Before the turn of the twentieth century, Western Union wasn’t yet sending and receiving money worldwide between customer’s online bank accounts and digital wallets – as the $4.6 billion company is known for today.^[1] Instead, the Rochester-based firm was in the much more down-to-earth business – figuratively and literally – of laying cross-continental telegraph lines.^[2] The first transcontinental telegraph system was completed by Western Union in October 1861, making it possible to transmit messages near-instantaneously from coast to coast and heralding an end to the letter-and-pistol-carrying Pony Express.^[3]

Now more than 150 years later, transcontinental transmission is again going through an era-defining change: companies like Western Union and their contemporary competitors – PayPal, Venmo, CashApp, ApplePay and Stripe to name a few – are increasingly utilizing emergent financial technologies (shorthand “fintech”) to streamline payment processing for hundreds of millions of customers across the United States.^[4] In 2018, data collected by the Nationwide Mortgage Licensing System (NMLS) indicated that $749 billion – nearly 55% – of all transactions completed by money transmitter businesses used some form of fintech.^[5] Fintech has enabled payments to be made with greater speed and efficiency between businesses (“B2B”), between customers and businesses (“P2B”) and between people in their everyday lives (“P2P”), contributing to the technologies’ rapid adoption and popularity.

Accordingly, these technological innovations in payment processing are increasing the need for innovations in payment processing regulation and law. Congress passed the Housing and Community Development Act in 1992, in which Section 1512 of Subtitle B required money transmitter businesses to register for state-issued licenses if their activities fall within a state’s definition of money transmission.^[6] In the years following 1992, forty-nine U.S. states (with the exception of Montana) enacted laws imposing licensure requirements.^[7] These laws varied from state to state – sometimes in important ways, such as how they defined “money” or “transmission” – and none of these laws could have anticipated the rate at which fintech-enabled payment systems would change, or how frequently people would soon be able to send money to one another.

State regulators inevitably found themselves struggling to use statutes that were enacted in a decade where IBM’s Simon was the first device to feature a touchscreen, to regulate companies that allowed their customers to send and receive cryptocurrencies between digital wallets, biometrically authorize transactions using face and iris scans, and make contactless peer-to-peer digital payments.^[8] Recognizing the challenge of getting fifty states up to speed, the Conference of State Bank Supervisors (CSBS) – a national organization of financial regulators and policymakers – collaborated between 2020 and 2021 to develop a uniform Money Transmission Modernization Act (MTMA) to, as its name suggests, modernize payment laws to better suit modern technologies.^[9] The MTMA has received broad support from both established and emergent companies in the payments industry, who have been advocating for a more consistent and predictable system of licensing and regulation for money transmission businesses.^[10]

The MTMA

The essential design and purpose of the MTMA is to maximize marginal productivity in balance with social needs, by allowing states to independently adopt the model act’s provisions alongside additional qualifications to promote state-to-state uniformity. By modernizing outdated and inconsistent regulatory requirements, the developers of the MTMA seek, among other goals, to reduce compliance costs for money transmission companies that operate nationwide while allowing state regulators to “focus less on navigating multistate differences and more on risk analysis and consumer protection.” ^[11]

The MTMA’s key provisions – pertaining to licensure, disclosure, prudential standards and enforcement – reduce the substantive and technical differences among the various jurisdictions, which makes it easier for companies to get licensed and avoid violating the law in each state.^[12] Individual states and territories, however, are able fine-tune specific provisions – like licensing fees, processing timelines and renewal periods – to facilitate MTMA’s operational implementation and accommodate their respective administrations costs.^[13]

Even so, the MTMA promotes administrative consistency between states with respect to certain critical aspects. The model act’s prudential provisions – which focus on the financial safety and stability of money transmission companies – require companies to maintain a surety bond or deposit at a bank sufficient to cover the value of their customers’ average daily transactions, and every state that has enacted the MTMA has retained these requirements in some form. Protecting consumers and promoting financial stability is unsurprisingly a common interest from state to state.

However, the MTMA allows each individual state to fine-tune their “form, beneficiary, liability provisions, cancellation, claim and judgment” requirements for surety bonds or permit deposits to be maintained in lieu of bonds, as long as the either is sufficient to achieve the end goals of safety and stability.^[14] The MTMA further encourages states to utilize a newly-created Electronic Surety Bond (ESB) recordkeeping service provided by the Nationwide Mortgage Licensing System (NMLS) to minimize administrative burdens.^[15] The ESB allows for the tracking of states’ surety bond requirements and companies’ surety bond information, which authorized surety bond underwriters and/or issuers are able to independently validate. ESB and other information-sharing services are functionally integrated into the MTMA to allow states to coordinate more effectively and improve the overall efficiency of their administrative efforts.^[16]

