A year after issuing an invitation for comments, the California Department of Business Oversight (“DBO”) has finally released a much-anticipated draft rulemaking relating to the scope of the “agent of a payee” exemption (the “Exemption”) under the Money Transmission Act, Cal. Fin. Code §2000 et seq. (the “Act”). Comments on the regulations are due April 20.

As we noted when the invitation for comments was first issued, the scope of the Exemption is a crucial issue for any company involved in facilitating payments—as a marketplace platform, a billing service, a payment facilitator, or otherwise—because California, like almost all other U.S. states, regulates money transmitters under a state-specific licensing regime (in California’s case—the Act). Statutory definitions of money transmission are quite broad and, typically, can cover any entity that receives money for transmission. Under the Act, for example, unless otherwise exempt, a license is required to engage in “[r]eceiving money for transmission.” Cal. Fin. Code §§ 2010(q)(3), 2030(a).

The DBO’s rulemaking, released earlier this week, appears to affirm a broader interpretation of the scope of the Exemption than has been historically applied, albeit with a number of express limitations as well. In doing so, the DBO is seeking to facilitate online commerce and related activities. But while the proposed draft regulations appear to provide a simple clarification of the existing agent of the payee exemption, our initial review of the draft, and the accompanying Initial Statement of Reasons for the proposed regulations, reveals a much more complex framework that will undoubtedly raise a number of questions for industry participants, many specific to their business models and their roles in the online payments ecosystem. The comment period for this draft rulemaking is an important opportunity for payments companies and online platforms to assess how these rules, if adopted, would impact their compliance approaches, and to provide feedback to the DBO as warranted.

The basic concept of an exempt agent-of-a-payee transaction is that the intermediary facilitates the receipt of payment by merchants or other payees, rather than facilitating the transmission of funds on behalf of a sender. An entity providing this type of service often has a contractual relationship with the recipient under which the entity is appointed as an agent to receive funds on behalf of that recipient (i.e., the payee). The common law principle of agency suggests (although not always applied in the same manner by state regulatory agencies) that the receipt of funds by the agent should be treated as tantamount to the receipt of funds by the principle, and, therefore, the agent does not receive the payor’s funds for transmission.

Based on this principle, in recent years, a number of states have determined—whether through legislation, regulation, guidance, opinion letter, or otherwise—that, subject to certain conditions, state money transmission licensing laws do not apply to services provided as an agent of a merchant or other payee pursuant to a direct contractual agreement. (We have written about recent developments here, here, and here.) One of the first states to formally affirm such an exemption was California, which, in 2014, amended the Act to exclude from regulation an agent‑of-a-payee transaction. As defined by Cal. Fin. Code § 2010(l), such a transaction is one “in which the recipient of the money or other monetary value is an agent of the payee pursuant to a preexisting written contract and delivery of the money or other monetary value to the agent satisfies the payor’s obligation to the payee.” For purposes of California’s exemption, a “payee” is “the provider of goods or services, who is owed payment of money or other monetary value from the payor for the goods or services,” and a “payor” means “the recipient of goods or services, who owes payment of money or monetary value to the payee for the goods or services.” As discussed below, each element of this statutory exemption is addressed by the draft regulations.

The draft regulations are brief but they cover a lot of ground:

  • Does an agent of a payee receive money for transmission? According to the draft regulations, no: “The agent of a payee has not received money for transmission” because “the receipt of money or other monetary value by an agent of the payee from a payor is the equivalent of receipt of money or monetary value directly by the payee.” This position appears to be a reversal of how the DBO previously viewed the agent of a payee construct. In last year’s invitation for comments, for example, the DBO stated that a marketplace—even if acting as an agent of a payee under the statutory exemption—“receives funds from buyers to transmit to sellers.”
  • What is excluded from the scope of an agent of a payee? Though it appears to be tautological, the regulations would affirm that an agent of a payor or sender of funds is not exempt from the Act. In addition, the draft states that the exemption “does not apply to the sale or issuance of stored value.”
  • What are “goods and services”? Under the Exemption, a payor is person that obtains goods and services and a payee is a person that provides those services. So, if a transaction does not involve goods or services, it would not come within the scope of the Exemption, even if other criteria are met. The draft regulations provide an expansive definition of what constitutes goods and services: “Any good or service, other than money transmission services, for which the payor has a payment obligation to the payee.” In addition, the draft regulations expressly define a service to include “charitable purposes,” from which it appears to follow that an intermediary that accepts a payment as an agent of a charity could avail itself of the Exemption.
  • Who is a Payee and a Payor? The draft regulations would affirm a broad interpretation of a payee and a payor to include not just the direct provider and recipient of the good or services, but also an “indirect” provider and recipient. Specifically, an “indirect provider enables the provision of goods or services even if it does not have title to, or take inventory of, the goods or services provided” and an “indirect recipient does not receive the good or service but owes payment for it.” The DBO explains what this means in its Initial Statement of Reasons: “an online platform that matches consumers with third‑party service providers would be an indirect provider of a service. In this instance, the commerce platform would provide a bundle of services to the consumer, including the search algorithm, purchasing infrastructure, shipping and return processing, customer complaints, etc., but would not perform the service that is ultimately purchased.” Because the online platform would meet the definition of a payee even if it does not directly provide goods or services to the consumer, a payment services provider that processes the consumer’s payment on behalf of the online platform could potentially come within the scope of the Exemption as an agent of the online platform.
  • Can there be more than one agent of a payee? In a word, yes. These elements of the draft rulemaking are a drastic change. In an opinion letter dated April 5, 2018, the DBO appeared to indicate that it interpreted the payee-agency exemption as providing that no more than one entity can be exempt from licensing as an agent of a payee in connection with a single transaction. Based on that 2018 letter, it seemed that where a marketplace or other ecommerce platform receives funds and settles the funds to an intermediary for ultimate settlement to the payee, the platform and the intermediary could not both avail themselves of the agent-of-the-payee exemption.

Now, however, the draft regulations state that “[w]here there is a series of transactions involving multiple pairs of payors and payees in order to complete settlement of funds,” the exemption “applies to each transaction.” In the statement of reasons, the DBO appears to rely on common law of agency to suggest that the agent of a payee exemption can be available to multiple parties where: (1) there are multiple payment processors involved in settling a payment from a payor to a payee; and (2) transactions involving a customer, an online platform, and a marketplace. Specifically, the DBO states that “[t]he proposed regulation would clarify that there can be successive agents that facilitate the settlement of funds for payment.”

Non-banks that provides payments-related products and services will have to consider how the Exemption would apply to them, and whether the regulatory treatment of any of their activities would change—at least in California. In addition, while other states may follow California’s lead, interpretations of the scope of state-specific agent of a payee exemptions can diverge, and non-bank payments services compliance strategies still require a state-by-state approach.