What is a Money Transmitter?

Improving the merchant experience is a rallying cry for payment facilitators. Streamlining the underwriting and onboarding process is often a first step, but many PFs go further in search of solutions for the unique needs of their industries. 

For some, taking control of the settlement of funds offers another opportunity to address their submerchants’ challenges. But being involved in the funding process opens new risk and compliance issues, including the possibility of needing to adhere to money transmitter laws.

In many cases, payment facilitators rely on their merchant acquirers to settle funds directly to their submerchants after subtracting the payment facilitator’s fees. 

However, some payment facilitators choose to be involved in funding to control more of their submerchants’ experience, including the speed at which they are paid. Small businesses in particular benefit from receiving the funds from their completed sales within hours or the following day, rather than waiting the traditional timeframe of a week or more. 

Increasingly, PFs are using their technology and access to data to speed the process of fraud and risk mitigation that can delay funding so they can pay their submerchants faster. 

But PFs who wish to manage the settlement of funds must be prepared for the logistical, risk management and compliance complexities that creates. And one of those is the question of whether the PF is a money transmitter. 

A money transmitter is essentially someone who receives funds to transfer them to someone else. Businesses that operate as money transmitters are regulated by both federal and state law. On a federal level, the Bank Secrecy Act requires money transmitters to register with the Financial Crimes Enforcement Network (FinCEN). 

There are exceptions to who is considered a money transmitter according to federal law, including someone who “acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller.” (You can find a definition and the exemption here.)

Many payment facilitators can qualify for this federal exemption because they are transmitting funds as part of an agreement with their submerchants. 

However, state laws create even more complexity. Money transmitters are required to apply for licenses in the states in which they operate, and requirements for money transmitter licensure differ state by state, creating a notoriously complex system for payment facilitators to navigate. While some states offer exemptions to money transmitter licensure that payment facilitators often qualify for, others do not.

The Conference of State Bank Supervisors, an organization representing state financial regulators, has recognized the challenges inherent in adhering to a patchwork of state laws, and has begun taking steps to streamline those efforts. 

In October, the group sought public input on a proposed model law to help drive consistency in money transmitter licensing requirements nationwide. The model law is one component of the organization’s overall efforts to make managing compliance with rules state by state easier. 

But those efforts will take time. In the meantime, payment facilitators and software companies considering becoming PFs should consult with payments attorneys for advice on money transmitter licensing and registration that applies to their unique situations.