BILL ANALYSIS Ó
AB 786
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Date of Hearing: April 29, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
AB 786 (Dickinson) - As Introduced: February 21, 2013
SUBJECT : Money transmissions.
SUMMARY : Makes various changes to the Money Transmission Act
(MTA). Specifically, this bill :
1)Exempts from the MTA a person that delivers payroll money on
behalf of an employer to employees.
2)Revises the minimum net worth requirements so that an
applicant or licensee must maintain minimum net worth ranging
from $100,000 to $500,000 depending on the estimated or actual
transaction volume, as determined by the commissioner of
Department of Business Oversight.
3)Provides the commissioner with authority to increase net worth
up to $2,000,000 if the commissioner determines that the
higher net worth is necessary to achieve specified purposes.
4)Provides that a licensee may use funds held in a custodial
capacity as an agent of its customers to fulfill the eligible
securities requirement when those eligible securities that are
held in a custodial capacity as an agent of the customer.
5)Requires the commissioner to make a determination on the use
of custodial accounts to fulfill eligible security
requirements on a case-by-case basis.
6)Enhances enforcement of the MTA by providing the commissioner
the authority to bring an action to enjoin a person from
violating the MTA. Additionally, allows the commissioner to
seek ancillary relief, including, but not limited to, a claim
for restitution, disgorgement, or damages on behalf of the
persons injured by the act or practice.
EXISTING LAW establishes the MTA which provides for the
following:
1)Defines "payment instrument" as a check, draft, money order,
traveler's check, or other instrument for the transmission or
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payment of money or monetary value, whether or not negotiable.
The term does not include a credit card voucher, letter of
credit, or any instrument that is redeemable by the issuer for
goods or services provided by the issuer or its affiliates.
2)Defines "receiving money for transmission" or "money received
for transmission" as receiving money or monetary value in the
United States for transmission within or outside the United
States by electronic or other means. The term does not include
sale or issuance of payment instruments and stored value.
3) Defines "stored value" as monetary value representing a claim
against the issuer that is stored on an electronic or digital
medium and evidenced by an electronic or digital record, and
that is intended and accepted for use as a means of redemption
for money or monetary value or payment for goods or services.
The term does not include a credit card voucher, letter of
credit, or any stored value that is only redeemable by the
issuer for goods or services provided by the issuer or its
affiliates, except to the extent required by applicable law to
be redeemable in cash for its cash value.
4)Requires licensing for domestic money transmittal services.
5)Provides for regulation of non-bank issued stored value cards
that may be offered by licensees.
6)Prohibits a person from engaging in the business of money
transmission in California or advertising, soliciting, or
holding itself out as providing money transmission unless
licensed.
7)Requires specified information to be included in an
application for a license which shall be in the form
proscribed by the commissioner of DFI.
8)Authorizes the commissioner to conduct an examination of an
applicant, at the applicant's expense, and would require the
commissioner to approve an application for a license if the
commissioner makes specified findings, including that the
applicant has adequate net worth and is competent to engage in
the business of receiving money for transmission. In order to
meet the net worth requirements a licensee that sells or
issues payment instruments or stored value must maintain
securities on deposit on a surety bond of no less than
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$500,000 or 50 percent of the average daily balance of
outstanding payment instruments and stored value in CA. A
licensee engaged in money transmission must either maintain
securities or a surety bond not less than $250,000 and no more
than $2,000,000.
9)Requires licensees to file audit reports with the commissioner
within 90 days after the end of each fiscal year.
10)Imposes various fees and would require the commissioner to
levy assessments on licensees for the purposes of
administering these provisions regulating money transmission
including:
a) A $5,000 application fee;
b) An annual license fee of $2,500;
c) An annual branch office fee of $125 per branch office;
d) An annual $25 fee for each branch employee; and,
e) For licensees that sell or issue payment instruments, an
annual assessment based on the volume and aggregate face
amounts of payment instruments and stored value issued or
sold in California.
11)A licensee must maintain specified eligible securities
including and/or a surety bond and maintain $500,000 in
net-worth.
