Opinion Letter – Payment processing service not exempt as agent of payee or factoring
October 4, 2018
Re: ______________________________ – Opinion Request
Thank you for your letters to the Department of Business Oversight dated June 6, 2018 and August 28, 2018. You have requested a determination that the payment processing services
conducted by ______________________________ (“__________”) do not constitute money transmission. In the alternative, you have requested a determination that
______________________________’s payment processing services meet the requirements of the agent of payee exemption in the Money Transmission Act (“MTA”).
______________________________ is a Delaware corporation with a principal place of business in New York and offices in Delaware. ______________________________ provides payment processing services to businesses that sell goods and services online. To provide its payment processing services, ______________________________ enters into Merchant Services Agreements with businesses and processing agreements with card companies. The payment processing services involve the following steps: (1) When a purchaser seeks to make an online purchase via credit or debit card, ______________________________ requests a purchase authorization from the relevant card company. If authorization is granted,
______________________________ communicates the authorization to the business selling the goods or services. (2) ______________________________ submits required data about the purchase to the card company. (3) ______________________________ settles the payment owed to the business (collectively, “Settlement Activities”).
In connection with the Settlement Activities, a card company may use
______________________________’s platform to transfer funds to businesses. You provided a flow of funds chart that shows funds flowing from a consumer’s bank account to the card company’s bank account, the card company’s bank account to ______________________________’s bank account, and ______________________________’s bank account to the business’s bank account.
If a consumer cancels a purchase, a chargeback occurs requiring ______________________________ to pay the purchase price back to the card company and collect the same amount from the business, less any fee paid by the business to ______________________________. To mitigate credit exposure, ______________________________ may require a business to establish and maintain a minimum balance in a reserve account controlled by ______________________________. If a business fails to reimburse ______________________________ for a chargeback, ______________________________ may apply reserve account funds against the loss.
MONEY TRANSMISSION ACT
The MTA prohibits a person from engaging in the business of money transmission in California, unless the person is licensed or exempt from licensure or is an agent of a person licensed or exempt from licensure.
A. Receiving Money for Transmission
Financial Code section 2003, subdivision (q)(3) defines “money transmission” to include receiving money for transmission. Financial Code section 2003, subdivision (u) defines “receiving money for transmission” to mean receiving money or monetary value in the United States for transmission within or outside the United States by electronic or other means. ______________________________ receives money in an Illinois bank account for transfer to business merchant bank accounts. This constitutes receiving money for transmission pursuant to Financial Code section 2003, subdivision (u).
Financial Code section 2003, subdivision (k) defines “in California” to mean physically located in California, or with, to, or from persons located in California. You state that consumers purchasing goods and services using ______________________________’s payment processing services “generally are not located in California.” This implies that consumers may be located in California. You also state that ______________________________ provides payment processing services to businesses located in California. This constitutes money transmission in California pursuant to Financial Code section 2003, subdivision (k).
B. FinCEN’s Exemption for Payment Processors
You state that FinCEN exempts a payment processor from registering as a money services business (“MSB”) if it meets four conditions. You state that ______________________________’s payment processing activities for ____________ and ____________ cards satisfy all four conditions while its payment processing activities for _______________ cards satisfy three out of four conditions. However, whether ______________________________ satisfies the conditions necessary to exempt it from registering as an MSB with FinCEN is irrelevant to the determination of whether ______________________________ is exempt from the MTA.
C. Agent of Payee Exemption
Financial Code section 2010, subdivision (l) exempts from the MTA transactions in which the recipient of the money is an agent of the payee pursuant to a preexisting written contract and delivery of the money to the agent satisfies the payor’s obligation to the payee for the goods or services provided. “Agent” is defined as one who represents another, called the principal, in dealings with third persons. “Payee” means the provider of goods or services, who is owed payment of money from the payor for the goods or services. “Payee” means the recipient of goods or services, who owes payment of money to the payee for the goods or services.
