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Government watch
The Impossible Dream?
not unheard of for the cost to
be more than $1 million to obtain licenses in all states, and the process can sometimes take
two or more years to complete.
To further dampen the ability of companies to enter the payments market quickly, it’s a federal crime under 18 USC 1960 to own, man- age or conduct a money trans- mission business—even de minimis transmission business—without these licenses.
Another difficulty for payments entrepreneurs is that a company needs to obtain a separate license in every state where it sells or markets its services. There are similar laws in Europe, but the
EU has a “passport” system that enables a registered payments company in one EU country to
get permission to do business in another EU country. There’s nothing really comparable in the U.S. There have been calls for a single national license that could replace multiple state licenses, but with the current Congress, and the increasing tendency to move away from federal preemption, those efforts are unlikely to succeed.
I have had many talented entrepre- neurs tell me that they’ve chosen to launch a new payments products business outside the U.S. because the state money transmitter regula- tory system is simply too costly and burdensome. And, I admit
I sympathize. After all, how can a startup business possibly develop and launch new and innovative payment programs in a timely
and efficient manner, and still remain compliant in this environ- ment? This issue is particularly critical with the opportunities presented by cryptocurrencies and the blockchain structure behind them, which have the potential to revolutionize payments globally.
The Authorized
Delegate Solution1
One of the few options available
to startups has been to partner with a fully licensed company and becoming its “authorized delegate” (or agent). The authorized delegate process enables licensed entities to appoint appropriate third parties to do business under their money transmitter’s licenses.
Becoming an authorized dele- gate of a licensed money trans- mitter is not a simple task either. The licensed money transmitter becomes responsible for its authorized delegates and must report its authorized delegates’ transactions, and oversee and monitor those authorized del- egates’ activities. The fact that
the authorized delegate is offer- ing its services under the licensed money transmitter’s license always must be disclosed to consumers. In most authorized delegate arrangements, the licensed
money transmitter will subject
the potential authorized delegate to intense due diligence, including reviewing its anti-money launder- ing compliance procedures, anti-fraud procedures and the company’s history, management and banking relationships.
Given the extent of the licensed money transmitter’s obligations vis-à-vis its authorized delegates, it’s, of course, understood that the authorized delegate will pay a transaction fee to the licensed entity as compensation for assuming the risks and responsibilities arising from establishing the relationship. That’s not only fiscally responsible, it also assists the licensed money transmitter in covering its own considerable compliance costs.
More importantly, however, es- tablishing an authorized delegate relationship between an innova- tive new payments company and a licensed money transmitter creates a quadruple win, in which everyone benefits:
win 1: The consumers’ funds are fully protected;
win 2: Innovation is en- couraged and the startup company may pursue its product development efforts safely;
win 3: The licensed entity benefits from achieving higher transaction volumes, tapping into transactions from emerg- ing markets and increasing the value of its licenses,
which are expensive to acquire and maintain;
win 4: The U.S. payment system is protected. There’s no incentive for startup pay- ments companies to operate off the grid or outside the U.S.,