Weekly Fintech Focus

  • The California DFPI issued new opinions on the scope of its money transmission laws, including the agent of the payee exemption, addressing virtual currency transactions, and pay-in/pay-out scenarios related to gaming.
  • Rohit Chopra, the nominee for the CFPB Director position, answered questions at his confirmation hearing.

CA DFPI Issues New Opinions on Money Transmission and the Agent of the Payee Exemption

California’s Department of Financial Protection and Innovation (DFPI) recently issued new opinion letters that expounded on its interpretation on exemptions to the licensing requirements under the California Money Transmission Act (MTA).

  1. Purchase and Sale of Virtual Currency. According to the DFPI, if a company’s activities are limited to buying and selling virtual currency directly from and to consumers via automated clearing house (ACH) or wire transfer, it does “not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” This interpretive opinion follows California’s long-standing position that virtual currency activities do not trigger money transmission licensing requirements.
  2. Agent of Payee Exemption.

(a) Online Gaming/Sports Betting. A company’s payment processing services to merchant clients located in the United States may qualify for the agent-of-payee exemption under certain circumstances. While the DFPI recognized this exemption is generally unavailable for payments of money transmission, it “can be applied to transactions involving payments owed for closed loop stored value because the sale or issuance of closed loop stored value is not money transmission.” The DFPI stated that each pay-in transaction may constitute “receiving money for transmission” but the activity may qualify for the exemption if (i) the merchant is the payee, (ii) customer is the payor, and (iii) the company is the agent of the merchant (the DFPI found that the Master Services Agreement (MSA) stated that the receipt of funds satisfied the customer’s payment obligation to the merchant). Further, such exemption would also cover refunds but not pay-outs of winnings. Each pay-out transaction will constitute “receiving money for transmission,” which triggers licensing requirements. This has implications for “e-commerce, digital goods, financial services, travel, and online gaming/sports betting” activities (though the DFPI specifically stated the letter refrained from commenting on the legality of activities such as sports betting under California law).

(b) Payments to Daily Fantasy Sports Providers. Similar to the analysis on payment processing services to U.S. merchant clients for online gaming/sports betting above, the DFPI concluded an MTA license was not required for closed loop pay-in transactions. If a company offers U.S.-based merchant clients (primarily daily fantasy sports providers) an ACH payment platform to allow customers to use bank accounts to purchase credits for their accounts with the merchants, such pay-in transactions for stored monetary value “constitute ‘receiving money for transmission.’” However, the pay-in activities qualify for the agent-of-payee exemption when the merchant is the payee, the customer is the payor, and the company is the agent of the merchant. Further the DFPI noted, “the [p]ay-in transactions are all closed loop because the [c]ustomer’s stored value is only redeemable for goods or services provided by the issuing [m]erchant or its affiliate.” While the agent of the payee exemption is generally not available for payments for money transmission because it is not a good or service, the exemption can be applied to payments for purchase of closed loop stored value because such sale is not money transmission.

  1. Paying Recipients Before a Company is Reimbursed. If a company offers transactions that result in beneficiaries being paid before the company receives money from the sender, such transactions may not constitute receiving money for transmission and hence, will not trigger licensing requirements. The DFPI pointed out that since funds are not transferred to reimburse the company until after the designated beneficiary has been paid, the company does not incur transmission liability (and consumer funds are not at risk). The DFPI’s conclusion was based on the following analysis of the payment reimbursement model: Although upon receiving customer’s instructions the payment processor instructs its bank to immediately disburse the amount and places a hold on the sender’s debit card, the hold does not initiate the transfer of funds. The hold transfer is only converted to payment/post status after the reimbursement is finalized. Hence, the company does not receive money for transmission, as it “does not actually or constructively receive, take possession of, or hold money or monetary value for transmission.”

Nominee for CFPB Director Faces Senators’ Questions

Rohit Chopra, the nominee to be the Director of the Consumer Financial Protection Bureau (CFPB), faced questions from the Senate Banking Committee during his confirmation hearing on March 2, 2021. The hearing was wide-ranging, covering Chopra’s thoughts on the broad scope of CFPB jurisdiction. In his responses were a number of interesting issues for fintech:

  • Big Data, Big Tech, and FCRA—Chopra discussed issues related to the amount of consumer data that large technology companies hold. He noted that big data “is something we must carefully look at because it will change financial services fundamentally.” Big tech companies have amassed huge databases of consumer data, and Chopra believes that the accuracy of the information collected and used by Big Tech companies should be considered under the Fair Credit Reporting Act as such data is used in the provision of financial services. Additionally, Chopra emphasized the need for regulators to check large companies to ensure that they do not misuse their market power.
  • Federal Reserve Payments Initiatives—Chopra made clear that he supports the Federal Reserve’s payments initiatives like its real-time payments network, stating that the network will help everyone have equal access. Chopra sees the United States falling behind in financial services innovation compared to other countries, including in payment, and considers the Fed’s real-time payments network as a way to modernize the system.