Agent of the Payee Exemption

Post Authored By: Kasim Carbide

Since the early 2000s, many companies have understood that an entity is often necessary to facilitate the receipt of payment by merchants or other payees, rather than facilitating the transmission of funds on behalf of a sender. This concept of an “agent of the payee” is grounded in common law principles of agency, and it promotes the idea that receipt of funds by a payment processor facilitating a transaction should be treated as tantamount to the receipt of funds by the principle. In other words, a contractual agreement with a merchant to collect payment on its behalf does not constitute money transmission, since the agent is not receiving the payor’s funds for transmission.

In 2009, the United States Department of Treasury issued a ruling on whether an agent of the payee engages in money transmission when collecting payment for social security and veterans benefits, excluding these activities from the definition of money transmission. In 2011, this ruling was clarified and expanded to any company facilitating the purchase of goods or services, using BSA-regulated financial institutions, and operating pursuant to a formal agreement.

While the Federal Government adopted and incorporated an exemption in response to technological advancements, states have been slowed in understanding and incorporating the same. Since the 2011 ruling, many states have enacted legislation to provide this exemption to companies in their state. To date, states like New York, California, Illinois, Texas, Ohio, and Philadelphia, among others, have adopted the agent of the payee exemption.

Yet, ironically, many states like Oregon and Florida refuse to reform their money transmission laws and clinging onto outdated definitions of money transmission. In doing so, these states effectively close their borders to innovation and technological advancement by discouraging payment processors and financial technology start-ups from operating in these states. While many of these states have attempted to create alternative “sand-box” programs for start-ups, these programs miss the mark and leave legitimate companies without remedy in these states.

For now, companies operating within this space and seeking to expand their operations must confine themselves to progressive states recognizing this exemption, or risk heavy fines for operating without a money transmitter license, until all states have understood and recognized said exemption. Nevertheless, last year the Conference of State Bank Supervisors (“CSBS”), proposed model language for all states to adopt and apply a consistent and universal agent of the payee exemption. By adopting the recommended language, state regulators would provide uniformity to an otherwise disjointed legal exemption, while allowing payment technology companies and new financial services to flourish. This uniformity would finally allow companies to operate in states with outdated money transmission laws (while raising revenue for the state), but more importantly, would bring new and exciting financial services to consumers in these states.

About the Author:


Kasim 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.

Leave a Reply