12)Requires a licensee to provide specified notices and
disclosures to customers, including a notice relative to a
customer's right to a refund, disclosures relating to rates of
exchange, a notice indicating that payment instruments are not
insured, and a notice providing information on making
complaints to the commissioner against a licensee.
13)Requires licensees to maintain financial records for a 3-year
period.
14)Mandates each licensee to file with the commissioner a
certified copy of every receipt form used by it or by its
agent for receiving money for transmission prior to its first
use.
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15)Authorizes the commissioner to suspend or revoke a license if
the commissioner finds that a licensee or agent of a licensee
has, among other things, violated the provisions of the act or
engaged in fraud or unsound practices and would authorize the
commissioner to assess specified civil penalties against a
person that violates these provisions.
16)Makes it a crime for a person to engage in the business of
money transmission without a license or for a person to
intentionally make a false statement, misrepresentation, or
false certification in a record filed or required to be
maintained under these provisions.
17)Exempts from licensing,
a) The United States or a department, agency, or
instrumentality thereof, including any federal reserve bank
and any federal home loan bank.
b) Money transmission by the United States Postal Service
or by a contractor on behalf of the United States Postal
Service.
c) A state, county, city, or any other governmental agency
or governmental subdivision of a state.
d) A commercial bank or industrial bank, the deposits of
which are insured by the Federal Deposit Insurance
Corporation or its successor, or any foreign (other nation)
bank.
e) Electronic funds transfer of governmental benefits for a
federal, state, county, or local governmental agency.
f) A board of trade designated as a contract market under
the federal Commodity Exchange Act (7 U.S.C. Secs. 1-25,
incl.) or a person that, in the ordinary course of
business, provides clearance and settlement services for a
board of trade to the extent of its operation as or for
such a board.
g) A person that provides clearance or settlement services
pursuant to a registration as a clearing agency or an
exemption from registration granted under the federal
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securities laws to the extent of its operation as such a
provider.
h) An operator of a payment system to the extent that it
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, to the extent of its operation as such a
provider.
i) A person registered as a securities broker-dealer under
federal or state securities laws to the extent of its
operation as a broker-dealer.
18)If the commissioner finds all of the following with respect
to an application for a license, the commissioner shall
approve the application:
a) The applicant has adequate tangible shareholders'
equity, as specified in Section 2040 of the Financial code
to engage in the business of money transmission and the
financial condition of the applicant is otherwise such that
it will be safe and sound for the applicant to engage in
the business of money transmission.
b) The applicant, the directors and officers of the
applicant, any person that controls the applicant, and the
directors and officers of any person that controls the
applicant are of good character and sound financial
standing.
c) The applicant is competent to engage in the business of
money transmission.
d) The applicant's plan for engaging in the business of
money transmission affords reasonable promise of successful
operation.
e) It is reasonable to believe that the applicant, if
licensed, will engage in the business of money transmission
and will comply with all applicable provisions of this
chapter and of any regulation or order issued under this
chapter.
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FISCAL EFFECT : Unknown
COMMENTS :
This bill represents efforts to revise and update provisions of
the MTA to address emerging technologies that are changing money
transmission and to provide clarity for existing and future
licensees. On March 11, 2013 the Banking & Finance Committee
convened an oversight hearing to review the MTA. Almost one
year prior to the convening of the hearing committee staff had
been contacted by numerous parties raising concerns about the
MTA and potential unintended consequences of its application. In
the brief time since the MTA became law, technological
innovation in the payments industry has exploded as money
transmission has transcended into mobile applications and new
point of sale (POS) devices. Whereas, five years ago the bulk
of money transmission activity involved international
remittances where the customer would go to a brick & mortar
location to send money to friends or family in other countries,
now mobile phone users can use apps to pay for goods and
services where the customers payment method (credit card or bank
account) sends money to the third party provider and then that
provider sends payment to the provider of goods and services.
The definition of "money transmission" doesn't provide the
answer to these issues, as it's defined, as the transmission of
money from one party to another. This could include a host of
various activities, though it is relevant to ask if the original
intent of the MTA was to cover any and all instances when money
is sent from one party to another via a third party?
Proposed federal regulations.
