Attention—payments processors and merchant acquirers—beware of regulatory watchdogs, in this case Washington State’s Department of Financial Institutions, on the prowl for any business entities that participate or facilitate the payments settlement process between retail merchants and consumers. Morrison and Foerster, LLP, has written this cautionary note:
One of the defining aspects of the payments revolution of the past few years—at least from a regulatory perspective—has been the question of whether any particular payments service is subject to regulation as money transmission. Almost all U.S. states regulate money transmitters under state-specific licensing regimes; the statutory definitions of money transmission are quite broad and typically cover any entity that “receives” and “transfers” money.
Late last year, Washington State’s Department of Financial Institutions (“DFI”) entered the fray with an interpretive (“Statement”) that took effect in January. This Statement is unique, however, in that it requires a “payment processor” to obtain a licensing waiver from DFI prior to operating in the state. The Statement is not explicit about what constitutes covered payment processing, but it does describe “payment processors” as entities that “receive payments from consumers, settle payment transactions with or without financial institutions, and transmit payments to merchants’ or creditors’ accounts.” Furthermore, payment processors “may also provide marketing, billing, or other merchant service functions.
This Statement establishes DFI’s position that a “payment processor” is a money transmitter that must seek a waiver to operate in the state of Washington without a money transmission license. Companies that provide services to facilitate transactions in Washington should therefore evaluate whether their business models might make them a “payment processor” and whether the licensing waiver would apply to their business models. Any such analyses should be approached deliberately, especially in light of DFI’s warning that a payment processor “must” seek a waiver “before conducting activity in [Washington] state,” and that a failure to do so “risk[s] an action by [DFI] for unlicensed activity.”
Any company in the value chain of payments processing and acquiring needs to be aware of state-by-state interpretations of existing banking laws and regulations. Whether this Washington State case is the start of an expansive regulatory movement, or simply an outlier, remains to be seen. Typically, these issues take months, sometimes years, to resolve. However, payments processors are advised to place their legal departments and outside law firms on speed-dial.
Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group
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