Money Transmission in the Payment Facilitator Model

Ellen Traupman Berge, Andrew Bigart, Evan Minsberg

The payment facilitator model continues to grow in popularity in the merchant acquiring space as a way to board merchants quickly and with minimal friction. While there are many benefits to this model, payment facilitators and their sponsoring banks and processors should be aware of the potential money transmission risks.

This risk is greatest where the payment facilitator participates in the settlement of funds for its sub-merchants – a process that is popular because it provides the payment facilitator with additional control over its sub-merchant relationships.

Settlement and Payment Facilitation

Settlement is usually accomplished in one of two ways under the payment facilitator model. First, the acquirer or processor can settle transaction funds directly to a sub-merchant’s account and send the payment facilitator its fees separately. Typically, this is accomplished by the processor sending payment instructions to the acquirer to transfer the appropriate amount of funds through the card networks directly to the sub-merchant and payment facilitator’s accounts.

Alternatively, the acquirer or processor can settle the funds to an account owned by the payment facilitator, typically for benefit of (FBO) its sub-merchants. The payment facilitator then distributes the funds to each sub-merchant, net of its fees.

Often, payment facilitators will prefer the second method because it gives them greater control over the flow of funds and better protects their relationships with sub-merchants. However, when the payment facilitator is responsible for settlement, all parties must consider the potential money transmission compliance consequences of that activity.

When Does Payment Facilitation Involve Money Transmission?

“Money transmission” is a regulated activity under both federal and state laws. Although definitions may vary to some degree, it is generally defined to mean the receipt of funds for the purpose of transmitting them to another place or person.

Under the federal Bank Secrecy Act (BSA), a money transmitter is required to register with the Financial Crimes Enforcement Network (FinCEN), a division of the Treasury Department, and develop a comprehensive anti-money laundering program.

Under state law, a money transmitter is required to obtain a license in every state where it either receives funds from, or sends funds to, a resident of that state, whether an individual or a commercial entity.

Thus, when a payment facilitator receives funds from an acquirer/processor for the purpose of distributing them to its sub-merchants, it is potentially engaged in money transmission.

Under both federal and state laws, there are certain broad exemptions from the definition of money transmission that are potentially applicable to payment facilitation. At the federal level, FinCEN provides an exemption for a company that facilitates payment for the purchase of goods and services through a clearance and settlement system admitting only BSA-regulated entities under an agreement with the seller. Most payment facilitators should be able to meet this exemption because they receive transaction settlement funds under an agreement with their sub-merchants.

Similarly, many states offer an exemption from their money transmitter licensing requirements for companies acting as an “agent of the payee.” Because payment facilitators provide services to the sub-merchant payee, they can potentially take advantage of these exemptions.

However, an “agent of the payee” exemption does not exist in all states, and the requirements to meet the exemption vary on a state-by-state basis. For example, the Vermont Department of Financial Regulation stated in a recent enforcement action for unlicensed activity that “Vermont does not exempt a payment processor or an agent of a payee from licensure.”

Failure to obtain a necessary state money transmission license can be a federal crime, and may also be subject to a range of civil and/or criminal remedies under various states’ laws.

Given this, payment facilitators should carefully consider whether they want to take on the responsibilities and compliance requirements of the settlement process. In addition to the operational cost of developing a settlement engine, determining the extent to which money transmission exemptions are available at the federal and state levels, and potentially obtaining any necessary licenses, can be expensive and time-consuming.

Ellen Traupman Berge, Andrew Bigart and Evan Minsberg are attorneys with the law firm Venable LLP. An expanded version of this article was originally published on the Venable web site.