Federal Regulation E, the Electronic Funds Transfer Act (EFTA)
was amended via the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank) to include regulation of
international remittances and money transfer. Section 1073 of
Dodd-Frank expanded the scope of EFTA to include requirements
concerning remittance disclosures to consumers. The Consumer
Financial Protection Bureau (CFPB) has been tasked with creating
rules to implement these changes. Last year, CFPB released
draft rules that were to take effect February of 2013. However,
CFPB postponed the final rules until later in the year to work
out potential compliance issues. A brief description of the new
requirements:
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Money transmitters will be required to provide customers
with written pre-payment disclosures containing information
about the specific transfer, such as the exchange rate,
applicable fees and taxes, and the amount to be received by
the designated recipient.
Money transmitters will be required to provide a written
receipt when payment is made. The receipt must include the
information provided on the pre-payment disclosure, as well
as additional information, such as the date of
availability, the recipient's contact information, and
information regarding the customer's error resolution and
cancellation rights. As an alternative, the new money
transmitter regulation allows money transmitters to give
customers a single written disclosure prior to payment
containing all of the information required on the receipt,
so long as the money transmitter also provides proof of
payment such as a stamp on the earlier document.
The pre-payment disclosures and receipts must be
provided in English and in each of the foreign languages
principally used by the money transmitter to advertise,
solicit, or market money transfer services at a particular
office. If you offer customers the ability to make money
transfers using text message or a mobile application, the
new money transmitter regulation provides additional
guidance on how to provide the required disclosures.
If, (i) due to the laws of a recipient country or (ii)
the method by which transactions are made in the recipient
country, a money transmitter cannot determine certain
amounts that are required to be disclosed, exceptions
permit the money transmitter to disclose an estimate of the
amount of currency to be received, rather than the actual
amount.
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Money transmitters will be required to provide customers
with a 30-minute cancellation period that allows a customer
the opportunity to review both the prepayment disclosure
and the receipt to ensure that the transfer was sent as the
customer intended. If a customer requests, a money
transmitter must promptly provide the customer a notice
describing the customer's "error resolution" and
cancellation rights, using specified language or
substantially similar language. Even after the cancellation
period has passed, customers will have a right to a refund
or other remedy if an error occurs in a transaction.
In the event a customer timely requests the cancellation
of a money transfer, the new money transmitter regulation
requires money transmitters to provide customers with a
refund, at no additional cost to the customer, the total
amount of funds provided by the customer, including any
fees and, to the extent not prohibited by law, taxes
imposed in connection with the money transfer, within three
business days of receiving the request to cancel the money
transfer.
The United States Department of Treasury under the Financial
Crimes Enforcement Network (FinCEN) requires registration of
money services businesses (MSB). According to FinCEN an MSB
includes any person doing business, whether or not on a regular
basis or as an organized business concern, in one or more of the
following capacities, and that meets a threshold of $1,000 or
more in transactions per day:
Currency dealer or exchanger.
Check casher.
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Issuer of traveler's checks, money orders or stored
value.
Seller or redeemer of traveler's checks, money orders or
stored value;
Money transmitter.
FinCEN registration does not apply to a bank or a person
regulated or registered with the Securities and Exchange
Commission. Entities registered with FinCEN must make
electronic filings under the Bank Secrecy Act (BSA). As of July
1, 2012, all such filings must be electronic and made through
the BSA E-Filing System. Reports that must be filed through
this system include, but are not limited to:
Currency Transaction Report (FinCEN Form 104)
Designation of Exempt Person (FinCEN Form 110)
Suspicious Activity Report (Form TD F 90-22.47)
Suspicious Activity Report by the Securities and Futures
Industries (FinCEN Form 101)
Suspicious Activity Report by Money Services Business
(FinCEN Form 109, formerly 90-22.56)
Suspicious Activity Report by Casinos and Card Clubs
(FinCEN Form 102)
Currency Transaction Report by Casinos (FinCEN Form 103,
formerly 8362)
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Registration of Money Services Business (FinCEN Form
107)
Report of Foreign Bank and Financial Accounts (Form TD F
90-22.1)
Emerging technologies.
