In January 2024, one of the largest U.S. non-bank merchant acquirers announced that it is pursuing a special-purpose bank charter developed by Georgia. Although the “merchant acquirer limited purpose bank” (MALPB) has been a charter option for non-bank payments companies for over a decade, non-banks have not been able to fully leverage it because card networks have not allowed them to be direct participants. That prohibition appears to be changing in light of this new application.

As a MALPB, a non-bank company can authorize, settle, and clear payments transactions for merchants and, importantly, enter card networks directly rather than through a bank sponsor. In doing so, a MALPB can own the transactions from end to end and eliminate various third-party risks. But this option also comes at significant costs and with compliance obligations.

This alert discusses some of the most important issues for non-bank payments companies considering the MALPB charter.

Key Takeaways

• A major participant’s pursuit of this charter is noteworthy and may open the door for others. But we note that Georgia has not formally accepted the application yet (or approved it). Once it is accepted, more details will be available.
• This development comes at a time when some banks are pivoting away from these activities.
• The benefits this charter affords come at the cost of many bank-like requirements and restrictions. MALPBs, their owners, and related companies will need to think more like a banking organization (e.g., holding company and affiliate transactions considerations).
• Capital requirements, though different from bank capital rules, may be a big change for non-banks, and MALPBs cannot benefit from funding sources like deposits from the broader public.
• It remains unclear how MALPBs will be treated outside of Georgia in terms of other states’ banking and licensing laws, and for purposes of FDIC deposit insurance applications (if pursued), among other considerations.

Scope of Activities

Permissible activities. A MALPB is authorized to carry out the following standard merchant acquirer activities:

• Being a member of one or more payment card networks
• Signing up and underwriting merchants to accept payment card network branded payment cards
• Providing the means to authorize valid card transactions at client merchant locations
• Facilitating the clearing and settlement of the transactions through a payment card network
• Engaging in settlement activities
• Providing access to or sponsoring the participation of the MALPB’s customers, affiliates, or customers of affiliates in one or more payment card networks
• Statement generation and other information reporting for client merchants
• Training and technical assistance for merchants, terminal support, and encryption servicing
• Authorization and capture
• Dispute processing

Incidental activities also may be permissible with the prior approval of the Georgia regulator.

Other activities restrictions and considerations include:

• Deposits. MALPBs may accept or hold deposits only from an entity that owns the majority of the shares of the MALPB. MALPs may apply for FDIC deposit insurance.
• U.S.-based activities. A MALPB may only engage in merchant acquiring activities originating in the United States and with a merchant that has a physical U.S. location or, for digital transactions, with a merchant that has a fixed place of business located in the United States where the economic activity is completed.
• Banks still involved. MALPBs must deposit all merchant funds immediately at federally insured financial institutions authorized to do business in Georgia for the benefit of each merchant (until paid) and maintain appropriate records. MALPBs and their officers owe fiduciary duties to preserve and account for these funds and may be liable for them.
• Outsourcing. While MALPBs may outsource certain administrative, IT, financial, tax, or finance support, they must obtain the prior written approval of the Georgia regulator. MALPBs must also have controls to monitor and ensure these vendors comply with applicable rules, remain in good financial condition, and do not engage in illegal activity.
• Payment of dividends. The prior approval of the Georgia regulator is required to declare and pay cash dividends. Requests are evaluated based on whether the MALPB will have an adequate capital structure after payment of the proposed dividend.

Impermissible activities. MALPBs may not engage in activities not expressly authorized under applicable Georgia law or as determined by the Georgia regulator. Impermissible activities include (among others):

• The general business of banking, including deposit-taking activities generally, as well as money transmission or acting as a fiduciary
• Sponsoring ATMs or cash-dispensing machines
• Issuing payment card network branded payment cards
• Merchant receivables factoring or financing
• Advance funding activities
• Soliciting, processing, or making loans pursuant to payment cards or otherwise
• Self-acquiring activities

Charter Considerations

Like a full-fledged bank charter, a MALPB charter involves significant requirements and restrictions that likely exceed the regulatory requirements for other types of licenses.

• Physical locations and local employment. MALPBs must maintain main offices as authorized by the Georgia regulator. Other physical locations require the regulator’s prior approval. In addition, a MALPB must employ at least 50 employees that reside in Georgia that perform merchant acquiring activities for the MALPB.
• Ownership/control considerations. Similar to other licensing/charter considerations:
  • Holding company. Direct or indirect acquisition/control of a MALPB requires the approval of the Georgia regulator. Written notice to the regulator regarding changes in directors, control persons and principal shareholders, and executive officers is also required. Limits on the number of MALPBs acquired over certain years may apply (unless waived). In addition, a holding company must serve as a source of strength to its MALPB.
  • Transactions with affiliates. All transactions in which a MALPB engages with its holding company or an affiliate must be on terms and under circumstances, including credit standards, that are substantially the same as or at least as favorable to the MALPB as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of a comparable transaction, they must be on terms and under circumstances that in good faith would be offered to or would apply to nonaffiliated companies.
• Minimum Capital Requirements. MALPBs must maintain the following minimum levels of regulatory capital. While similar in some respects to the capital requirements that apply to commercial banks, these requirements may be far more prescriptive and costly than what non-banks are accustomed to maintaining:
  • Minimum statutory capital (sum of capital stock and paid-in-surplus of the MALPB): At least $3 million
  • Minimum leverage capital ratio (tier 1 capital to average total assets): 10%
  • Minimum payment value capital (tier 1 capital based on payment value): Based on a sliding scale
  • Minimum risk capital requirement (amount of tier 1 capital required to be maintained by the MALPB based on the dollar volume of chargebacks): Not less than the greater of the aggregate dollar volume of chargebacks for the previous 6 months or the forecast dollar volume of chargebacks for the next 6 months
  • These requirements would be in addition to other costs, such as fidelity insurance coverage and data breach insurance coverage
• Advertisement requirements. Advertisements may not suggest that the MALPB can accept deposits from the general public or otherwise attract depositors. FDIC regulations also apply in this regard. All advertisements must contain the suffix “MALPB” following the MALPB name. The MALPB must also maintain a record of its advertisements for examination by the Georgia regulator.
• Federal laws incorporated by reference. The applicable Georgia regulations also extend to MALPBs the federal Interagency Guidelines Establishing Information Security Standards, Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice, BSA/AML regulations, OFAC regulations, and the Payment Card Industry Data Security Standard (PCI DSS).

MALPBs outside of Georgia

• Other states’ characterization. States may characterize MALPBs differently and require non-bank licensure, depending on how each state’s law treats MALPBs. States may define “bank” to specifically mean entities that accept deposits from the public, that are federally supervised, or that have FDIC deposit insurance, among other factors. Rules on advertising and use of the term “bank” may vary too. Similar considerations may apply to state money transmission licensure requirements.
• FDIC Deposit Insurance Application. While MALPBs may apply for FDIC deposit insurance, it is not guaranteed that the FDIC will grant the application. While distinct from other novel charters, the FDIC has typically scrutinized and in some cases delayed FDIC deposit insurance applications for charters that deviate from the standard commercial bank charter. Any application to the FDIC for deposit insurance should carefully and fully explain the limited nature of the activities, how they closely resemble traditional banking activities, and how prudential safeguards make the MALPB a safe and sound institution.