Money Transmission Laws: Recent DFI Guidance for FinTechs

Post Authored by Kasim Carbide

Money transmission laws have historically been modeled after companies like Western Union and International Money Gram – traditional money transmitters.[i] For years, anachronistic, outdated, and fragmented money transmitter statutes stifled payment innovations due to a lack of exemptions from state licensing requirements for these types of companies.[ii]

Fortunately, Illinois is among the states that updates its money transmission statutes to accommodate financial innovation. It recently provided clarity for Financial Technology Companies (“FinTech”) wishing to operate in the state. On July 9, 2020, the Illinois Department of Financial Institutions (“DFI”) issued two interpretations affecting FinTechs wishing to operate in Illinois. DFI clarified its position on “stored value” as well as the “agent-of-the-payee” exemption, narrowing one, while reaffirming its position on the other.

DFI narrowed the scope of operation for stored value and quasi-bank FinTechs.[iii] DFI proposes providing “bank-like” membership services that allow for the one-to-one exchange of cash or credit/debit funds for “company credit,” held in an account in the name of the company, requires a money transmission license under the Illinois Transmission of Money Act (“TOMA”).[iv]

The proposed operation works like this: “a membership-only network” provides members with quasi-banking services and bank accounts, allowing for an exchange of real money for company credit.[v] In turn, the credit can be exchanged for “member-only” goods and services, and even for bill payment outside the member network. The credit allows members to then exchange the credit for member-only products and services, and for bill payment using Automated Clearing House (“ACH”) transfers, eCheck or wire transfers.

Presumably, these quasi-bank services will be marketed to underbanked populations. The company is registered with the Financial Crimes Enforcement Network, a bureau of the United States Department of Treasury (“FinCEN”), and adheres to all Bank-Secrecy Act and Anti-Money Laundering rules and regulations. The proposed software protects members by processing bill payment only when a member’s account has sufficient credit available. Despite this, DFI reasoned that bill payment outside the member-network requires a license under TOMA.

Since the proposed company credit is not only redeemable for merchandise and services within the member-only network, but also outside the network for bill payment, the company is not eligible for the stored value exemption under TOMA.[vi] Importantly, the gravamen is that the credit is not redeemable only by the issuer for merchandise or services, which is required for the stored value exception to apply.

On the other hand, in a separate opinion, DFI affirmed its position on the agent-of-the-payee exemption as well as it relates to a company offering a digital platform to facilitate customer-to-merchant payments in Illinois.[vii] That is, a merchant receiving payments from customers, in exchange for goods and services, through ACH transfers by use of a company’s digital platform, does not require a money transmitter license.

The process is simple: a customer places an online order through the platform, the merchant initiates a payment request through the same platform, and the customer then authorizes a payment to the merchant from the customer’s verified bank account. The company would always enter into a formal written contract with each merchant, and the merchant would expressly authorize  the company to act as agent on its behalf. The Division reasoned that licensing is not required for these activities, which was consistent with its July 29, 2015 opinion exempting third-party payment processors from licensing as a money transmitter in Illinois.[viii]

These recent rulings should help clarify the landscape for FinTech companies wishing to operate in Illinois by further widening the welcome to payment processing innovation, while narrowing the permitted activities for quasi bank-like services.

 

[i] The Conference of State Bank Supervisors, REENGINEERING NONBANK SUPERVISION, CHAPTER 4: OVERVIEW OF MONEY SERVICES BUSINESS, (Oct. 2019) (Pg. 5).

[ii] Benjamin Lo, FATAL FRAGMENTS: THE EFFECT OF MONEY TRANSMISSION REGULATION ON PAYMENTS INNOVATION, 18 Yale J.L. & Tech (2017) (Pg. 113).

[iii] Illinois Department of Financial and Professional Regulation, NON-BINDING STATEMENT 2020-5, (July 9, 2020).

[iv] Id. at 4.

[v] Id. at Pgs. 1 -2.

[vi] 205 ILCS 657/5.

[vii] Illinois Department of Financial and Professional Regulation, NON-BINDING STATEMENT 2020-6, (July 9, 2020).

[viii] Id. at Pg. 3. See also Illinois Department of Financial and Professional Regulation, STATEMENT REGARDING THIRD-PARTY PAYMENT PROCESSORS AND THE TRANSMITTER OF MONEY ACT, (July 29, 2015).

About the Author:

KCarbideKasim Carbide concentrates his practice in Corporate Law, Bank Secrecy Act/Anti-Money Laundering Compliance, and counseling FinTech startups. When he is not reading or billing, Kasim enjoys cooking, watching the Office, and playing Catan with family and friends.

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