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 a particular payments service is subject to regulation as money transmission. A recent trend has been toward states affirming that, under certain conditions, state money transmission licensing laws do not apply to services provided as an agent of the payee. The most recent state to do so is South Dakota.
South Dakota HB 1016, which was signed by the Governor on February 12 and takes effect July 1, 2020, exempts from the state’s money transmission licensing law:
An agent appointed by a payee to collect and process payment as the agent of the payee, if the agent can demonstrate that: (a) A written agreement exists between the payee and the agent directing the agent to collect and process payments on the payee's behalf; (b) The payee holds the agent out to the public as accepting payments on the payee's behalf; and (c) Payment is treated as received by the payee upon receipt by the agent so there is no risk of loss to the individual initiating the transaction if the agent fails to remit the funds to the payee.
Like the agent of a payee exemption adopted in Michigan last year (see our alert on that exemption here), this new South Dakota exemption requires that an agent seeking to rely on the exemption “demonstrate” that it meets the three-prong criteria. The Michigan Department of Insurance and Financial Services (“DIFS”), which regulates money transmitters in that state, recently released “procedures for claiming the agent of a payee exemption.” Given the language in the new South Dakota law requiring the agent to demonstrate compliance, it is possible that the South Dakota Division of Banking (the “Division”) will also expect companies to affirmatively seek confirmation that the exemption applies to their business models. As of the date of this alert, however, the Division has not indicated whether companies must seek such confirmation. Also noteworthy is the fact that while the new South Dakota agent of a payee exemption refers to a payor and a payee, it does not expressly state that an agent must be processing a payment on behalf of the payee for the purchases of goods and services provided by the payee. While it is not clear whether South Dakota’s failure to expressly link a payee with the provision of goods and services was intentional, and how that may impact the Division’s interpretation of the exemption, we note, for example, that states such as California and Michigan have expressly defined a payee, in the context of an agent of the payee transaction, as the provider of goods or services.
Toward Convergence?
Almost all U.S. states regulate money transmitters under state-specific licensing regimes. Statutory definitions of money transmission are quite broad and typically cover any entity that receives money for transmission. Accordingly, one of the most important regulatory issues for non‑bank payments service providers is the extent to which money transmission laws apply to transactions where an intermediary acts as an agent to facilitate the receipt of payments by merchants and other payees (as opposed to acting on behalf of a sender to transmit the sender’s funds to a beneficiary designated by the sender). In this regard, the applicability of state money transmission laws can dictate whether and to what extent payments services can be offered, and whether money transmission licenses are required.
Alongside Massachusetts, which just last month affirmed a similar agent of the payee exemption, South Dakota[1] now joins the growing list of roughly 24 states that have determined – whether through legislation, regulation, guidance, opinion letter, or otherwise – that, subject to certain conditions, state money transmission licensing laws do not apply to payment processing activities engaged in as agent of a merchant or other payee pursuant to a direct contractual agreement between the payee and the agent.
Another recent example of efforts to make state regulation of money transmission more uniform is the promulgation of draft regulations in Delaware that would transition the state’s paper-based licensing application process to the Nationwide Mortgage Licensing System (“NMLS”). Comments on the regulation are due March 3, 2020; if adopted in their current form, Delaware’s transition to NMLS would leave only four U.S. states that do not use NMLS to manage money transmission licenses. While money transmission is still regulated on a state-by-state basis and material differences in regulation and oversight remain, recent developments suggest that more attention is being paid to efforts to mitigate uncertainty and improve the regulation and oversight of payment services companies.
[1] HB 1016 also adds an exemption, similar to some other states, for an operator of a payment system to the extent that the system provides processing, clearing, or settlement services, between or among persons excluded by this section, in connection with wire transfers, credit card transactions, debit card transactions, stored-value transactions, automated clearing house transfers, or similar funds transfers.
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