Implementing the MTMA

Individual states are also able to implement provisions of the MTMA that encourage inter-state cooperation. Section 2040 of the California Financial Code, for example, provides for when and how the Commissioner of the state’s Department of Financial Protection & Innovation (CDFPI) may exempt a money transmission license applicant from the MTMA’s requirement that companies retain a minimum tangible net worth (TNW). Subsection 2040(b)(2) enumerates several risk-based factors that the Commissioner “shall” consider in determining whether to grant an exemption in-part or in-whole, including:

• whether the applicant or licensee is licensed to engage in money transmission in other states and whether the applicant or licensee has been subject to any disciplinary actions, including license revocations or suspensions.
• whether the applicant or licensee is licensed to engage in money transmission in other states and the tangible net worth requirements in those other states, if applicable.
• the nature and magnitude of short-term fluctuations in the total assets and money transmitter liabilities of the applicant or licensee, the risks associated with those fluctuations, and how those fluctuations affect the net worth requirements of this section.
• any factors that suggest that the money transmission activities of the applicant or licensee function in such a manner that a waived or modified tangible net worth requirement would not compromise the interest of persons in this state who use money transmission services, including, but not limited to, both of the following:
  • the manner in which the applicant or licensee holds actual possession of funds from persons in this state who use money transmission services.
  • whether the applicant or licensee transmits funds described in clause (i) to the intended recipient as soon as practicable following receipt.
•  any other factors as the commissioner deems appropriate.^[17]

While preserving the Commissioner’s discretionary authority through the catch-all provision of factor (e), Section 2040 incorporates an express risk calculation in addition to the model language provided in the corresponding model language in the MTMA. Importantly, 2040(b)(2) establishes risk-management as the benchmark for determining what might constitute “acceptable” preconditions or what “good cause” – both terms left undefined in the MTMA – must be shown before the Commissioner may grant an exemption from the model act’s tangible net worth requirements.

Factors (a) through (d), however, align with the MTMA’s purpose of minimizing regulatory inconsistencies by requiring the Commissioner to consider factors (a) and (b) the extent to which a company’s practices comports with the requirements of other states, and factors (c) and (d) the extent to which an exemption or modification would affect the statute’s goal of consumer protection. Through this fine-tuning of the MTMA, California’s enactment in Section 2040 promotes the MTMA’s purpose of creating interstate efficiency and consistency while critically protecting the state regulators’ autonomy and authority to make decisions in the interest of its state’s citizens.

Uniformity Through Multi-Stakeholder Action

The purpose and effect of the MTMA is to make the licensing and regulatory system for money transmission businesses more consistent and predictable, as well as more transparent. The CSBS incorporated this purpose into the design of the model act, and states have so far implemented the MTMA with these objectives in mind. As states continue to adopt the MTMA, money transmission businesses should experience increased efficiencies that enable established companies to improve their capabilities and emergent fintech companies explore new ways to move money throughout the economy. The creation of the MTMA further presents a multi-stakeholder process that takes into account common goals like improving payments for people and businesses. CSBS represents the interests of fifty states in addition to the myriad of financial institutions they oversee, including state-chartered banks and short-terms lenders as well as money transmitters. Further coordinated action will be key to carry through the MTMA and other modernization legislation into the future as technology and law continue to evolve and each state experiments with regulation to encourage financial innovation.

 

 

^[1] https://companiesmarketcap.com/western-union/marketcap/

^[2] https://www.westernunion.com/blog/en/6-fascinating-things-about-western-unions-history/

^[3] https://www.loc.gov/item/today-in-history/october-24/#:~:text=On%20October%2024%2C%201861%2C%20the,end%20of%20the%20Pony%20Express.

^[4] https://americandeposits.com/fintech-changing-payments/

^[5] https://www.csbs.org/sites/default/files/other-files/Chapter%204%20-%20MSB%20Final%20FINAL_updated.pdf

^[6] https://fcic-static.law.stanford.edu/cdn_media/fcic-docs/1992-10-28%20102_P_L__550.pdf

^[7] https://www.csbs.org/csbs-money-transmission-modernization-act#:~:text=Share%3A,and%20regulation%20of%20money%20transmitters.

^[8] Supra n.4

^[9] https://www.csbs.org/money-transmission-modernization-act-powerful-story-state-and-industry-collaboration

^[10] Id.

^[11] https://www.csbs.org/sites/default/files/2022-07/CSBS%20MTMA%20Leave%20Behind_FINAL.pdf

^[12] https://www.csbs.org/sites/default/files/2023-08/CSBS%20Money%20Transmission%20Modernization%20Act.pdf

^[13] https://www.csbs.org/sites/default/files/2023-08/CSBS%20Money%20Transmission%20Modernization%20Act.pdf

^[14] Supra n.12.

^[15] Id.

^[16] https://mortgage.nationwidelicensingsystem.org/pages/esbt.aspx

^[17] https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=FIN&sectionNum=2040.