Last year, we noted that the Banking Department of the Vermont Department of Financial Regulation had taken the position that its money transmission law "does not exempt a payment processor or an agent of a payee from [money transmission] licensure." This position was at odds with the recent trend of state banking departments affirming that payee agency or payment processing transactions involving the sale of goods or services are not money transmission subject to licensing and regulation, provided specified conditions are met. As a result, the Vermont consent order had potentially far-reaching implications for consumers, businesses, and payments companies alike.
However, Vermont's Governor now has signed into law Senate Bill 154, which (among other things) creates a statutory exemption from the money transmission licensing law for payment processors, provided that certain conditions are met.1 Therefore, the legislation appears to override the earlier position of the Banking Department that "payment processing" is money transmission subject to regulation, at least with respect to entities that meet the criteria set forth in the exemption. In this regard, the law—effective July 1 of this year—expressly excludes a person:
that facilitates payment for goods or services, not including money transmission itself, or bill payment through a clearance and settlement process using institutions regulated under the Bank Secrecy Act pursuant to a written contract with the payee and either payment to the person facilitating the payment processing satisfies the payor's obligation to the payee or that obligation is otherwise extinguished.
While the state's previous position with respect to payment processing services could be seen as an outlier, Vermont has now joined a growing list of states, in the ever-evolving payments and money transmission regulatory landscape, that have formally recognized a payment processing exemption. Indeed, earlier this year, West Virginia Senate Bill 603 created a similar statutory exemption (effective June 7), and an exemption under Michigan's money transmission law (which we noted here) just took effect on April 1. In the last few years, other states, including Connecticut, Hawaii, Illinois, Kansas, Kentucky, North Carolina, Pennsylvania, Virginia, and Washington, have formally affirmed—through legislation, regulation, or guidance—that payment processing or "agent of a payee" transactions are not subject to money transmission licensing, provided specified criteria are met.
Express confirmations that such transactions are exempt are particularly important for non-bank payments service providers because almost all U.S. states regulate money transmitters under state-specific licensing regimes, and the statutory definitions of "money transmission" are quite broad and typically cover any entity that receives money for transmission. However, many such non-bank service providers facilitate the receipt of payments by merchants and other payees (such as public utilities), as opposed to acting on behalf of a sender to transmit the sender's funds to a beneficiary designated by the sender. The applicability of state money transmission laws to such transactions can dictate whether, and to what extent, payments services can be offered, and whether money transmission licenses may be required.
While the requirements to come within the applicable state exemptions vary, one relatively common element is an express appointment by the payee of the payments intermediary as its agent, such that payment to the agent is treated as received by the payee upon receipt by the agent. That is, when a payment is made to an agent, the agent has "stepped into the shoes," so to speak, of the principal, and so it is as if the payment has been made directly to the principal.
It is noteworthy, therefore, that the new Vermont exemption looks more like the federal payment processing exemption set forth at 31 C.F.R. § 1010.100(ff)(5)(ii)(B) than other state exemptions. For example, the Vermont exemption does not expressly require an agency appointment, but only: (1) a written contract between the payee and the intermediary; and (2) that payment to the intermediary satisfies the payor's obligation to the payee (or that obligation otherwise being extinguished). In addition, the requirement that the intermediary operate through a clearance and settlement process using institutions regulated under the Bank Secrecy Act is a criteria generally not found in other states' exemptions (with a few exceptions, such as the state of Washington). The federal payment processor exemption, by comparison, has been interpreted by FinCEN to require that the intermediary operate through clearance and settlement systems that admit only BSA-regulated financial institutions.2
Thus, payments services companies, whether payee agents, payment processors, platforms, or marketplaces, should review their compliance approaches in light of this new and somewhat unique state money transmission statutory exemption.
1 The legislation also makes other amendments to the state's statutes governing financial institutions, banking, and lenders, including changing the term "stored value" to "prepaid access."
2 See, e.g., FIN-2014-R009, Application of Money Services Business Regulations to a Company Acting as an Independent Sales Organization and Payment Processor (Aug. 27, 2014).
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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