated as received by the payee at the time it is received by the agent.^[7]

West Virginia similarly exempts “[p]ersons facilitating payment for goods or services (not including currency transmission or money transmission itself) pursuant to a contract with the payee and either payment to the person or persons facilitating the payment processing satisfies the payor's obligation to the payee or that obligation is extinguished.”^[8]   However, unlike the Michigan exemption, there is no additional burden of demonstration on the agent.

Michigan’s passed exemption (Senate Bill 729) is effective March 28. West Virginia’s exemption (Senate Bill 603) passed on March 9 and is effective 90 days from passage.

What’s next?

It is expected that the number of states with some agent of payee exemption will continue growing. The vast majority of the nine states^[9]   with exemptions were enacted within the last five years. Another state, South Carolina, introduced an agent of payee exemption bill last month.^[10]   Stay tuned – we will continue monitoring these and other regulatory developments in the money transmitter licensing world.

1. [1] Exact definitions vary, but Michigan’s definition is typical (Mich. Comp. Laws § 487.1003(c)).
2. [2] Merchant payment processors that accept, hold and pay funds to merchants resulting from card payment transactions are commonly referred to as payment facilitators or “PayFacs.” PayFacs differ from traditional merchant processors in that PayFacs are positioned in the flow of funds between the bank acquirer and the merchant, whereas in the traditional model, the bank acquirer would pay the funds directly to the merchant, while the merchant processor would provide only data processing and other services related to card payments. The business model for PayFacs demonstrates how technology has greatly broadened mainstream commerce opportunities for smaller merchants. Despite network rules that hold acquirer banks responsible for payments to merchants when a PayFac fails to pay funds owed to merchants, many state regulators have taken the view that PayFacs are conducting money transmission activities that is subject to licensing under state money transmission laws. In effect, while payment network rules position PayFacs as agents of the acquiring bank, these state laws recognizing “payee agents” provide an opportunity for PayFacs to act as an agent of the merchant
3. [3] See, e.g., Mich. Comp. Laws § 487.1011.
4. [4] Applications are submitted through the Nationwide Mortgage Licensing Service, which provides a checklist of required items. Michigan’s checklist is available at https://nationwidelicensingsystem.org/slr/PublishedStateDocuments/MI-Money-Transmitter-License-Company-New-App-Checklist.pdf.
5. [5] Mich. Comp Laws. § 487.1003(e).
6. [6] Id.
7. [7] Id. at § 487.1004.
8. [8] 2019 West Virginia Senate Bill No. 603, available at http://www.wvlegislature.gov/Bill_Status/Bills_history.cfm?input=603&year=2019&sessiontype=RS&btype=bill.
9. [9] In addition to Michigan and West Virginia, California, Nebraska, Nevada, North Carolina, North Dakota, Pennsylvania, and Texas have statutory exemptions
10. [10]2019 South Carolina House Bill No. 4126, available at https://www.scstatehouse.gov/billsearch.php?billnumbers=4126&session=123&summary=B.

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