The last five years have witnessed technological changes that
have drastically altered the old business model of remittances,
as well as, the ways in which consumers pay for goods and
services. Whereas, the traditional model involved visiting the
location of a money transmitter agent, new technologies have
completely changed the way in which customers send and use
money.
Now a consumer wishing to send money to another person for
goods, services, or simply as a remittance to family or friends,
has various online services to choose from, including
applications utilizing smart phones. The way in which consumers
pay for goods and services has transcended checks and credit
cards and is rapidly evolving with electronic payment systems
and new innovative payment networks. Large financial
institutions are also getting on the bandwagon as several large
financial institutions are offering money transfer services
using smart phone and web based applications. In the payments
space, typical five channels have been available, 1) Cash 2)
Check (Paper or Check 21 substitute check) 3) Automated Clearing
House (ACH) transaction 4) Credit/debit/stored value and 5) Wire
transfers. Emerging technologies have created new payment
methods such as web payments, contactless payments, mobile
payments, Bitcoin and other virtual currency.
Between December 2011 and January 2012, the Federal Reserve
Board conducted a survey of consumers concerning the use of
mobile financial services
( http://www.federalreserve.gov/econresdata/mobile-devices/files/m
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obile-device-report-201203.pdf ). The following are brief
findings from their report:
1)Mobile phones and mobile Internet access are in widespread
use.
a) 87 percent of the U.S. population has a mobile phone.
b) 44 percent of mobile phones are smartphones
(Internet-enabled).
c) 84 percent of smartphone users have accessed the
Internet on their phone in the past week.
2)The ubiquity of mobile phones is changing the way consumers
access financial services.
a) 21 percent of mobile phone owners have used mobile
banking in the past 12 months.
b) 11 percent of those not currently using mobile banking
think that they will probably use it within the next 12
months.
c) The most common use of mobile banking is to check
account balances or recent transactions (90 percent of
mobile banking users).
d) Transferring money between accounts is the second most
common use of mobile banking (42 percent of mobile banking
users).
3)Mobile phones are also changing the way consumers make
payments.
a) 12 percent of mobile phone owners have made a mobile
payment in the past 12 months.
b) The most common use of mobile payments was to make an
online bill payment (47 percent of mobile payment users).
c) 21 percent of mobile payment users transferred money
directly to another person's bank, credit card, or PayPal
account.
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4)Perceptions of limited usefulness and concerns about security
are holding back the adoption of mobile financial services.
a) The primary reason why mobile phone users had not yet
adopted mobile banking was that they felt their banking
needs were being met without the use of mobile banking (58
percent).
b) Concerns about the security of the technology were the
primary reason given for not using mobile payments (42
percent) and the second most common reason given for not
using mobile banking (48 percent).
c) More than a third of mobile phone users who do not use
mobile payments either don't see any benefit from using
mobile payments or find it easier to pay with another
method.
5)The "underbanked" make significant use of mobile financial
services.
a) The underbanked make comparatively heavy use of both
mobile banking and mobile payments, with 29 percent having
used mobile banking and 17 percent having used mobile
payments in the past 12 months.
b) 62 percent of the underbanked who use mobile payments
have used it to pay bills.
c) 10 percent of the completely unbanked reports using
mobile banking in the past 12 months, and 12 percent have
made a mobile payment.
Mobile payment devices and systems are turning into new and
innovative ways for businesses to accept electronic payments.
In addition to the money transmission licensing acts across 48
states, James Freis, Director of FinCEN testified on June 29,
2012, in front of the U.S. House Committee on Financial
Services,
FinCEN's regulations also have made it clear that the
acceptance and transmission of currency, funds, or other
value that substitutes for currency from one person and the
transmission of currency, funds, or other value that
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substitutes for currency to another person or location, by
any means, constitutes money transmission, and that any
person wherever located doing business wholly or in
substantial part within the United States engaging in money
transmission, regardless of any other business lines the
person is engaged in - such as the provision of
telecommunication services - would likely be a money
services business under FinCEN's regulations, and as such
must register and comply with all the reporting,
recordkeeping, and monitoring requirements applicable to a
money transmitter.
