As internet, mobile and virtual currency activities have prompted heightened supervisory and enforcement activity under state money transmission statutes, the once-settled role of payment processors acting on behalf of merchants has occasionally been re-examined by state regulators. In a novel departure from the historical understanding of merchant processing activities in this regard, the Division of Consumer Services of the Department of Financial Institutions in the State of Washington recently issued an interpretation providing that merchant payment processing constitutes money transmission under the Washington Uniform Money Services Act.(1) The interpretation therefore concludes that merchant payment processors are subject to licensing and other requirements under the act unless a waiver is granted by the department. The interpretation also outlines criteria under which a payment processor may be eligible for a waiver from the licensing requirements of the act. The interpretation became effective on January 1 2016.
Payment processing defined as money transmission
The Washington Uniform Money Services Act requires persons engaged in money transmission in the State of Washington to obtain a licence and subjects such persons to supervision, oversight and regulation by the Department of Financial Institutions. Although the term 'money transmission' as defined by the act does not expressly refer to payment processing, it is broadly defined to mean "receiving money or its equivalent value to transmit, deliver, or instruct to be delivered the money or its equivalent value to another location… by any means".(2) The interpretation expressly states that payment processing on behalf of merchants is money transmission under the act. Accordingly, the department expresses the view that persons engaged in merchant payment processing (including as bill payment processors on behalf of billers) are subject to licensing, regulation, supervision and oversight as money transmitters by the department under the act.
The interpretation does not define 'payment processing', but rather describes the role of payment processors as intermediaries that provide "money transmission services between various types of consumer/debtor/payors and merchant/creditor/payees". As such, the interpretation appears to fundamentally mischaracterise the role of merchant payment processors, which – if they are in the flow of funds to the merchant at all – are responsible for the movement of money between the acquiring bank that settles with the card association and the merchant. That role should arguably be covered by the payment processor exemption in Section 19.230.020(9) of the act, since both the acquiring bank (as an expressly exempt entity) and the merchant (as the recipient of funds not subject to the act in the first place) are excluded from the act's coverage. However, the interpretation does not address this argument, taking the position that "merchants/creditors and consumers/debtors are not typically persons all excluded from the Act".
Waiver of licensing requirement
Having concluded that the act broadly applies to merchant payment processors, the department acknowledges that under certain circumstances, the risk of loss to a consumer is reduced. The interpretation establishes criteria which, if satisfied, may allow the payment processor to obtain a department waiver from the licensing provisions of the act. The interpretation does not exempt a payment processor from the non-licensing provisions of the act and expressly states that the department "retains jurisdiction over the money transmission activities of the company even with the license waiver in place… [and] [c]ompanies operating under a license waiver are subject to entry and examination by the Department".
Regardless of whether they are licensed, companies that are payment processors must request an analysis by the department of eligibility for the licensing waiver. If a licensing waiver applies and the entity is otherwise licensed as a money transmitter in the State of Washington, it may elect not to report the payment processing activity subject to the waiver during the annual assessment period.
The interpretation states that the department may provide waivers to payment processors that:
provide services to merchants whose goods and services are immediately available to consumers, including digital goods available for immediate download (presumably including goods delivered at check-out in physical stores);
provide services to merchants that provide the consumer with a receipt or voucher immediately following a purchase that is redeemed for a product or service with little or no risk of not receiving it; or
satisfy all of the following criteria:
the payment processor facilitates payment for goods or services (not money transmission itself) or bill payment by receiving money from the consumer and delivering it to the payee;
the payment processor operates through a settlement system that admits only financial institutions regulated by the Bank Secrecy Act;
the payment processor operates pursuant to a formal agreement with the payee; and
the payment processor's formal agreement with the payee creates an agency relationship in which payment to the payment processor satisfies the consumer's obligation to the payee.
However, the licensing waiver cannot be applied to payment processors:
of virtual currency;
that provide services to the marijuana industry; or
that hold value beyond the period necessary to complete the purchase of goods or services.
While the waiver process mitigates the impact of the interpretation, it is possible that it will be challenged. Nonetheless, businesses serving as payment processing intermediaries between payees and payors should review their business models and relevant agreements to determine whether they are engaged in the payment processing activities covered by the interpretation and, if so, whether they are eligible for a licensing waiver.
For further information on this topic please contact David E Teitelbaum, Joel D Feinberg or Gretchen E Lamberg at Sidley Austin LLP by telephone (+1 202 736 8000) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Sidley Austin website can be accessed at www.sidley.com.
(1) Wash Rev Code §§ 19.230.005-19.230.905.
(2) Wash Rev Code §§ 19.230.010(18).