A Brave New World: California’s Effort to Expand the Scope and Reach of the Regulation of Money Transmission

July 22, 2010


California appears poised to enact legislation that would dramatically increase the regulatory burden facing firms in the electronic payment and stored value industries. At present, California regulates firms that help consumers transmit money overseas through the Transmission of Money Abroad Law (Cal. Fin. Code §§ 1800 et seq.), the issuance of travelers checks through the Travelers Checks Act (Cal. Fin. Code §§ 1851 et seq.), and the issuance of payment instruments through the Payment Instruments Law (Cal. Fin. Code §§ 33000 et seq.). If enacted, the California Money Transmission Act, AB 2789 (“the Act”), would consolidate the regulation of money transmission into one single law and, in the process, would expand the reach of California law to a number of additional firms in the electronic payment and stored value industries, including firms that simply enable consumers and merchants to exchange value for purely domestic transactions. The Act currently sits before the California Senate, having passed the California Assembly by a 65-4 vote and the Senate Finance Committee by a 10-1 vote. Given the Act’s broad language and onerous licensing provisions, the Act is of interest to virtually every firm that accepts, issues or facilitates the electronic exchange of value.

What is a ‘Money Transmission’ Business?

The Money Transmission Act, if enacted, will significantly expand the reach of California law. As noted above, the reach of California’s current money transmission statute is limited to firms that “receive[] money for transmission” overseas. California regulates travelers checks and other payment instruments such as money orders separately through two separate provisions. If the proposed legislation becomes law the three current laws will be consolidated and the reach of money transmission will be expanded. “Money transmission” will mean “any of the following: (1) selling or issuing stored value; (2) receiving money for transmission; or (3) selling or issuing payment instruments.” The proposed law consolidates instruments currently regulated by California’s money transmission statute along with the sale of money orders, travelers checks, and a handful of related payment devices under the category of “payment instruments.” And it subjects two additional categories of financial services to regulation: “selling or issuing stored value” and “receiving money for transmission.”

Stored Value

If AB 2789 becomes law, the most significant changes will occur in the area of stored value transmissions. Stored value transmissions are not currently subject to California’s existing licensing and regulatory requirements. The Money Transmission Act will impose significant new regulatory requirements on firms in the stored value business.

The Act defines “stored value” as monetary value that is stored on an electronic or digital medium and that is intended as a means of payment for goods or services. The Act provides a significant exception to this definition for stored value instruments that are redeemable for a fixed amount of goods or services from a specific entity. The Act’s provisions appear to apply only to more open-ended vehicles for payment. Thus, a $25 gift card to purchase textbooks from a particular website will escape regulation while a card that allows the purchase of goods or services from any general provider will be subject to state approval.

Even with this exception, however, the Act’s licensing requirements will apply broadly. The language of the Act appears to apply to any entity that distributes stored value that is accepted as a form of payment by multiple merchants. Moreover, other states that have enacted language similar to that contained in AB 2789 have struggled to distinguish open loop stored value cards from closed loop cards. In such states, the regulatory landscape is characterized by governmental discretion over enforcement and resulting uncertainty regarding the application of statutory provisions.

If an entity meets the above definition and thus transmits stored value in California, it will be subject to onerous licensing and bonding requirements. Firms in the stored value business will be required to submit to an examination by the Commissioner of the Department of Financial Institutions. Firms will subject to a broad net worth, safety, and soundness review at their own expense. Transmitters of stored value will also be subject to a significant bonding requirement. Such firms will be required to submit as deposit to the Commissioner no less than $500,000 or 50% of their average daily outstanding stored value obligations in California, whichever is greater. The maximum deposit is $2,000,000.

Receiving Money for Transmission

The Act’s second category, “receiving money for transmission,” also represents a significant expansion of California’s regulatory authority. As noted above, California’s current money transmission statute only applies to entities that receive money in order to transmit it from California to a foreign country. The Act would expand these regulations to include domestic transmissions as well.

The licensing requirements applicable to entities receiving money for transmission are largely the same as those that are imposed on entities that engage in stored value transactions. Each entity will be required to submit to an examination by the Commissioner of the Department of Financial Institutions. As with firms in the stored value business, entities that “receive money for transmission” will be examined, at their own expense, on net worth, safety and soundness grounds. Firms that receive money for transmission will also be required to place funds on deposit with Commissioner that exceed their average daily outstanding obligations in California. The minimum deposit is $250,000 and the maximum is $7,000,000.

Payment Instruments

The Act also seeks to expand the types of instruments regulated by California law. California’s existing law excludes money orders and travelers checks from its definition of money transmission because these instruments are currently covered by separate statutes as noted above. The Act specifically consolidates the regulation of these instruments into the money transmission law and expands the scope of the regulation.
Businesses currently subject to regulation as money transmission businesses will see relatively few changes, though the Act may reduce their regulatory burden in one respect. Existing California law imposes liquidity requirements on some money transmission businesses. They are required to maintain ownership of eligible securities that are equal in value to the company’s outstanding obligations. The Money Transmission Act changes the requirement. If enacted, sellers will be required to maintain either securities or surety bonds in an amount of at least $500,000 or 50% of their daily outstanding obligations in California, whichever is greater. The maximum deposit would be $2,000,000.

The “Catch-all” Exception:

Article 2 § 1806 of the Act gives the Commissioner the authority to exempt any person or transaction from these provisions if the Commissioner finds such action to be in the public interest and if the regulation of such persons or transactions is not necessary to fulfill the purposes of the Act. This provision may offer the sole mechanism by which smaller entities that would otherwise be faced with onerous licensing and bonding requirements can continue to operate, but this depends on the manner in which the Commissioner elects to exercise this exemptive authority.