Payment networks:
Payment networks are the infrastructure, made up of multiple
parties, that provide for the processing of electronic financial
transactions, most notably, credit card transactions. A typical
credit card transaction has four parties: the customer, the bank
that issued the customer's card, the merchant, and the
merchant's bank. The merchant typically receives less than the
merchant's bank as the transaction is discounted due to the
interchange rate (paid to network) and any fees paid to the
merchant bank. The largest payment networks are Visa,
MasterCard, Discover and American Express. The top issuers of
credit cards are American Express, JP Morgan Chase, Bank of
America, and Citigroup.
The emergence of alternative payment networks has arisen in
large part from the desire of merchants to mitigate the fees and
costs associated with the traditional payment networks.
Stored Value:
An additional expanding model in the money transmission business
is the use of stored value, typically via a pre-paid card, but
new technology is growing the use of stored value across new
mediums. The MTA regulates the issuance of non-bank stored
value, and exempts stored value offered by a bank, or stored
value on what is known as a "closed-loop" system. A closed loop
system is typically a gift card or some other item representing
monetary value that can only be used within the network of a
given retailer or merchant. Money transferred via traditional
means using an agent, or via computer can often be loaded onto a
stored value device and provided to the receiver.
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Remaining issues.
Committee staff has communicated with numerous parties on
outstanding issues related to the MTA.
AB 786 currently provides the initial steps of reform for the
MTA by addressing some of the main issues of concern. Following
outlines the outstanding issues that are still being discussed
by the author, staff and interested parties:
1)How do we ensure that the MTA is able to keep up with emerging
technologies in the payments industry? When is a payment
system not engaged in money transmission as defined under the
MTA? The potential solution to this issue is to require the
commissioner to draft clarifying regulations.
2)Licensing as a money transmitter creates significant
compliance costs, specifically in the case of start-ups with
mobile application platforms. Internet based applications
while creating a faster and easier way to reach consumers,
also blurs jurisdictional lines a California companies who are
able to reach consumers across every state and countries
around the world. This often requires licensing across
numerous states. Each state has its own special requirements
to be licensed as a money transmitter. Some of these states
have requirements that are very similar to the requirements in
California. Potentially some relief could be provided to this
issue if whether it is appropriate to create some type of
hybrid reciprocal relationship between states that have the
same or similar consumer protections in their money
transmission statutes.
3)Net worth and bonding requirements. Currently, the MTA
requires that a licensee maintain a minimum net worth of
$500,000 with a maximum of $2,000,000. An applicant for a
licensee may have to demonstrate a net worth over the minimum
amount. As some current and potential future licensees have
indicated to staff, the application process is very unclear on
what amount of net worth will be required, and how this net
worth is calculated. Currently, AB 786 attempts to provide
clarity to this issue. Discussions are ongoing regarding
additional clarifications on the net worth requirements.
4)Payroll service companies have expressed concern that they
could be interpreted as money transmitters under the MTA.
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While some of these companies currently offer, or may offer in
the future, lines of business that could require an MTA
license, AB 786 is clear that payroll service companies are
exempt from licensing under the MTA. Additionally, on March
28th, 2013 the commissioner released Commissioner's
Opinion-No. 001 which provides that for purposes of the MTA's
definition of "receiving money for transmission" payroll
processing companies, among other types of entities, that are
not required to be licensed provided that the companies or
other person only receive instructions, orders, or directions
to transmit money or monetary value and do not actually take
possession or hold the money for transmission.
5)The MTA requires that a consumer receive a receipt for their
transaction that includes a "right to refund" disclosure
statement. In the case of licensees that offer goods and
services and are subject to federal regulations concerning
credit card transactions, it may not be necessary to require
this specific receipt in a transaction for goods and services.
6)In relation to the provision of goods and services some of
these transactions may appear to be money transmission, but in
fact, may be typical retail transactions. In order to provide
clarity to this issue it may be necessary to provide clarity
on the relationship of agents and payees in the payments
ecosystem.
The aforementioned issues are part of ongoing discussions
between interested parties.
REGISTERED SUPPORT / OPPOSITION :
Support
National Payroll Reporting Consortium (NPRC)
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
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