You argue that ______________________________ satisfies the agent of the payee exemption because it receives funds from a consumer/payor and delivers the funds to a merchant/payee pursuant to a preexisting written contract. You state that under the Merchant Services Agreement (“MSA”) entered into with each merchant, as soon as a payment transaction is authorized by a card company, the merchant’s right to receive payment from the consumer purchasing the goods or services is replaced by the merchant’s right to receive payment from ______________________________. However, the MSA does not contain the language necessary to support your assertion. The MSA does not state that a merchant appoints ______________________________ as its agent to accept payment from consumers on the merchant’s behalf, for goods or services offered by the merchant. Nor does the MSA state that payments made by a consumer to ______________________________ satisfy the consumer’s obligation to the merchant.
You point to the definition of “transaction” in the MSA and argue that if a merchant accepts an approved card from a consumer, the consumer has no further payment obligation to the merchant. But the MSA does not explicitly state that payment authorization from a card company to ______________________________’s financial institution satisfies the consumer’s obligation to the merchant. Without explicit language in the MSA stating that
______________________________ is the agent of the payee and that delivery of funds to the agent satisfies the payor’s obligation to the payee, the requirements of Section 2010, subdivision (l) are not satisfied.
You also argue that ______________________________ does not require a money transmitter license because its activities represent factoring transactions rather than receiving money for transmission. You state that ______________________________ is a “commercial factor” defined as a finance company that purchases a business’s accounts receivable. As a factoring company, you state that ______________________________ acquires from California businesses, a consumer’s obligation to pay the business for goods or services rendered. You state that ______________________________ acquires the obligation upon receiving a card company’s authorization of the transaction, which occurs before money is paid by the consumer.
However, the MSA does not contain the language necessary to support your assertion. The MSA does not state that the merchant agrees to sell to ______________________________ the account receivable generated by a consumer’s obligation to pay the merchant for goods or services rendered, upon authorization of a transaction by a card company. Nor does the MSA state that a merchant releases its right, title, and interest to an account receivable upon sale of the account receivable to ______________________________.
You point to ______________________________’s designation as an “Acquirer” in the MSA and reference the definition of “account” under the California Commercial Code. You also state that ______________________________ can charge back the merchant in the case of fraud or “a setoff or counterclaim” of a consumer against a merchant, to show that
______________________________ is exposed to the credit risk of the sellers of accounts receivable like other factoring companies. However, these points do not establish that
______________________________ purchases from merchants, accounts receivable generated by a consumer’s obligation to pay the merchant for goods or services rendered, or that merchants agree to sell their accounts receivables to ______________________________ upon a card company’s authorization of a transaction. Because the MSA lacks explicit language reflecting a factoring arrangement between merchants and ______________________________, ______________________________ has not established that its activities represent factoring transactions rather than receiving money for transmission.
E. Public Interest Exemption
Financial Code section 2011 authorizes the Commissioner to exempt from the MTA any person or transaction if the Commissioner finds such action to be in the public interest and the regulation of such person or transaction is not necessary. To make this determination, the Commissioner may consider various factors, including whether the person is licensed by a government agency and the risk and potential harm to persons located in California.
You state that ______________________________ does not transact business with California consumers and therefore, requiring ______________________________ to obtain a money transmitter license would not further the consumer protection purpose of the MTA. However, as discussed in Section A above, you state that consumers purchasing goods and services using ______________________________’s payment processing services “generally are not located in California” which implies that consumers may be located in California. You also state that ______________________________ provides payment processing services to businesses located in California. Therefore, we disagree that California consumers and businesses are not at risk.
Because ______________________________ has not established that it should be exempt from the MTA in the public interest or that regulation of its activities is not necessary, we disagree that ______________________________ should be exempt from the MTA under Financial Code section 2011.
If you have any questions, please feel free to contact me at ______________________________.
Jan Lynn Owen
Department of Business Oversight
Pamela F. Hernandez
 Fin. Code, § 2010, subd. (l).
 Card companies include _______________, _______________, and _________________.
 Fin. Code, §2030, subd. (a).
 Fin. Code, § 2010, subd. (l)(1) and Civ. Code, § 2295.
 Fin. Code, § 2010, subd. (l)(2).
 Fin. Code, § 2010, subd. (l)(3).
 Cal. Code Regs., tit. 10, § 80.3002, subd. (b).
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